I have a confession: Every few weeks, I watch Jim Cramer for 10-15 minutes.
One evening in late 2008, I heard him confess to an investing mistake that millions of amateur investors and thousands of professional ones have made in the last 15 months.
With great candor, Cramer was describing the meteoric fall of the once white-hot copper manufacturing stock, Freeport McMoran (FCX), by all accounts a great company. Cramer talked about how he played it, and though I can't swear by every detail, he deserves credit for admitting the error.
Essentially, he said that after watching FCX fall $140 a share to $100 during the early fall, he bought the stock for his charitable trust. When it fell to $90, he bought again. Ditto for when it hit $80 and then $70. I forget whether he said he stopped at $60, $50 or $40, but it's unimportant. Even if he wasn't behaving like a great fiduciary, he was honest-as far as I know.
What is significant is that I have a strong hunch that the visceral, Pavlovian pattern of behavior Cramer articulated in his manic fashion has been repeated by millions of ordinary Americans and professional investors alike. Witness the stampede of value fund managers into bank stocks when they first cracked in early 2007. Aside from lowering their average cost per share, it's not clear what any of them achieved. FCX shares fell below $20 a share and were still under $30 last time I checked.
A generation of investors conditioned to buying on the dips turned out to be suckers for this kind of value trap. The guess here is that, in many cases, much of the difference between a fund that was down a mere 40% in 2008 and one that was down 65% can be traced to how much doubling down the manager engaged in. On a global level, it has resulted in a tremendous destruction of capital.
In a recent letter to shareholders, Jeremy Grantham says equities are cheap by most measures, but he also says 2009 will be the year of the value trap. Maybe this is what it's going to take to drill caution and sense into equity investors, just when they are facing one of the cheapest stock markets in 60 years.