Special Report: Jim Cramer Investing 101

Anyone who's ever sought investing advice has probably heard of Jim Cramer. For those who haven't, he's a TV personality and the host of CNBC's “Mad Money,” a show where he recommends either buying or selling particular stocks.

The former hedge fund manager, now primarily known for his emphatic persona, has recently encountered some controversy concerning his stock picks.

Let's take a closer look at some of his recommendations that so many individual investors take as gospel. We'll see that many of his top picks are mistaken at best and misleading at worst.

For instance, on November 20, 2012, Cramer urged his viewers to abandon two stocks immediately: Hewlett-Packard (NYSE: HPQ) and Best Buy (NYSE: BBY).

About six months later, Hewlett-Packard was up 115.62%, while Best Buy gained 124.64%.

All right, so the guy makes mistakes. So does everyone else. But everyone else doesn't run a TV show dedicated to recommending stocks.

According to investment management and consulting firm Wilshire Associates, Best Buy and Hewlett-Packard were ranked third and fourth, respectively, on the U.S. Large-Cap Index out of 749 total stocks based on their performance alone.

Now, to repudiate two of the top four stocks from a selection of 749 has to be tough to pull off, especially if you're trying to do the opposite. But Cramer actually did worse than that...

No Money

The first- and second-best performers in the six-month period preceding Cramer's denouncement of HPQ and BBY were Green Mountain Coffee (NASDAQ: GMCR), at gains of 161.68%, and Netflix (NASDAQ: NFLX), which was up 174.49%.

I could probably let Cramer's poor judgment on HPQ and BBY slide if he had recommended investing in either Netflix or Green Mountain Coffee...

But he listed both of them as sells as well, just weeks before turning on Hewlett-Packard and Best Buy.

That puts Cramer at four for four: He recommended shorting the top four performers of 749 large-cap stocks in a six-month period. That has to be some sort of reverse miracle!

Some months later, he reversed his view on Netflix after the stock had a chance to climb 182%, but without any mention of his former expectations. I can only surmise that this recommendation was driven by little more than recent performance.

Read All About It

In Cramer's book Getting Back to Even, published on October 13, 2009 in the wake of the 2008 financial crisis, Hewlett-Packard was one of the few stocks he recommended in the chapter dedicated to investing for the recovery.

HPQ's performance from the publish date of Cramer's book to his trademarked “sell, sell, sell!” proclamation over three years later was a sobering loss of 73.83%.

Not only did those who followed Cramer's advice lose nearly three-quarters of their investment, but they also missed out on the chance to double what was left of it.

Sounds like a great plan... if your goal is to lose money.

Fashionably Absent

Speaking of missed opportunities, the liquid natural gas (LNG) and compressed natural gas (CNG) revolution took off five years ago — which, incidentally, is exactly when Angel Publishing's very own Nick Hodge called it.

Just last year, after all the stocks of the major players in natural gas had the time to soar — some as high as 2,126% — Cramer had the audacity to declare that the natural gas revolution had finally begun. He wasn't just fashionably late; he didn't even bother to show up — and if you played by his rules, neither did you.

The problem with these so-called stock gurus like Cramer is that they aren't particularly better at what they do than anyone else — they're just better funded. They have millions of followers that hang onto their every pick, which is what produces gains on the stocks they recommend in the first place.

A few years back, Cramer mentioned that Wind River Systems (WIND) was trading under its 52-week low and made for a fine opportunity. He also mentioned that he liked it as a potential buyout target.

On his word alone, the stock climbed to about $9 the next day as volume exploded. But the surge didn't last long. Any short-term investors who ran with his call bought too late and lost money on the subsequent pullback to $8.

Most of the time when you heed picks coming from Cramer or someone like him, you’re buying along with the masses. Together, you create artificial volume and price spikes that might or might not stick around for another 24 hours. When you hit the buy button on Cramer's word, you're buying stock along with thousands of others who are after the exact same thing.

That isn't the way to make money with stocks...

Successful investing isn't done by joining the crowd and piling into popular stocks. The point is to identify emerging trends and buy the appropriate stocks before the stocks are making headlines and the share price is soaring.

Buy Low, Sell High

Back in 2012, most investors still didn't trust U.S. banks like Bank of America (NYSE: BAC). At the time, Cramer said Bank of America was an “inconsistent performer,” and he liked US Bancorp (NYSE: USB) and Wells Fargo (NYSE: WFC) much better.

We disagreed. Earnings momentum was clearly picking up for BofA, and the bank was cutting costs, improving its capital base, and would soon restore its dividend. So we recommended Bank of America to subscribers to The Wealth Advisory at $9.10 a share.

Cramer's recommendations did OK — USB is up around 30% since, and Wells Fargo is up 57%. But our Bank of America recommendation is up 95%, and there's more to come.

I don't mean to hammer Cramer too badly. The man has clearly made a lot of great calls throughout his long career.

But like I said, you don't make money in the market by moving with the crowd, which is exactly what you're doing if you just take Cramer's word for it.

What you really want to do is get in before the crowd — like Wealth Advisory subscribers did in 2011, when they learned about the massive upside for Boeing's new line of airplanes, or in 2012, when we noted that Starbucks was looking very attractive.

Those two stocks are up 122% and 87% in just a couple years.

Clearly, Bank of America, Boeing, and Starbucks are not obscure penny stocks. They are household names you can feel good about owning. All it took for us to make excellent profits on these stocks was to identify trends most investors were missing.

At The Wealth Advisory, we regularly get in top-rated stocks ahead of the crowds, before important trends are recognized. Right now, we are recommending a solid American blue-chip stock that is on the verge of a huge earnings jump and a 50% hike to its dividend. This $16 stock will be among the best performers over the next 12 months, and most investors are missing this story. Cramer is telling investors to “proceed cautiously.”

But once again, we're going to make money while Cramer's listeners miss out...

Comic Relief

I'll leave you with this segment on what Jon Stewart had to say on Cramer.

I don't know where Cramer got the stones to go back on the air after a thrashing like that, but it's probably the same place he gets some of his stock picks.

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