Look Both Ways Before Crossing the Street

“You’ve been screwed. You’ve been bludgeoned, skewered, crushed, mutilated by the stock market. …. You think the stock market must have been rigged. And you’re right.”

To hear that these days is hardly original. But hearing it from a man who’s dedicated to getting you back into the market, to beat the hell out of the market — that’s original. Of course, if you’re a regular listener or reader of James Cramer (HLS ’84), you know better than to be surprised.

Cramer — who claims to have spent his HLS years ignoring class and rehabbing the portfolios of Profs. Fried and Nesson, among others — is a busy man. Besides writing books, he is the centerpiece of TheStreet.com, hosts a daily radio show and co-hosts a nightly CNBC news analysis hour. He returned to HLS Tuesday to discuss his memoir, “Confessions of a Street Addict”; but while that book is retrospective, his current tome, “You Got Screwed! – Why Wall Street Tanked and How You Can Prosper”, offers prospective advice for the investing classes.

Just over 100 pages, the book barely matches up to a Duncan Kennedy vehicle – but what it lacks in size it makes up in accessibility and fire-branded enthusiasm. Still enraged at the actions of Jack Grubman and the rest of Wall Street’s johnny-con-latelys, Cramer spends three-quarters of the book reviewing what went wrong – the familiar litany of “Investment banks hungry for deal work forced analysts to trump up the stocks of prospective clients, whose execs played shady with the books, thanks to the aid of ‘auditors’ who did more consulting than auditing, all under the nose of boards of directors that were too distracted/ignorant/complicit/corrupt to blow the whistle.”

Still, Cramer’s treatment of history comprises an efficient summary for investors who aren’t black-fingered Wall Street Journal readers or manic-depressive CNBC addicts.

The core of “Screwed,” though, is Cramer’s advice to those re-entering the market. His overarching commandment is get diversified. Cramer, who dedicates every Wednesday’s radio show to a game show style call-in, “Am I Diversified?”, repeats this mantra for the benefit of those who sank all of their 401(k)s into the stock of their employers — and watched as collapse eviscerated net income and nest egg alike.

He also reviews the fundamentals of financial literacy. Eschewing “buy-and-hold,” he endorses what he calls “buy-and-homework”: Invest in value companies but never get complacent. He highlights the importance of dividends and the role of cash and bonds in the well-diversified portfolio. All very characteristic of Cramer’s playbook – as essential to rookies as it is familiar to his regular audience.

A second, equally-compelling take on investing is former SEC chief Arthur Levitt’s “Take On The Street.” Levitt offers the perspective of a long-time regulator in lengthy reviews of his attempted Wall Street reforms throughout the 1990s (much of which was stifled, allegedly, by GOP congressmen (and a few Dems) in the pocket of Big Finance). Levitt spends more much time detailing the inner workings of Wall Street exchanges, tracking a trade from the mouth of the investor, through the broker, into The Market — to highlight for the reader the importance of timing (and the compounding effect of fees and “rebate” kickbacks) in choosing investment vehicles. Like Cramer, he also cites the importance of diversification, and — HLSers! — the necessity of starting early — in your twenties, if possible. He finishes his book with an appendix of letters from congressmen who stifled his SEC reform efforts, and a letter from Enron CEO Ken Lay touting the company’s relationship with Arthur Andersen.

Levitt’s book reads like the memoir of a regulator (particularly, a Clinton regulator) — there are few problems that cannot be regulated away. As one who demanded increased “board independence,” his obsession shines through in his description of the ideal Board of Directors, enumerating quality proxies such as independence, overcommittment, compensation and perks, but never… competence per se.

That, to a large extent, is the failing of much of Levitt’s reform plans. In a time marked by audit malfeasance, it’s easy to focus on audit-related reforms — but costs of independence cannot be ignored. “Insiders” on the board may be less valuable at audit time, but they are valuable in the regular operations of the board of directors — namely, directing the company.

Finally, the lengthy indictments of corporate wrongdoers on the part of Levitt and, to a lesser extent, Cramer, hide an equally-important indictment: that of willfully ignorant investors. After their manic investing in vacant tech stocks, filling 401(k)s with employer stock, and taking for gospel the recommendations of clearly conflicted analysts, it’s hard to feel sympathy for those who bought into the scheme with such lucre-lust or astounding ignorance. Some investors did indeed get screwed – they deserve Cramer and Levitt’s advice. But countless others — those that screwed themselves with all of the vigor of Grubman et al. —need to take a long look in the mirror before pointing the finger elsewhere.