Jim Cramer's Worst Financial Advice

One consistent feature of the experience provided by Jim Cramer's financial advice is this idea that investors should potentially aim to beat the market. Cramer often speaks about the flaws and failings of his history in the marketplace when not performing his "Mad Money" act for the camera. Every investor will have their own horror stories about times when the market got the better of them and Cramer, to his credit, is willing to share these learning experiences under the right circumstances. However, the platform he's best known for tends to lean into a strategy of aggressive stock picking in an effort to find the next best thing before it blows up.

Investors of all stripes should be wary of this kind of approach. Note, professional investors rarely beat the market over the long term, even if they may be in a position (with accumulated knowledge and experience) to pick a few stocks that perform well here and there in the short. By and large, the best way to ensure great returns on your investment is to create a diversified portfolio and invest in simple-to-understand index funds and ETF holdings. These kinds of investments provide widespread market exposure and will give you an investment covering the entire scope of the marketplace to create both long-term profit accumulation and downside reduction that's absent when opting for a strategy primarily aiming to best the market.

While Jim Cramer doesn't often recommend selling assets, when he does recommend it, he is often wrong about the stock in question. Between 2016 and 2022, the one-year average return on stocks he recommended selling added up to a 14.25% increase in value. This means that viewers who took his advice 100% at the time would've missed out on a sizable boost to their portfolio year over year. To be fair though, the one-year average return for his buy picks came out to a 16.39% increase, meaning many of his selections did in fact perform well during this time period. But there's a certain cherry- picking of data that must take place to seriously tout these as comparable since this is fundamentally a reading of opportunity cost.

It can't be overstated that in the days and weeks following a Jim Cramer sell recommendation, the stock in question has tended to perform with a mixed bag of success. Generally speaking, there's a random distribution of value addition and loss occurring directly after the pundit makes a pick. But crucially, during this time, Cramer never made a sell recommendation that ended up saving investors substantial capital through a massive drop-off in value, while on multiple occasions during this six- year stretch, directly after a sell recommendation, stocks increased astronomically in value. Most notably, PG&E's 76.6% increase the day after Cramer's sell recommendation on January 23, 2019, certainly would've left many viewers in a frustrating spot.

Jim Cramer's approach highlights a number of less than stellar pieces of investment advice. But his financial advice isn't the only issue at play, as he has a history of betting on the wrong horse. Anyone who tries their hand in the stock market or provides advice to others will get it wrong sometimes, but Cramer has notched an impressive set of gigantic blunders. One of his worst came just days before the dot-com bubble burst.

On February 29, 2000, Cramer delivered a keynote speech at the 6th Annual Internet and Electronic Commerce Conference and Exposition, where he heaped praise on the tech sector in general, as well as named a variety of his favorite stock picks. Not only did he say "only those companies are worth owning" about the tech sector over virtually every other, but he noted gleefully that many companies in this classification didn't "even have earnings per share, so we won't have to be constrained by that methodology for quarters to come." While it's true fast-developing investments require a sort of leap of faith, actively championing a disregard for proven analysis metrics is a dangerous approach that investors would be wise to steer clear of.

Poor financial advice on when to sell isn't Jim Cramer's only issue. Like many other stock market commentators, Cramer has been caught sleeping with some of his buy picks, too. In April 2015, Jim Cramer advocated for Kohl's, suggesting it was poised for a terrific value run.

Yet a month later, Kohl's saw its biggest-ever price drop, trading 13.27% lower than at open on the day. It would continue to slump after a weak earnings report for the majority of the remaining year. In November, it reported positive results but suffered from an industry-wide downturn that kept the company's value from fully recovering. What's perhaps unique about this poor pick, aside from the 41.11% loss of value within six months, is the missed analysis of the wider industry.

Not only was Kohl's stock a bad buy at the time, but Cramer failed to realize the weakness of the furniture and household goods marketplace as a whole — in the same way he overestimated the tech sector before the dot-com bubble burst. It's possible this showcases a pattern for Jim Cramer, in missing the forest for the trees when it comes to wider marketplace trends.

In late 2008, Jim Cramer found himself on the "Today" show suggesting investors should consider "selling everything now," as a result of indications the market could decline in the near future — and potentially remain somewhat deflated over the following year.

While Cramer tends to be a bit of a risk-taker in the marketplace, this financial advice seemingly represents the exact opposite strategy. The "sell everything" mentality isn't sound financial advice under virtually any set of circumstances. The reality is that the stock market can take a massive hit at any given moment and as a result of a startling array of factors. From elongated downturns to flash crashes, the stock market has seen just about everything by now. Attempting to predict when the next downturn may occur is a fool's errand and could lead investors on a wild goose chase, looking for signs of the apocalypse at every turn.

Most investment analysts will talk about rebalancing as more of a soft reallocation of assets. This means selling stocks when they reach a kind of natural high watermark, but typically not the entirety of a portfolio's holdings and looking to buy into new assets or adding to a position when stocks see a relative dip in price. Likewise, holding on to assets is typically advised, even when market outlook appears bleak, perhaps especially then.

In the 1990s, Jim Cramer purchased hundreds of thousands of shares of the Silicon Valley startup Memorex Telex. Cramer went all in on this brand after it had gone through bankruptcy proceedings, leaving the stock price at just $2 per share. He spent a huge amount of time exploring the company's financial data, even speaking with its management team to get a sense of where the brand could be headed. Cramer continuously bought huge sums of shares, sinking an increasingly large amount of money into his ownership stake. Importantly, Jim Cramer says he justified this approach by telling himself: "What's the worst that happens?"

Jim Cramer has been a millionaire since his late 20s after achieving significant financial success early on in life. As a result, he can afford to sink tons of cash into what ultimately might result in a complete loss — as was the case with Memorex Telex. But for most investors, this kind of mentality will only end in heartbreak and lots of trouble. Cramer himself notes that Memorex Telex was the worst investment mistake of his career and that investors shouldn't follow this example, instead learning from his mistake and opting for a better path.

At the heart of it, this mindset of "What's the worst that happens" is one built on faulty logic and either a misunderstanding of the data or a rejection of it altogether. In Cramer's case, it came down to a misunderstanding of the company's debt. For an investor who isn't a professional in the field, it often shows itself is a lack of knowledge and a hope-and-a-prayer approach.

Lastly, while this isn't specifically about past financial advice dished out by Jim Cramer, it's worth noting that any advice Cramer does give on national television immediately loses at least some of its efficacy. The large platform that Cramer is afforded means that any advice he offers up, he does so to potentially every investor out there. Generally speaking, stock traders are looking to buy when prices are good and sell when they reach their peak before turning back around and consolidating at a lower price point. To get this timing right, investors require a first-mover advantage that sees them beat the majority of others to a great stock. As with any commodity, when more people are buying, the price goes up.

When Cramer names a stock as a new buy selection on his program, he eradicates any first-mover advantage traders might be able to take advantage of by following his advice. Once a stock is named, everyone knows it's on his radar and potentially should be on theirs as well. Keeping this in mind is an important step in the process of following any financial advice provided by Cramer or any other stock market analyst out there. Public information is just that, public.

That said, a potentially valuable approach instead might be to consider the kinds of stocks Cramer is targeting. If he speaks highly of utilities, for instance, it might be worth looking into other businesses in the sector or digging even deeper to uncover tertiary brands that work with or serve companies in the utility industry.