It's easy to attack Jim Cramer. And there are no shortage of people taking their pot shots. Some are justified. Some are not. But in this article, we'll focus on a characteristic Jim Cramer has which really irks most traders, and show why Jim Cramer is right and they are all wrong.
The characteristic is that of changing his mind. How frustrating is it when Jim Cramer picks a stock today as bullish only to revert back to being bearish tomorrow? If you were relying on his advice, you could be forgiven for being frustrated. And he's not the only one, Goldman Sachs came out with GDP forecasts on Friday only to revise them on Monday.
Morgan Stanley, Credit Suisse, JP Morgan, and all the other top firms, their traders, research departments and bankers have over the years stated one bias and quickly changed direction, to the chagrin of following investors.
As frustrating as it is to see them change bias so quickly, maybe the better question isn't to state the fact “But you were bullish yesterday, and now you're bearish today, you can't do that!” as much as it to ask the question: “Why did you change your mind?”
The statement keeps the trader chained to the past whereas the question opens up new possibilities, like figuring out whether the facts have changed. Every day, millions of variables impact the direction of markets. To be committed to a bias and unwilling to change quickly is a dangerous game because some variable, somewhere of significance could have changed to warrant a change in bias.
An old John Maynard Keynes quote began “When the facts change, I change my mind, what do you do sir?”
In his hedge fund, Jim Cramer at one stage was about $300 million in the hole and ended up getting $450 million back to end the year positive. How was he able to pull off such a feat? One answer is by trading with versus against the markets, and by adapting to the direction of the market each day.
Contrast this approach with the nature of traders to stick with a position after entering it. By entering a trade, a trader assumes (s)he is right. By changing that position, one must admit the original trade was wrong. Nobody likes to feel they are wrong. But the active trading game warrants a willingness to change on a dime when the facts change. Better to exit a losing trade early than late.
By evaluating a position rationally, it is easy to choose to change bias. All the trader needs to ask is “What action should I take to make most money?” Sometimes, the answer will be no action at all. But sometimes, action is required even if it means admitting fault on the original position. Or maybe there was no fault at all but some variable changed in the markets to impact them. By subordinating emotions to the rational decision-making process of making money, trading becomes a whole lot easier.
And that's why Jim Cramer is right. Not because his decision to change his mind on every position turns out right. But because he's adhering to the principle that it's better to change his mind and make money than stick to an old position and build up losses.
To figure out a clear plan to enter and exit positions, so that you don't build up losses, make sure to take Module 7 of our video on-demand series to know when and why clear rules are so important to success.
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