We know the stock market can be stormy waters. In times of turbulence, the first thing most investors do is seek out the most experienced hands. Jim Cramer, for better or worse and often both, has with his “Mad Money” shtick undeniably made himself one of the most well-known people providing market guidance. Should his pronouncements really be your only moral compass directing your investment decisions? I believe a far more prudent approach involves diversifying your strategies and perspectives, crafting a personalized roadmap that aligns with your unique financial goals and risk tolerance.
Cramer’s high-energy schtick and harebrained scheme of the day stock picks make for irresistible television—particularly to beginning investors. Besides the bluster, his daily show is a reliable source of information and his enthusiasm for the free market is infectious. Trusting one source alone, even a well-liked one, is a genuine danger in the unpredictable financial landscape. To best inform your decisions, it’s crucial to diversify your information sources. The market is a fickle beast, moved by a thousand different hands. No one can predict its every step all the time with perfect accuracy.
Following one guru too closely risks turning into a herd mentality. This encourages investors to indiscriminately invest in whatever is hottest and most popular, rather than conducting their own research. This can create and inflate asset bubbles, producing potentially devastating losses when the bubble eventually bursts—inevitably at some point. Longer memory Rewind to the dot-com boom and bust. Many investors fell victim to the frenzy and invested their life’s savings into web-based companies that were earning next to nothing. When the bubble did burst, they lost all their investments.
Cramer’s advice, like that of all market pundits, is usually focused on short-term profits. Though short-term gains will always be tempting, a sound investment plan focuses on long-term gain and security. This puts a premium on a more diversified, holistic approach that looks across asset classes and investment horizons.
So what are some outside-the-box strategies investors need to think about incorporating into their playbook? Perhaps the most promising approach for this work is the least discussed: direct lending. Private middle market loans are a compelling investment opportunity that offer institutional investors a predictable risk-adjusted stream of income. This holds true particularly during market downturns, as shown by the highly respected Cliffwater Direct Lending Index (CLDI). These loans tend to be highly uncorrelated with public markets, giving them a shock absorber effect against volatility.
Real assets—like infrastructure, real estate, and commodities—provide a more attractive hedge against market volatility. These assets naturally hold their value under inflation. What’s more, they show you outperformance returns reliably—regardless of the broader market’s ups and downs. Now imagine that you’re invested in a toll road or a pipeline. Unlike most public equities, these assets continue to produce cash flow and income—even during bouts of stock market turmoil.
Private equity offers a second opportunity for meaningful diversification outside of the publicly traded stock markets. By investing in private equity funds, you gain access to a portfolio of privately held companies, which can be less susceptible to the daily fluctuations of the stock market. Further, while private equity investments are quite illiquid and involve a longer-term commitment, they often provide better returns over the long term.
Hedge funds are known to employ other alternative strategies. You just have to know how to use them well to truly improve your portfolio’s diversification. This is because truly diversifying strategies—such as long/short equity or global macro—tend to protect on the downside while making money on both sides. It’s important to thoroughly vet hedge fund managers and know the risks involved with their individual strategies.
Other credit strategies, like mezzanine loans and distressed debt, provide another means to line investors’ pockets when the market is in decline. These investments involve the risk of lending to companies that are the walking dead. To compensate for the increased risk, they typically have higher interest rates. Although they can be profitable, these strategies demand a unique skill set and deep contextual knowledge of credit underwriting.
Further than understanding particular asset classes, it’s just as important to develop an attitude of always learning and self-evaluating. Investors should regularly reassess their portfolio, at least annually, to ensure it still aligns with their financial goals and risk tolerance. The expected return with any investment depends on market conditions, and thus your investment strategy should change with market conditions.
What I have found to be most powerful is the practice of hedging. By simultaneously opening long and short positions on correlated assets, I can hedge my investment, effectively offsetting potential losses from volatile market movements. I too am a big proponent of building non-toll revenue streams to safeguard against sector-specific downturns.
As with any investment, diversification is an important part of mitigating risk. Diversify your investments between asset classes, sectors, and geographic areas. This approach minimizes the consequences of any one individual investment failing to perform as expected. While diversification does not protect against loss or guarantee investment returns, proper diversification can be the most effective way to reduce the volatility of your portfolio.
Behavioral economists have found that investors tend to experience the pain of a loss nearly double the pleasure of a gain. To stop themselves from selling out of impulse, they have to be able to decide better. 3) Don’t just do what everyone else is doing. Don’t listen to the hype. Instead, take the time to ground yourself in independent decision-making based on your own analysis.
Ultimately, the path to successful investing is one of lifelong learning, adaptation, and self-discovery. Perspectives from people like Jim Cramer can offer some real help. As always, don’t forget that they represent only a small part of the picture. Broaden your approaches and do your homework to figure out the best ways to engage them. Once you know how much risk you’re comfortable with, you’ll be better equipped to establish a financial plan that meets your individual needs and goals. So don’t make “Mad Money” your investment gospel—resolve instead to equip yourself to be a better informed, truly independent investor.
