June 29th, 2007

Dear Jim Cramer (2): WAG, RAD

Dear Jim Cramer,

I can’t believe it’s been just over a year since I last wrote you (see my June 4, 2006 post) but I just couldn’t resist doing so again.

You were so kind to send me an autographed copy of “Real Money: Sane Investing in a Sane World” to make amends for the treatment many of us received when you oversold seats to the Fathers’ Day show. I’m now working my way through it and promised myself to finish it.

But I got to Chapter 4 and was stopped in my tracks. In the chapter, “Some Investing Basics”, you lay out the “homework” before buying even one share of a stock. Honestly, with the extent of research you insist is necessary the average individual investor must compete for any chance against the “big money guys” it’s amazing that even as low a number as 30% of trading volume is done by individuals like me (yes, 70% is institutional volume).

Rather than complete a humongous homework assignment (listening to conference calls, reading industry reports, reading annual and quarterly reports, studying financial statements, calculating ratios, reading articles, etc., etc.) in order to do a better job than, do it quicker and sooner than, so as to buy in or get out before the institutions, I think “there’s got to be a better way”. Maybe I should just give my money to them and have them to do all for a fee.

But, no, I’ve proven, hopeful, to some of you and to myself, that stock charts are a better and more manageable alternative? And then comes your blow below the belt. You write:

“Looking at the chart, the graphic demonstration of where a stock has gone is not homework. It can tell you nothing. Some think it is the sole compilation of all investing thought and from it you can divine the next move. That’s preposterous, and I have the tire tracks on my back to prove it, for I have been short, or have bet against, many a failed chart only to be hit by a huge takeover and a subsequent wipeout. In investing a picture is not worth a thousand words; in fact, it is worth almost nothing. A chart is never enough to buy a stock from. Never. Don’t be conned into believing that looking at a chart can suffice for homework; it simply can’t.” (page 86)

Poor Jim, you got burnt by a failed chart once. But does that mean you’ve never been burnt after committing untold hours doing your homework? I think not.

The book, not more than a few pages later, provides a case that makes the point. You take 5 pages describing how, using your homework outline, someone could compare Walgreen (WAG) and Rite Aid (RAD) and then conclude:

“the risk-reward of Walgreen versus Rite Aid is simply so much better that you can’t afford to risk buying Rite Aid. You may have a very compelling reward with Walgreen.” (page 92)

Remember, the copyright date of the book was sometime in 2005. How have WAG and RAD down since then? I’ll arbitrarily picking June 30, 2005 (mid-year) as the starting point. To quote a local sportscaster, “let’s roll the tape”.

  • WAG is down (5.35%) since the June 30, 2005 close:

  • RAD is up 48.33% since June 30, 2005:

It must be very embarrassing and helps put a nail in the coffin of your assertions about doing your homework as the key to making more money (at least the way you spell it out). Perhaps using charts does make more sense!

I’d pull the books out of the stores.

more on the WAG and RAD soon….

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