The Financial Analysis Guy

This is a great read on this guy.  Jim Cramer made millions as a hedge fund manager and is no doubt very well connected on The Street.  My dollar to anyone’s dime, he makes even more money doing what he is doing right now.  The power of influence is contagious with this guy.  Whether or not he has a positive or negative influence on investing, who knows for certain.  But entertaining?  Very much so.

His shtick may get tiring at times and I will go weeks or months not watching the guy, but when I come back to him…very entertaining stuff.   I love the comparison to a televangelist.  He does have a cult-like following where people hang on his every word for investment advice. 

I do think his show highlights a problem with our society in general, though.  We are always looking for the quick fix; the timesaver; the get ahead idea; the way to beat our competition to the punch. This mentality, coupled with the seamingless massive liquidity that exists in publicly traded stocks, forces wild swings and knee-jerk reactions to any new news.

Since almost all of us are now using online trading accounts for our investments, taking investment action is literally 30 seconds away. This is bad for trading, let alone investing. It is the “gotta have it now” convenience of acting on this stuff that really is the root of the issue.

Argument: Positive
Doing your homework on stocks as investments is music to my ears. I am all about doing the analysis and when it comes to finances, you better do it at least twice.  If this message gets to investors (or even speculators for that matter) then his message is indeed positive.  When people start to learn why things happen in the markets the way they happen, then people will eventually become smarter and better investors.  It is just that simple.

Another place where he helps tremendously is keeping it interesting.  This stuff is not all that exciting.  Matter of fact, it can be like watching My Left Foot for the 67th time.  It can be outright boring.  At times, you will not see a return on your investment for years.  This is not good for our get it now society.   Holding the interest of people when they are learning is very difficult.

Finally, his approach to understanding sector influence on individual stocks is fantastic.  Knowing when things cycle in and out of favor depending on what is happening in the general economy is vital to long term success in investing.   Much of the financial analysis that I do is related to the sector and general market conditions.  After all, watch the general stock market tomorrow.  See which way it is going and see how that corresponds to the stocks you are watching.  The correlation coefficient on staggering in some industries.

Argument: Negative
The Cramer effect is a tough one to quantify. However, it is real just like any other influential person in our society.   He is the cause, like so many like him, for the massive increase in the VIX (Volatility Index) over time.  Remember, he is part of a 24-hour news and business station.  That is a lot of hours to fill up with commentary.  People use this as the new way to educate themselves and it is VERY easy for people to overreact to these folks looking for ratings.

When I ask some of the pros who lived through the S&L crisis of the late 80’s and early 90’s if this downturn is worse than then, they all say the same thing:  MUCH WORSE!!!  They say the amount of fear and uncertainty in the market (led by the news shows and media in general that is now and in your face 24/7) is immensely more influential.  It is leading the problem to a much worse scenario just based on the amount of fear it is producing.  It is a reality we have to bare with 24 hour media and attention grabbing techniques for eyeballs.

Finally, his constant “BUY, BUY, BUY” or “SELL, SELL, SELL” leads the weary to do one thing all the time - act on our investments constantly.  The brilliant Warren Buffett abhors this type of investing.  The need to constantly be acting on our investments is our way of making sure we “stay ahead of the curve” - which is insane.  It is also a way for us to “stay relevant” - also insane!  Do the homework and be patient.  You always have to make sure your thesis makes sense, but buy and hold works.  Holding forever does not work on everything, but holding for the long-term almost always does on good investments.

Wrapping it up…
I love watching him for entertainment value - anything beyond that is simply buyer beware. He keeps it interesting and his books are not bad so long as you understand the context. This is going to sound weird, but he offers me almost no value for trading purposes.  He is usually reporting on stuff that already happened or is behind the curve.  For investment value, he offers me very little as well, but does help with some of the education. He has some good ideas and his work on sector analysis is priceless in my book.  Everyone, please, do your own homework and learn, learn, learn.  As you start doing your own financial analysis, you will see order where there is nothing but chaos.  The fog will eventually get lifted and you will benefit from your own education.

“They are the same, right?  I mean, finance is finance and doing analysis is the same regardless of what you are doing it for.  Right?”  Something that I am sure most people believe is the case.  Well, that is partially true, but not 100%.  Let me explain.

Making Better Decisions

Corporate and personal financial analysis are the same when it comes to what they will do for the person using the information - to help make better decisions.  That is the essential purpose of doing financial analysis.   That is it.  People make decisions every day using their own financial analysis, but of course not everything can be boiled down to understanding the financials.

Some people in the financial analysis/investment industry believe that the act is actually the cure.  It is not and don’t let anyone try to tell you differently.  We must keep in mind that doing proper financial analysis is a way to support decision making in all walks of life - corporate/business AND personal.

Corporate Financial Analysis

I will address this in several other posts, but in general, corporate financial analysis is there to support the business operations - regardless of the size of the business.   Ask any CEO (or any other business owner) how their business makes money and they will talk about their operations, growth, logistics, customers, brand, etc.  Sound financial management and analysis is almost always never mentioned.  However, all will admit it is essential in the “measurement” of those items.  It is also essential in the efficient management of those core competencies when making strategic decisions. 

Measurement and decision making are core to what financial managers do in the business world.  It is by far not that simplistic, but, in general, it is essentially what we do.  There are countless tools to assist in this artwork that the corporate financial manager performs.  We will address these in various other entries.

Personal Financial Analysis

Yup.  Most of us do this every day in one way or another.  Whether we are simply trying to balance our budgets and trying to make decisions about household expenditures or when we are deciding on types of investments for our family units - we are analyzing the numbers.  Numbers are boring compared to the emotional side of these decisions, no doubt, but we all know they are essential.  

Remember, at the beginning of this commentary, I said you were partially right on that they were same.  Well here it is - personal financial analysis has two main goals: measurement and improved decision making.  That’s right - the very same goals as corporate financial analysis.  Looking at the numbers in our every day lives is essential to see how we are doing and how we will be doing after making today’s decisions.

The key differences lie in the depth of analysis and emotions.  In business, you NEVER want emotions part of the decision making process or clouding up the measurement of operations.  Unfortunately, emotion always creeps into the equation and makes it a little more complicated.  In our personal lives, emotion is at the forefront of everything we do.  The numbers tell only part of the story and sometimes we move in complete opposite direction of what the numbers tell us to do - simply because emotion gets in the way.  And that, my friends, can be a very good thing for your family and friends.

In any event, the numbers are always a factor.  You must understand them and respect them, but never let them completely dictate your decision making.  Also, one must be wary not to let the numbers dominate your analysis of past performance.