Transcript
Jim Cramer (0:00)
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Unknown Caller (0:34)
Everyone has one, and everyone deserves a.
Jim Cramer (0:36)
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Unknown Caller (1:03)
My mission is simple to make you money. I'm here to level the playing field for all investors. There's always a bull market somewhere, and I promise to help you find it. Mad Money starts now. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. If you want to make friends, I'm just trying to make you a little money. My job is not just to entertain, but to educate and teach you. So call me at 1-800-743-CB. Tweet be Jim Kramer. You want to know the single most useless thing you can do in this business? Oh, that's easy. The most useless thing you can do as an investor is to worry about what everyone else is worrying about. The flip side of this is also true. There's no point in getting excited about something that everybody else is eagerly anticipating. Why? See, because when the vast majority of investors agree that something's going to happen, that thing is already priced into the stock market. Priced in while the real economy moves at its own state pace. For example, you got to borrow money to buy, build out equipment, then use that equipment to manufacture goods and transport them to retail outlets and wait for the customer to come along and buy them. The stock market has no such limitations. Stocks don't quite travel at the speed of thought, but they come pretty close. So the moment of preponderance of hedge fund and mutual fund managers decide that the economy slowing or speeding up or flatlining. Stocks are trading like that's already the case. Usually it takes some time to build that kind of consensus, which is why you rarely see these moves happening instantaneously. But once the big institutional portfolio managers are on the same page about something, you can be pretty darn confident that it's baked into the averages. This is some basic economics one on one stuff. Now, I don't have a ton of use for economists as a professional in this show. They tend to take a totally ivory tower approach to this discipline, meaning they have all sorts of models for how the world's supposed to work, the economy supposed to work. Often very boring models, by the way. But they rarely let the empirical facts get in the way of a good theory. If the data conflicts with the model. Economists have a bad habit of throwing away the data and not the model. However, as long as you keep that caveat in mind, some basic economics is incredibly useful when you're trying to manage your own money. For example, let's take something a little bit difficult, but we're going to get get this together. What's known as the efficient markets hypothesis. This series says that at any given moment, stock prices already reflect all the relevant information that's out there. And when some new piece of data comes out, stocks immediately adjust to reflect the new reality. You often hear index fund purists citing this theory to explain why it's impossible for stock pickers to get any kind of edge. Because whatever you know about a company should already be baked into its share price. As far as they're concerned, markets are so efficient that investing in individual stocks is basically the same as gambling. If everything you could possibly know is already priced into the stock, that means your homework's meaningless. And the only thing that can push a stock higher or lower is some random new piece of information nobody knows about. It has to be something totally unknown, because if anyone did know, they would have acted on already, ergo would be baked into the share price. That means under the extreme version of the efficient market hypothesis, that the only thing that can move stocks are unknown unknowns, to use the parlance of former Defense Secretary Donald Rumsfeld. And if you're merely betting on unknown unknowns, you might as well just be playing roulette. It's more fun. Again, that's why index fund advocates adore the efficient markets hypothesis. This theory tells them that it's impossible for individual investors to consistently beat the averages. So if you want equity exposure, the only smart way to do it is putting your money into a nice low cost index fund that mirrors the SB500. Now, as anyone who watched the show regularly knows, I have no beef with index funds. In fact, I think they're the best way for the vast majority of people to invest in the market. I've held that position since the year 2000. Even if you've got the time and the inclination to pick individual stocks and manage your own portfolio, you should still direct a big chunk of your savings, if not the plurality of it, into some cheap s and P500 index fund. It's the safest way to give yourself equity exposure. It's perfect for your retirement accounts. Think of like this. It's not that easy to be a good individual stock investor. It takes real work. Which is why of course, we try to help you if you join the CBC investing club. But it's an incredibly easy thing to be an index fund investor putting money in a 401k or an IRA. Oh, that's index fund territory. You can gradually contribute over time with every paycheck. And as long as you believe the US economy can keep growing over the long haul, you can park that money in an index fund and check in on it maybe once or twice a month. But to get back on track, this idea that you can keep can't possibly beat the averages because of the efficient market hypothesis tells us stocks are always perfectly valued. And you know what? That's just totally bogus. Putting aside the fact that I did consistently beat the averages nearly every year at my old hedge fund, gave my clients a 24% compound annual return after all fees over the course of 14 years versus 8% for the S and P. The simple truth is that markets are not perfectly efficient. In fact, frankly, they're often irrational. They ignore things, make mistakes, misvalue information every day. And that's a major reason why anyone can make money picking individual stocks. These anomalies are everywhere and they can be great for your portfolio. Ironically, this core dogma of free market economics is a lot like communism. Makes a lot of sense in theory, doesn't necessarily work in life. So why the heck did I bring up the efficient markets hypothesis in the first place? Is such a boneheaded idea. Because even if the most extreme form of this theory isn't true, and it's not empirically, we know for a fact that markets are all kinds of inefficient. It's still a very useful idea. As an ironclad law of the universe, the efficient markets hypothesis can't help us. But as a Rough guideline. It can lead us in the right direction. Markets try to be efficient. They aspire to be to efficiency. When a company puts a fantastic quarter, stock spikes immediately. Because that kind of data. This can get baked in very quickly. When the Federal Reserve changes policy telling us is probably done raising interest rates like we saw in late 2023, that's huge news. And it takes longer to get reflected in the average. Baking that in could take months. Even the Fed abruptly changed courses at the end of 2018. That kind it took weeks to work in through the averages. Stocks that benefit from lower rates will instantly soar. But it can take days or weeks or even months for the average to fully reflect the new normal because it takes time for portfolio managers to reposition. We're talking about huge slugs of stock here. No hedge or mutual fund is going to buy or sell them all at once. Sooner or later though, we do reach a new equilibrium. So let me give you the mad money version of the efficient markets hypothesis. Quote the kind of sort of efficient markets corollary. When there's a widely held consensus view about something, anything, be it positive or negative, you have to assume that view is already being discounted by the stock market. So when everyone's feeling euphoric about the strong job market, that's probably baked into stock prices already. When everybody's worried about a temporary Fed mandated slowdown is probably baked in when investors are hunkering down and fear of bad earnings season. Don't expect the stocks to get slammed on disappointing numbers, people already anticipating a disappointment. In short, when all the talking heads and journalists and media friendly money managers are telling you to be afraid of the same thing, that might be the one thing you don't actually need to be worried about. Let everybody else worry for you. From the stock market's perspective, the fact that most investors believe something's going to happen means that Wall Street's already treating it as a reality. Yet it's so easy to fall prey to groupthink when you're managing your own money. Emotions are infectious like communicable disease. Frankly, when you see all sorts of experts coming on television and saying the same thing, while the newspapers print similar stories and your friends echo this stuff back to you, it's only natural to assume must be true. And you know what? Very often it is true. But that doesn't mean it's going to move stock prices. By the time we get any kind of real consensus on issue, that move is probably over. You missed it. The bottom line, if you want to Be a better investor. Don't tear your hair out fretting about the same things as everybody else. Instead, you should worry about the things other people don't seem to care about because the real threat is the one that you don't see coming. Let's take questions. Let's go to Mary in Idaho. Mary? Hi, Jim. Nice to talk to you again. I have a comment and a question for you. Okay. The comment is regarding when you were talking about the conventional stupidity. Yes.