Jim Cramer's nephew gives awful advice too

[emon87]

So Jim Cramer's nephew, Cliff Mason, managed to land a staff reporting job right out of college with TheStreet.com. And he wasted no time in giving awful advice. Young Ones, Go Forth and Speculate

Some great gems:

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Being an investor in your 20s is totally optional, but if it's something you want to do, as opposed to something you believe you ought to do, then take my advice. Unless you actually have a pretty large amount of money that you're interested in preserving, you should take on as much risk as possible. Buy small-cap stocks that trade under $10, have little analyst coverage and a reason to go higher. In a word: Speculate.

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If you're trying to earn a respectable 10% return without taking too much risk, you might as well stop wasting your time.

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To be clear, if you're buying stocks in your 20s, you shouldn't be investing to gradually build up your "nest egg," a phrase that for some reason grates on me like the sound of fingernails scraping across a chalk board. This is the typical route followed by most personal finance gurus, and as far as I'm concerned, it's a dead-end.

With maybe $2,000 to invest a year, you won't make serious money in the market unless you take enormous risks.

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And where did he get these ideas from?
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I'm not alone in recommending that young people speculate. Cramer advocates speculation because it's fun.

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But Cramer still has to be the voice of age and responsibility. If he comes out and tells everybody under the age of 25 to put all the money they have invested into speculative stocks, he'll get crucified.

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I wonder why that is?

[erac22]

"Unless you actually have a pretty large amount of money that you're interested in preserving, you should take on as much risk as possible."

I don't think he's too off-base here. It's simply a bankroll concept, the smaller your "roll" the less important it is to protect it and vice versa. Certainly most successful gamblers would agree with this.

"If you're trying to earn a respectable 10% return without taking too much risk, you might as well stop wasting your time."

If you're investing for the future and you can invest 2k/year, a 10% average annual return is pretty respectable and will amass you quite a bit of money by the powers of compounding. Not sure why he would say this.

"To be clear, if you're buying stocks in your 20s, you shouldn't be investing to gradually build up your "nest egg,""

Why the f,uck not?

"With maybe $2,000 to invest a year, you won't make serious money in the market unless you take enormous risks."

You can't possibly disagree with this in the short term. Obv the longer your horizon, the less true this becomes.

I can't comment on the last 2 quotes b/c I don't really know anything about Cramer. So basically, some of what he says is true and some of what he says is silly. I'd say that's pretty standard for anyone publicizing their opinions.

[rsliu]

This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.

The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

[DcifrThs]

[ QUOTE ]
This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.

The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

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thats a very good question.

i don't have access to the data, but since you do...why don't you run some backtests for various time horizons (5, 10, 20, 30, 40, 50 years) and see what the different between your employers' passive strategy and a very aggressive strategy would net on average during those time periods.

compare cumulative as well as risk adjusted returnsa nd report back [img]/images/graemlins/smile.gif[/img]

oh...i'll expect that report on my desk 9am monday.

Barron

[Jeffmet3]

kramer has done very well, and from what ive heard, is a really nice guy in person. i dont understand the hate for him

[jaydub]

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This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.


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Elaborate on "work in finance".

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The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

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What you miss is that active trading of volatile stocks is not equal to buying emerging market index funds.

Following the article's advice you have a bunch of financially challenged, inexperienced investors aggressively trying to beat the market. How does this end well for the majority of them?

J

[DesertCat]

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kramer has done very well, and from what ive heard, is a really nice guy in person. i dont understand the hate for him

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He's alleged to have done very well partially through market manipulation (alledgedly he'd pump positions on TV, then sell them). But he doesn't seem to be a bad guy. Many people hate him because

1) They are traders who think his trading ideas are simplistic and wrong headed.

or

2) They are investors who think his investment advice is too short term trading focused, i.e. he encourages the bad habit of "trading" positions instead of being a long term buy and holder.

or he just grates on them.

