BULLS & BEARS: Rantings lift TV ratings, but not portfolio values

March 6, 2006

If you own individual stocks, you know they periodically drop or pop in price for no apparent reason.

A big company's total value can easily swing several billion dollars with seemingly innocuous news or comments from an influential analyst.

One of the guys who can influence investor behavior is James Cramer, host of CNBC's "Mad Money."

It is one of CNBC's highest-rated shows and is entertaining, if you like stock market TV shows. If you hate those kinds of shows, that tells me you are a grounded and balanced person with healthy interests and passions.

Cramer is the P.T. Barnum of stock-market seers, and because of that has developed a loyal following. He spews out opinions on companies like a Gatling gun, creating hoopla with his centerring-style antics. His antics influence short-term price swings in the stocks he mentions.

Trading off his recommendations, however, could be another thing.

One company my firm follows was skewered by him on his Jan. 25 show. With veins popping out of his neck, he yelled the stock should be sold at $25 per share.

Three weeks later, on Feb. 16, a caller again asked Cramer's opinion on the same company. This time, he screamed to buy it, although by then it was trading 35 percent higher at $34 per share.

Ranting increases ratings.

A broker friend of mine had a great description for this type of highly charged offering of questionable value.

As he said, "It doesn't matter what you're serving; it's how you serve it."

He is correct. Wolfgang Puck could probably sell fried mush for $40 a plate if it were presented right.

His idiom rings especially true in the investment business. How else can you explain the popularity of variable annuities, commission-loaded bond funds, and "free" dinner seminars complete with shrimp cocktails?

In the 25 years I've been in this business, the commission to trade 1,000 shares of a stock has compressed from several hundred dollars to less than $10. The spread between the bid and ask on that stock (the profit margin for the floor trader) has dropped from up to 50 cents per share to one penny per share.

And, last, the spread on a bond trade has been squeezed to razor-thin margins.

Today, because there is little profit margin to the firm in the transaction side of the business, the only real profit is in the packaging.

The packaged products have pictures of tanned, smiling and healthy seniors on golf carts or cruise ships.

Before you buy, remember those smiling folks are models.

Investors, more often than not, get a fancy brochure with glossy pictures to put in their file drawer, only to find out a few years later they really bought a paper sack of mush.

Here's a rule of thumb: The fancier the package, the nicer the dinner and the bigger the shrimp, the worse the deal is for you.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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