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Ignore the Academics

Monday, 13 Jun 2011 | 6:19 PM ET
Practice What You Preach?
Cramer advices investors to be wary of anything they hear from an academic because sometimes theory isn't practical.

Some of the biggest purveyors of market misinformation are uninformed academics. So beware the ivory tower.

“Of all the armchair players who constantly opine about the stock market in the press,” Cramer said during Monday's Mad Money, “the professoriate is the most dangerous.”

That’s because being a professional economist has little to do with being a professional investor. There’s little crossover, Cramer said. Academics aren’t veteran traders, they don’t know how corporations operate, nor do they know the “nitty-gritty details” of the economy.

Still, the Nouriel Roubinis and Paul Krugmans of the world command a lot of media attention. But, as Cramer said, they have “maximum influence but minimal understanding.” That’s why you have to be especially careful when heeding their advice.

Consider Roubini and Krugman’s calls during the financial crisis to nationalize the biggest US banks. They pointed to the insolvency of these banks, but every one of them was able to raise private capital after passing the Treasury Department’s “stress tests.” Even some of the hardest hit, like Fifth Third , Huntington Bancshares and KeyCorp . Not only did the facts contradict Roubini and Krugman, but neither seemed to understand how detrimental nationalization would be been to the entire market.

What these guys didn’t get was that nationalizing the banks would have wiped out their preferred share holders and probably hurt their bonds, too. Preferreds are one of the main ways that banks finance themselves, and the biggest holders of these shares are other banks. So the collateral damage from nationalization would have rippled out, causing as much pain as “half a dozen Lehman Brothers,” Cramer said.

“We would never have recovered,” he said, “let alone had the gigantic rally we caught in 2009 off the generational bottom.”

Cramer’s bottom line: Be careful not to give too much credence to academics with impressive credentials but little real investing experience.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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