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The Uninformed Investor

As you probably heard on Monday night's show, there's a new column in the Wall Street Journal called "The Intelligent Investor" by a guy named Jason Zweig. Let's just say I find the veracity of the column's name a little questionable. This one only came to our attention because of the author's oblique reference to Mad Money, writing about "TV pundits who shriek out trading advice as if their underpants were on fire."

I'd be inclined to let this insult go if the "Intelligent Investor's" advice looked like the product of an intelligent mind. Mad Money is constantly being attacked by these commentators who think investors should "buy and hold" stocks for eternity, and this guy's just another example. We're not all that touchy about being insulted, but we do worry about you getting bad advice – and that's exactly what "buy and hold" is.

How do you recognize buy-and-hold fanatics? Well, they'll constantly throw around references to the late Benjamin Graham and Warren Buffett, as if invoking those two names automatically makes their arguments correct. Graham and Buffett, great investors sure, are not the founders of an investing religion, which is how they're treated. There is no god but Benjamin Graham, and Warren Buffett is his prophet! The buy-and-hold guys call anyone that recommends selling a stock a "trader," and they use this term like it's the worst form of insult imaginable.

Now, we don't do trading advice on Mad Money, we do investing advice. But to the buy-and-hold partisans, there's no difference between being someone who's actively involved in managing their investments, staying informed – doing your homework as Jim says on Mad Money – and reacting accordingly, and people who just buy and sell brainlessly based on momentum. The buy-and-hold guys think we're stupid because we recommend buying and selling stocks as the fundamentals change, and because we think it's a good idea to take profits when you're stocks are up big, instead of keeping everything on the table, like a pig getting ready for slaughter. They'd have you just buy, and buy, and buy. Selling is just not part of their equation. They think it makes you a trader, and they think being a trader is bad – for no particularly well-argued reason – so I think they're just being insanely dogmatic.

Whenever someone tells you not to buy and sell stocks too frequently because of brokerage fees and capital-gains taxes, you're looking at a buy-and-hold nut. Let me be clear on this: Historically the buy-and-hold mantra evolved decades ago when capital-gains taxes and brokerage commissions were much higher. It may have made sense then to just buy a stock and sit on it, but times have changed. Advice that worked in the 1960s and ‘70s isn't applicable in a time when commissions and capital-gains taxes have never been lower.

But if you've paid any attention to the market over the past decade, you should know that "buy and hold" doesn't make a bit of sense now, certainly not next to the Cramer strategy of "buy and homework." At one point, the so-called “Intelligent Investor” quotes Warren Buffett saying that he wished all of his stocks would go down 50% because then he could buy more. Of course, those are Warren Buffett's stocks, and like we recommend, he's done the homework on them. And hey, if I were Warren Buffett, I'd love it even more if my stocks went down 50% after I'd trimmed back my positions and taken some profits, so the loss wouldn't hurt as much. As Jim pointed out on Monday, there are droves of stocks that have come down 50% only to go much, much lower: Fannie Mae, Freddie Mac, General Motors, Ford, Citigroup, AMD, MBIA, Lehman Brothers, practically every homebuilder like Lennar and Pulte Homes, as well as the stocks of companies that are no longer with us like Enron, and now IndyMac.

There was a time when every company on that list was the classic "high-quality stock" that a buy-and-hold fanatic would recommend owning forever. And if it went down, they would say to buy more. For some reason, it makes sense to the buy-and-hold mind to buy more when a stock goes down, but selling when it goes higher is verboten.

It seems to me like the "Intelligent Investor," and all of his ilk, has an allergy to being informed, or thinks that regular people can't be well informed when it comes to stocks. They come after Mad Money because we believe you're capable of doing the same homework that Warren Buffett does, maybe not as well as Buffett, but you don't have to be that good to make a bundle as long as you keep track of what you own, buying when it makes sense to buy, and selling when it makes sense to sell.

This "Intelligent Investor," along with the other buy-and-hold fanatics, appears to believe that regular people are too dumb to know when to sell, or at least that's my read on their position. Personally, I just hope this guy's column doesn't hurt too many people with its bad advice. If you're smart enough to buy stocks, you're smart enough to know that sooner or later you have to sell them.

Do your homework, and you’ll know when the time is right.




Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.




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