My opinion is he's just an entertaining guy who has an entertaining show that is pretty much worthless from an investing perspective. If someone were to create a truly useful investing show that I wanted to watch would have a total audience of less than 100 people and be canceled mid way through first commercial break.

Cramer is just doing the schtick most people want to see. It's like sports talk radio for investors and traders. Professional baseball GMs don't watch Mike and the Mad Dog to get trade ideas.

[DcifrThs]

[ QUOTE ]
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This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.


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Elaborate on "work in finance".


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aka, works for one of the top finance shops.

[ QUOTE ]

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The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

[/ QUOTE ]

What you miss is that active trading of volatile stocks is not equal to buying emerging market index funds.

Following the article's advice you have a bunch of financially challenged, inexperienced investors aggressively trying to beat the market. How does this end well for the majority of them?

J

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i didn't read the article, but i can see what rsliu is getting at.

his point is not to go willy nilly taking on non-diversifiable trading risk (for the sake of having a more risky portfolio). his poitn is that it may be the case that owning a diversified optimal portfolio is dominated by an absolute riskier risk premium collection strategy that concentrates on higher risk (and thus higher reward, but lower sharpe ratio) investments.

i.e. imagine 2 portfolios:

portfolio A) .6 sharpe ratio targeted at 10% risk annually...think aboutt he portfolio i'm always blabbering on about

portfolio B) .35 sharpe ratio targeted at 20% risk annually...think about a emerging market, small cap, growth dominated, leveraged portfolio

which portfolio will return more over rolling 5, 10, 20, 30, or 40 year periods?

i don't know, but it may be the case that the drawdown induced losses from the riskier strategy are offset by the compounded gains during good periods for the riskier, higher rewarding portfolio. EDITted to make the portfolio's returns not equal (expected return on portfolio A=6%/year B=7%/year)

rsliu makes a good point and one that warrants further investigating via simulation and backtesting.

Barron

[emon87]

[ QUOTE ]
This is pretty sound advice. I'm 23, work in finance, and know a number of people who basically do this.

The reason to speculate is very simple: you are compensated for higher risk with higher returns. This is why on average, US bonds return worse than US stocks, and Emerging Market stocks do better than US stocks. If you are 20 and not planning on retiring until your 60s, then you can afford to handle volatility in your retirement portfolio. Your goal should thus be to maximize your returns, not to worry about risk adjusted returns.

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No. What he is saying is basically buy random small cap stocks and gamble. Then if you lose, you start over with a "conservative" philosophy at 35.

Well here is the issue with that. If you invest the $2000 he says is all you can save at 25 each year and get 10% returns, at age 65 you will have $1,170,198.03. (Start 3 years earlier right out of college and you have $1,584,661.41). If you get the same returns saving the same amount starting at age 35, you have $419,562.35. (Got that using a calculator on moneychimp.com, ignores taxes and inflation).

Um, that is pretty significant. In fact, you would have to save nearly $5,700 a year in order to start saving at age 35 and have the same $1.1 MM at age 65 that you would have if you start at age 25 and save just $2000 per year.

Now, for the sake of argument, you could use probabilities to see what you might end up with if you speculate. For example, if you give yourself a 25% chance to earn 20% returns for those first 10 years saving and speculating $2000 each year, and 50% chance to break even, and a 25% chance to lose 20%, (and then passively invested at 10% returns with $2000 annual contributions for the next 35 years) you would have about the same as if you just passively invested from age 25. And you'd have done a whole lot more work picking those stocks.

NOTE: you might object to my percentages, I just pulled them out of my ass. If anyone has better ones to use, go for it.

I'd say passively going for the index fund returns is the better bet for most people who either don't have time or don't have the ability to really research speculative stocks.

Also, what do you when you say you "work in finance"? This is a finance board - we know what the different jobs are here.

[pig4bill]

I think it's a good article. The average subscriber to thestreet.com is orders of magnitude more market savvy than the typical schmuck buying Money at Safeway to read their ten-thousandth article on how to buy index funds.