Let this be the death of risk on, risk off

This lazy nonstrategy might as well be called 'buy high, sell low.'

By Jim Cramer Jan 2, 2013 10:06AM

thestreet logoStock market report ULTRAF Digital Vision Getty ImagesYou know what didn't work in 2012? Risk on, risk off. As hard as I tried to stamp out this ridiculous bit of hedge-fund-ese, I was not able to. There are too many commentators out there, and too many traders who want to succumb to this kind of non-rigorous, intellectually lazy thinking, and it's impossible to shut them all down.

But let 2012 be a lesson to you: It was revealed that you would have underperformed these people if you'd followed them. Notice I say "underperformed," because one thing is for certain -- none of these blowhards will let you see their returns after what I bet was a fiasco year for what I can only call an "alleged" strategy.

Why did risk on, risk off lead you astray? Let's count the ways. First and foremost, the S&P 500 ($INX) gained 13.5% last year, or 16% if you include reinvested dividends. One thing we know for sure is that those who played this on/off switch game -- this binary nonsense -- didn't get to reinvest those dividends. Again, these payouts were a hugely important component of the year's performance. Some of these trading machines may not have much of any of these dividends to show for their efforts, let alone reinvested ones, even as companies continued to deliver increasingly higher payouts and even though the tax rate on them was absurdly low. (At this point, let's just call that tax rate "low," as the increase in the new law only takes it to about half of what we were warned it could be.)

Second, the shorthand "risk, no risk" let you down entirely as a daily allocation tactic. Let's take Europe. What was risky? Bonds? Stocks? Bonds were miraculous performers. But stocks were incredible, too. I guess if you flitted from risk-on to risk-off and back again, you sold low and bought high pretty regularly. After all, the biggest amounts of money were made from the riskiest moments -- theoretically what you were supposed to avoid if you were "playing" risk-off. The non-strategy might as well be called "buy high, sell low." Maybe if you do it enough times, it will work?

I don't think so.

Third, risk on, risk off totally backfired as a portfolio sector-management tool. The riskiest stocks were the least risky -- the utilities and the lower-yielding healthcare names. So you would have been hurt even by the term "risk" as a rubric. Secondarily, bonds as a risk-off strategy seems contradictory. Bond funds began to take it on the chin late in the year even as the environment got riskier and riskier, thanks to the fiscal cliff and its attendant spending slowdown by more cautious U.S. consumers.

So what's the conclusion of all of this? Simple. I ran money for 30 years before this risk-on, risk-off garbage came in to play. I am beginning to believe it is simply the refuge of those who refuse to do individual stock homework, or who can't think of anything to ask or say.

Let 2013 be the year when people who continue with this terminology get defrocked -- not that they were ever frocked to begin with. I know I will do my best to out them as short-term mental hooligans. Maybe this time, with the sterling performance of the risky S&P, it will become clear that the risk-on/risk-off nonsense is nothing but a travesty perpetrated by those seeking and offering sound bites that were nothing but costly diversions from true investing principles.

 

cramer's face

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust.  

 

 

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95Comments
Jan 2, 2013 1:43PM
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Lemmeee see, Now we have the "3 Ds" to battle over..Debt, Deficits and Defaults....Right ??
Jan 2, 2013 1:42PM
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Ok,help me understand something,this "cliff" deal only held off a N E W problem,it didn't S O L V E  any present problems.Sooooo,whats driving the market and oil up so much ???

 

allow me to explain....the market is manipulated by those who have money........they create the ILLUSION that things are going fine.....u, the dummy, invest and drive the prices they intend to sell into higher...

 

IT'S ALL KOOLADE

Jan 2, 2013 1:40PM
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Noticed that Swaggs and Active are flitting in and out today; Hope you both had a nice Christmas and Best wishes for a Prosperous New Year in 2013...

Got to agree with a lot of what oldCHUM is saying...We got a can-kick on parts and there is plenty of work to do yet....It involves cuts, and many; OTHERWISE this was just "window dressing."

 

Glad some have explained what we(they) have accomplished so far...Read a little in other places,

some is important to us, and plenty might be important to others...THEY are far from done, YET.

The VOTE of 257-167 is not what I called comfortable.....We'll see.

As I called a few to a dozen days back....Expected "11th. Hour" and a "300-500 up for the week..."

But we still have the Profiteers, lurking in the shadows..And a few pennies are just that, a few pence.

Jan 2, 2013 1:36PM
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Excellent article Evil Chris, we've taken a small step in the right direction by not continuing to coddle the super rich. Mitt Romney made about $25 million last year and had He claimed His Charitable deductions He would have been in the 9% federal tax bracket, while I paid 13% making 333% less than Mitt. Now Mitt will have to pay about the same as me, is this class warfare or is it just fair ?
Jan 2, 2013 1:18PM
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Just seems like a good day to sit back and SIP...Fine whiskey...Got a few bottles for Christmas..

Have a few friends...That drink...And a couple good kids or g-kids.

 

As I wrote elsehere......Just sit back and muse about what has happend.

Your Congressman and Senators are probably all Gathering for expensive luncheons,in small groups.

I'm sure they are backslapping, all saying they did what they could; And won their Points..

All sitting around giggling about how they GOT their way...And the other guy was an idiot.

And we will all get this hammered out in a few weeks, and all be winners...except..

Yup guys, light up the Cigars;  Time to get the "top shelf" booze out..

Jan 2, 2013 1:11PM
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We're on the brink of financial collapse because of the debt and the market is over 13,000. Nothing to worry about here, just keep risking and smiling.
Jan 2, 2013 12:50PM
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It makes no sense to me that the government eagerly condones the inflation caused by the federal reserve, but then must buy (and can't afford) the resulting inflated goods and services. 

