Why Jim Cramer Is Wrong About Doing Your Homework

When I worked on Wall Street, CNBC played on the TVs around the trading floor. Most of the traders were gone by 5:30 pm, but I was usually one of the last people on my team to leave. On an otherwise quiet trading floor, Jim Cramer’s show, Mad Money, was a jolt of energy. Cramer would blitz his audience with a dizzying blur of stock picks and sound effects. He doesn’t take himself too seriously (unlike the rest of Wall Street), and his show was pure entertainment.

The premise of Jim Cramer’s investment philosophy, which includes not only the Mad Money show but numerous books as well, is that ordinary investors can beat the market by shrewdly picking individual stocks. He doesn’t advocate day trading, but instead advocates medium-to-long term investing through individual stocks. He says that ordinary investors can make good money (or should I say, “Mad Money”), by picking good companies. Why hold every stock in an industry, he argues, when you can buy companies that are the “best of breed”.

Jim Cramer: Buy and Homework

Cramer quickly caveats that investors should not “buy and hold”, but “buy and homework.” He emphasizes to viewers that in order to pick stocks successfully, you need to do your homework.

Of course, you should do your homework when deciding to purchase a stock, but the homework should not stop once the buy order is filled. He advocates doing one hour of homework a week for every stock in your portfolio. You need to continually monitor events related to the company and how it might affect the stock’s future prospects.

For example, if the company decides to acquire a competitor or reports poor quarterly earnings, you need to re-evaluate whether the company is still worth keeping. Holding a stock should not be a passive “set it and forget it” process, but an active process, Cramer argues.

Seems easy enough, right?

Why Jim Cramer Is Wrong About Doing Your Homework

The problem with Jim Cramer’s approach is that a diversified portfolio needs at least 10 stocks, but probably closer to 20. You still don’t get the diversification of holding 500 stocks like you do with an S&P 500 index fund, or the 3,500 stocks you get with a total stock market index fund.

Cramer has a recurring segment on his show called Am I Diversified? Viewers call in and give Jim their top 5 stock holdings, and Cramer will tell them if they’re diversified. If they’re not diversified, he’ll tell them which stocks to buy and sell.

At a minimum, you’ll need 5-10 hours a week to tend to your portfolio. Here are three reasons why you shouldn’t bother doing your homework, and should forget trying to beat the market with individual stocks:

Do you have 5-10 hours to work on your portfolio?

I’m not sure where busy physicians, residents, or medical students will find the time to do their homework. Medical students definitely should be studying instead of researching investments. Spending those 5-10 hours on studying, becoming better doctors, or re-charging is a much better investment than tending to your stock portfolio.

Residents are already working way too many hours, and have no time to be managing their (tiny) portfolio of stocks.

Attending physicians probably have the time to do their homework if that’s how they choose to use their precious free time. But time is money, and I’d much rather make extra money by taking extra shifts than spend it trying to pick stocks. An emergency physician or anesthesiologist can make $200/hr by picking up extra shifts. You could potentially earn an extra $100,000 a year ($200/hr x 10hr/week x 50 weeks/year) with the time you spend doing your “homework”.

Or you could invest in a three-fund portfolio and have fun playing golf, sipping on a nice wine, or playing with your kids.

You probably won’t be able to beat the market anyway

Do you think you’d be able to beat LeBron James in basketball practicing 5-10 hours a week? Professional investors spend thousands of hours and millions of dollars searching for the tiniest of edges.

Most of us got into medical school because we studied hard and outworked our fellow students. An hour a week per stock is not outworking your competitors. They have superior technology, better access to research, and more experience than any amateur investor.

Even the professionals repeatedly struggle to beat the market, largely because they are playing a game that is increasingly hard to win.

It will take more than effort to beat the market

You need the resources and access to beat the market. Research analysts at Apple do market checks where they look for changes in the supply chain that might affect their ability to produce a product on time. Analysts in restaurant stocks will do store checks to see if there is more or less foot traffic than the month prior, which might influence same-store sales growth, and in turn the stock price.

There is no way for the average investor to do this kind of homework. Sure, you could probably find this information on the Internet, but a lot of this information will be from expensive, proprietary research reports that the average investor will never read.

Plus, you never know whether the person on the other side of the trade has inside information.

Conclusion

Jim Cramer is selling a hope that all of us have, that we can make mad money with just a little bit of effort. I suspect physician investors are more susceptible to this belief than even average investors. We’ve been the best at what we do our entire lives, and if we just do enough homework just like we did in college and medical school, we can achieve the same success in investing as we have in medicine. Unfortunately, you can’t out-homework Wall Street.