Beware the Financial Media: Cramer’s 5 Rules for Becoming a Better Investor

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The financial media is a big business. Investors must be careful not to fall prey to investment newsletters, financial magazines, and television commentators. Through these mediums, financial “experts” offer general advice to all investors as if it addresses their particular circumstances.  Investors who act on this advice without regard to how it fits into their individually-tailored plan can find themselves underperforming the average market participant.

Jim Cramer, host of “Mad Money,” lights up the television every afternoon.  He breaks down the events that day and even recommends buying or selling particular stocks in an investor’s portfolio.  He makes his decision based on a short phone call and a handful of stocks the investor owns. The problem with following this type of advice is that it is not personal, comprehensive, or evidence-based.  In fact, Cramer himself puts it best with his fifth rule: “Be critical of commentary.” Cramer goes on to explain that investors:

…assume that people on TV criticizing the market must be telling the truth. Don’t fall victim to this.

This advice is sound, following investment advice provided by media sources has been shown empirically to be a sub-optimal investment strategy.  For example, a recent paper by Thomas Schuster called “Fifty-Fifty. Stock Recommendations and Stock Prices. Effects and Benefits of Investment Advice in the Business Media,” showed that creating portfolios based on financial advice given by the business media significantly underperforms the market.  At Empirical, we believe that a prudent investor should create a long-term investment strategy, and then allow that strategy to work for them.  Financial advice in the media may provide entertainment value, but it is not the basis for successful investing.