In Defense of Cramer -- Why We Need CNBC's Mad Money

Last Updated Jun 10, 2009 5:44 PM EDT

Sure, CNBC's Mad Money host Jim Cramer encourages investors to treat their nest eggs like poker chips, but that just means we need him now more than ever.

I'm admittedly not his biggest fan. Once I compared him to SpongeBob Square Pants, a cartoon character that never knows what's going on, which made Cramer a human cartoon that thinks he knows what's going on. Unfortunately, Cramer's sound effects and antics are aimed at pulling his audience onto the crazy train with him. That said, Cramer is also a virtuoso at playing on our irrational emotions. I'll tell you how he does it, and why I hope Mad Money is around for many years to come.

They Call it Mad Money for a Reason
I was watching Cramer earlier this week as he discussed whether we're in a bull market or just a rally in a bear market. This debate is particularly important for those who try to time the market as they did last October. That was when Cramer came to the sudden realization -- after the plunge, of course -- that money needed in the next five years was too risky to be in the stock market and urged his listeners to get out. I think Cramer appeals to what author Jason Zweig calls our emotional "reflexive brain" better than anyone I know. Zweig's book, Your Money and Your Brain, brilliantly explains why all the Cramers out there have jobs.

In his usual sleeves-rolled-up, in-your-face, carnival barker style, Cramer's response to those questioning whether we were in an actual bull market or a rally was "shut up" -- a phrase he repeated multiple times for emphasis. He followed up with a little past-predicting by noting that the Nasdaq was up the second highest of any year in the last dismal decade, which when it's all said and done means a whole lot of nothing.

Why We Need Jim Cramer
Like the sun rising in the east, we can always count on Jim Cramer to make calls like "No no no -- Bear Stearns is not in trouble," to get out of the market after a plunge and get back in after a bull. Paul Farrell at Dow Jones MarketWatch has done a comparison of Cramer's picks to seven others in his Lazy Portfolios, my son's Second Grader Portfolio among them, in which Cramer lost badly. Yet ineffectual as he continues to be, the bottom line is that we need Jim Cramer and all of the Wall Street gurus.

The reason is this: If investors all invested rationally, no one would try to time the market, as research shows that the more we trade, the lower our returns. That knowledge would drastically lower the volume of trading in stocks and mutual funds and markets would come to a virtual standstill.

In my opinion, by encouraging his viewers to buy hot stocks and move in and out of the market, Jim Cramer does more than anyone on Wall Street to keep markets efficient. That trading volume keeps the market going and is critical to allowing the market to function. Unintentional though it may be, Cramer creates the market mechanism that allows long-term investors to profit from the foolishness of those who think they know what the near term future holds or what the next hot stock will be. Without that mechanism, the landscape of investing would be a pretty barren place.

So I thank Cramer, and his viewers, for the free ride they are giving to long-term rational investors. Without them, and the 95 percent of active investors who believe they are above average, we would have to pay the penalties of market timing or make our brokers rich.

Jim Cramer gets a hefty paycheck for the "education and entertainment" he provides. I think he deserves every penny he makes. Here's hoping CNBC's Mad Money ratings go even higher!
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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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