Hi everyone,For those of you who may not have access to the Stock Advisor discussion boards, I wanted to share this post on a comment Jim Cramer made recently (last night?) on his show, Mad Money.A bit of context: These comments were about Netflix, a company I own and which hit 10-bagger status for me on Tuesday, when it topped $205 per share."I have talked endlessly about the need to ring the register when you have a double," Cramer said. "Focus on the fact the stock is up almost 100 percent in four months."Cramer said he’s now taking the stock from a buy to a hold.Investors who sell half "are playing with the house’s money," he said.http://www.bloomberg.com/news/2010-12-02/netflix-investors-s...Here's my beef with what Cramer is quoted as saying."Playing with the house's money" makes investing no different than gambling. It's not."Playing with the house's money" makes it perfectly fine to lose it all. After all, you're not out anything. It's not."Playing with the house's money" implies that investing is a competition against some big entity from whom you are trying to win something. It's not."Playing with the house's money" implies that you didn't earn the money. That's not true either.IT'S NOT THE HOUSE'S MONEY! IT'S YOUR MONEY!Sorry for shouting (in bold, even), but this is one phrase that really gets to me. You and I have earned that money by:1) earning the capital to invest in the first place,2) risking the loss of that capital in some company that has a bunch of risks associated with it,3) spending a whole bunch of time reading about and learning about the company, and4) having the intestinal fortitude to hold on for a double, a triple, a 5-bagger, a 10-bagger, a 12-bagger, whatever, when most investors get freaked out over a 50% rise and want to cash in and thus never having the chance at those really big returns.Skull sweat, gut sweat (okay, that's gross, but I hope you get what I mean), and lots and lots of posts. That money is earned ... every penny of it. In whatever investment we make.It is never "the house's money."Grrr.Jim
Jim,I couldn't agree more, but JJC was simply using that as a metaphor that *most watchers of his show* would understand simply and easier than your thoughtful and well-written post.He's communicating in a fashion that you don't need, but is most likely to get across what he wants the general public to understand. [i.e. - reduce risk]Secondly, if you have big gains in NFLX [like you do] it is likely now an outsized position in your portfolio, or it certainly is for those viewers at home who only buy like 4-5 stocks. You do need to rebalance if you put $10k in 5 stocks, and now they are worth 9, 10, 11, 12 and 100.4) having the intestinal fortitude FWIW, I don't think this has a single thing to do with whether or not you should reduce, or add, to a position in NFLX. You're letting anchor bias [and emotions] affect your investment process.best,
Hi CoL,Thanks for your comments and visiting this board.I certainly agree with rebalancing an unbalanced position. I did it myself with Netflix.My issue with that phrase isn't a problem with the sell action, however, but the framing of that action -- the reason given for taking it. As I wrote in the post, "house's money" implies gambling, winning from a faceless entity, the earnings not yet your money. That frames it in such a way that is detrimental to the investor because he then takes more risks with the remaining money (see work by Odean and Barber, for instance).If the investor instead framed it as rebalancing or taking some of the gain to put into a different position to diversify a bit more, that tells the investor that the remainder is still at risk, should still be watched carefully, that the money is his (not the "house's").Framing is well-known to affect how we humans perceive events and react to them. I'm sure you've read of studies where the same outcome is framed in two different ways, yet people give contradictory responses. For instance:The U.S. is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact estimate of the consequences are as follows:• If Program A is adopted, 200 people will be saved.• If Program B is adopted, there is a 1/3 probability that 600 people will be saved, and 2/3 probability than no people will be saved.Which do you favor?<<When asked, 72% of respondents chose Program A -- risk averse.>>Now change the presentation, the frame, of the two programs:• If Program C is adopted, 400 people will die.• If Program D is adopted, there is a 1/3 probability that nobody will die and 2/3 probability that 600 people will die.Which do you favor?<<78% of respondents chose D, even though C and D are numerically equivalent to A and B, respectively -- risk seeking.>>(From The Psychology of Judgment and Decision Making by Scott Plous.)If the reason the investor tells himself to sell half is to protect the initial investment leaving the house's money in play, that investor will be more likely to make riskier decisions with the remainder than if the reason he tells himself is to diversify into other (maybe better) opportunities. Because of the power of words and framing.Cramer is doing a disservice to the people who watch his show in framing the reason to sell half of Netflix the way he did. That was the point of what I was saying.Cheers,Jim
Hi Jim,I found my way here by way of your POD for The Houses Money post.You need to do more self promotion!I read through the whole board and found it very educational. I like the thesis behind the Messed up Expectations approach.I will add this to my favorites.I may have more to say on msft vs aapl.JSergeant
Hey JSergeant!I may have more to say on msft vs aapl.I wouldn't expect any less. Ha! :-)Cheers,Jim
My issue with that phrase isn't a problem with the sell action, however, but the framing of that action -- the reason given for taking it. As I wrote in the post, "house's money" implies gambling, winning from a faceless entity, the earnings not yet your money. Yes, as I said, that was an unfortunate turn of phrase, but phrased in the way that more people would understand it. Not everyone has the background in Behavioral Finance that you and I have.JJC also talks repeatedly about the need to rebalance one's portfolio, which has involved him getting death threats and the like prior to two different downturns. In short, 60 mins of tv 5x a week, people are going to frame their comments sub-optimally from time to time. Again, I agreed with pretty much everything you said.
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