Jan 2, 2013 12:47PM
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Thank you to Active RIA for pointing out what this bill does that is very good;

1.  this provides a measure of short-term certainty over both income tax and estate tax policy

 

2.  this provides a big stimulus of another year of federal unemployment payments

 

3.  this fixes the whole alt min tax (AMT) mess permanently so it doesn't have to be fixed and kicked around every year

 

4.  this shows that when it comes to a real crunch, and when obama takes the time to actually provide leadership instead of doing the hulu in hawaii, the congress can actually come together and compromise to get something done

 

It seems that only you and I have read and liked this bill LOL.  I agree it is a solid first step, everyone on here complaining about this bill not addressing spending cuts seems to miss the point.  Immediatly after the bill passed every member of congress and the president  all said we now have to tackle spending but the tax issue has been solved, a first step.  They are not saying they are done and admit there is tons of work ahead. 

This bill does everything you wrote and maybe as importantly it will 1 less complication or issue to hide behind when negotiating spending cuts.  The cuts in the cliff that will happen in 1 month actually seem less scary now without the tax increases, might be the only shot at decreasing military spending.

 

in the end, this was a concrete advance from the fear gripping the market based on past actions of the conservative roadblock in the house of reps.  it is indeed a good beginning ....  

Jan 2, 2013 12:45PM
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Of course Jim.  The major proponent of changing horses in mid stream are the brokerage houses.  They make a fortune and foster the uncertainty for their own profit.  Where there's money to be made, these is BS.  I have only seen two analysists that have an open portfolio and a track record to back it up and both are named Jim.
Jan 2, 2013 12:40PM
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And this morning when anohter commentator asked what about the fed being the biggest buyer of our debt by prining money, Mr. cramer smugly said "Go buy some gold".  These pundits who are legends in their own minds are really something.  They remind me of people who laughed at me in 2006 when I said you had to be a dummy to buy a house especially in places like Florida or Phoenix. We cant default on our debt. The only thing the U.S can do is keep doing what it has been doing and that is printing money to buy bonds to try and keep interest rates at zero. But even the fed has warned that will be coming to an end in 2014.  A one percent increase in interest rates will eat up the entire obama tax increase. How come people like Mr. Cramer dont talk about that??? But in five years or so Mr. Cramer will have forgotten his smugness just like he cant remember his smugness during the internet boom when he was telling you to buy companies like Yahoo in the hundreds pers share.

Jan 2, 2013 12:32PM
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I have watched Mr. Cramer on and off since the internet stock bubble. I love how now he and Mr. Blodget have become quasi liberals now since they live in the beltway.  Why on earth would you listen to anyone who screams buy buy buy or sell sell sell on their investment entertainment show.  Mr. Cramer should play some of those clips back in 1999 when the sky was the limit and little investors got sucked in.  What happens in 60 days when the debt limit comes??? Is mr cramer going to ignore that as he famously insisted this morning??? And when we have a 300 point plus drop or more in one day will he be telling you to ignore washington, ignore our debt, ignore our deficit then???? 
Jan 2, 2013 12:26PM
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So once again not one sickening thing has changed, and there'll be more trillion dollar annual debts, more market and commodity manipulation, more money printing, and more corruption. Just what the stock market wanted.
Jan 2, 2013 12:19PM
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So nothing was done about spending?!?!?  I just saw on TV that this bill passed yesterday actually adds $4 trillion more to the deficit.  This is CBO numbers.  I assume that's over 10 years but not sure.

So why would anyone celebrate such a bill?
Jan 2, 2013 12:16PM
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No significant cuts in spending will come from this deal, just more money for Washington spenders to squander. Investors are pouring money into stocks and we have another crisis to deal with, giving the spenders even more money by letting them borrow even more. We just gave them more spending money and we cheer, and we will give them the OK to run up more debt and we will cheer again. What's wrong with this picture?
Jan 2, 2013 12:15PM
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what do we do when and if we run out of paper.

Jan 2, 2013 12:00PM
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Who didn't know the market would be up today?   LOL
Jan 2, 2013 11:57AM
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Well, JC certainly does make some good points here for the buy and sell investor for 2012.  However, I would like to see a side-by-side analysis as to how this buy and hold strategy has performed since January 1, 2000.

 

What would avoiding the 50% decline in the 2000-2002 tech crash have done for your long term returns - even if you only avoided two-thirds of that "tech-wreck?"

 

What would avoiding the plus-60% decline (mix of big/small cap U.S. and foreign stocks) in the 2008-2009 financial implosion have done for your long-term returns - even if you avoided only two thirds of that?

 

There are a lot of "break-even" long-term stock investors, even with this one-time "bonus dividend" year that basically robbed from future earnings.

 

One thing is for sure - "cherry picking" investment performance periods like this is easy .... but talking the "intellectual lazy" talk is a lot easier than taking that intellectually honest walk.  Show us some long-term numbers and charts please.

 

Wishing everyone a peaceful, healthy and prosperous New Year.

Jan 2, 2013 11:49AM
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FIRST OFF.....You have to have a plan.....Then if it all goes to shidt...You have to have another plan.

Let's call that Plan"B".....If that falls into the proverbial manure pile....Try Plan "C"...

 

If you have went this far, you probably don't need anoher Plan, because you are pretty much done OR

COOKED, TOAST, FINI........SCREWED.

Jan 2, 2013 11:25AM
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Let's see.... "risk on"...."risk off"...Should be on a light switch...Never know what electricity will do..?

A little bit like "lightning in a bottle."

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