Why waste 15 hours a week and lose a $72,000 'opportunity cost?
By Paul B. Farrell
This column, originally published Nov. 6, has been updated with a link to Jim Cramer's response.
ARROYO GRANDE, Calif. -- Last week I finally listened to the "Mad Money" show for a full hour. When channel surfing in the past I'd move on after 30 seconds. It's about as educational as Saturday morning cartoons. What I heard was a manic distraction for addicted personalities. But there I was, alone in the car on a five-hour trip back home. So I made a conscious decision to listen to the entire show, first time (and last!). "Oh god, what torture," I screamed aloud somewhere near Gilroy, the garlic capital of the world: "This is crazy-making, what a waste of time!"
Of course that was the voice of passive investors coming out from deep within my soul, speaking for the 90 million American investors who don't have the time to waste watching this inane "entertainment" program that's brainwashing innocent minds, repeating the dot-com drumbeat of the late 1990s. Seriously, most folks have real jobs that take up most of their time, real families, real outside interests, real lives to live.
Fortunately many Americans have figured out that active trading is a dead-end street. Remember University of California-Davis finance Profs. Terry Odean and Brad Barber and their famous study of 66,400 accounts at a major Wall Street brokerage? They concluded that transaction costs, fees and taxes ate much of the pretax returns: "The more you trade the less you earn." Active traders actually made a third less than passive buy-and-holders. And it's still true.
OK, assuming you're one of America's 2 million to 5 million fairly active traders, calm down. I know you're dismissing what I said. But stick with me for a minute. Take a deep breath before you fire off a nasty email. Quash those emotions and let's look at this another way.
Figure your 'opportunity cost' of trading
You already know that the Odean and Barber research tells us that traders are running the race with a huge handicap. So, let's quantify traders' "opportunity cost," the "economic cost of an opportunity foregone" when they spend time playing by "Mad Money" rules (or any other trading game). In short, what's your time worth if you watch "Mad Money" daily and do the "homework" Cramer recommends?
Jim Cramer's a brilliant trader. I interviewed him in the late 1990s when he was a hedge fund manager. He didn't like my criticism of the Mutual Fund Derby Race on TheStreet.com, of which he was one of the founders. Said I was "over the top." That was at a time when a competing dart-throwing chimpanzee's index called Monkeydex was beating America's top funds.
The fact is, what was "over the top" was TheStreet's manic racetrack imagery that encouraged passive investors to start trading funds, only to rue the day a couple years later when the market tanked and lost $8 trillion in a three-year bear/recession. That was bad media. And last week's "Mad Money" program is the same kind of subtle brainwashing that's misleading passive investors unconsciously into high-risk trading.
Work the numbers. Cramer's emphatic: "Do your homework, the right homework." That can mean many things, depending on your approach to stock research. But one thing's certain, Cramer says: "Doing homework could take as much as an hour per week per position."
But when he says that to investors, "they look at me as if I am some kind of old-fashioned teacher who is asking for way too much in this busy world in which we live. That's just plain wrong."
Good advice. But the one hour daily "Mad Money" show is such a manic wisecracking racetrack mentality with funny costumes, bizarre sound effects and boo-yah cheers that it totally undercuts the subtlety of doing passive "homework." It's more like a hard-sell infomercial to get you to buy a trading system "guaranteed to make you a successful trader."
Except "Mad Money" is drawing people into a new 2007 Derby Race, targeting traders with the minds of kids chasing instant gratification. Read Jim Cramer's response.
'Mad Money's' wasted 'opportunity cost' Here's the hard facts folks: How to quantify the economic "opportunity cost" of the "Mad Money" game. Cramer's right, you must do serious analysis of your "positions." OK, so for five hours a week he overwhelms your mind with tons of opportunities. Let's say that somehow, when the smoke clears, you have 10 "positions."
Now let's do the math in this simple economic equation: If you're following Prof. Cramer's rules and doing your "homework" you're watching "Mad Money" five hours a week and doing another 10 hours of "homework" on your "positions." That's potentially 60 hours of your valuable time each month, on top of your full-time job. Assuming you're a professional or business executive, let's say your time's worth $100 per hour, probably more.
So, bottom line: Your economic "opportunity lost" for 60 hours is at least $6,000 a month or $72,000 a year, playing by "Mad Money" rules. Get it folks? Your time is valuable. If you're worth a minimum of $100 an hour and you spend 60 hours a week on any activity, you darn well better be earning at least $72,000 a year. And to make that kind of money at, say, 15% a year you'd need more than $400,000 capital at risk.
My guess is that most of the "Mad Money" audience takes the easy route: They just go emotionally gaga over some of Cramer's manic stock picking and buy some, without doing the necessary hours of "homework."
'Lazy portfolios' outperform 'Mad Money'
The vast majority of American investors, probably 95%, will likely never waste their valuable time playing "Mad Money's" new Racing Derby, watching and doing all the necessary homework. The odds aren't very good anyway: the unofficial tracking site CramerProject.com says Cramer's chance of making a wrong call is about 42%. That means that nearly half the time you may be misled.
How about portfolio performance? CramerProject.com says the 30-day average return on the Cramer Index was 14.90% on Nov. 2, though undoubtedly much less on an after-tax basis. The Web site tracks a "Jim Cramer index" of more than 1,600 stocks. You can find data on Cramer's individual stock picks on TheStreet.com, a staggering 3,000 from the prior three months -- about 50 a day. But to get a peek at some of his portfolio data you have to subscribe to his service for $400 a year. Now suppose you're a full-time teacher, cop, attorney or entrepreneur running your own business. You don't have an extra 60 hours a month. Or maybe you're already a nervous active trader whose family wants more quality time, and isn't making that $72,000 breakeven ROI for your valuable time.
So, compare the "lazy portfolios:" They require almost no time, so you can continue making money on your job plus add some nice passive money from your customized lazy portfolio, without wasting the "opportunity cost" on trading. See how the lazy portfolios stacked up in the third quarter.
True, only five of our eight lazy portfolios return more than the 14.9% from "Mad Money's" active trading. But that is giving Cramer a tremendous benefit of the doubt, since the lazy portfolio returns are computed as an annual gain and the "Cramer index" is a 30-day moving average. On Sept. 17, for example, that average was closer to 9%.
Even with that edge, the lazy portfolios stack up well. The Aronson Family Portfolio's one-year return of 23.5% is beating "Mad Money's" number by a wide margin. And the lazy fees, taxes and transaction costs are less than with active trading, if you reflect on the Odean-Barber research.
And even more embarrassing, the passive three-fund "Second Grader's Starter Portfolio" is also beating the CramerProject Index, 19.5% to 14.9%. And that kid's a full-time student, so he doesn't have time to watch "Mad Money." Plus he's doing some real "homework" and it looks like he's already learned a valuable lesson that goes over the heads of the "Mad Money" crowd: "The more you trade the less you earn!" Boo-yah! End of Story
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