CNBC host Jim Cramer has recently been challenging the prevailing belief that investors can only succeed by investing in index funds and that trying to outperform the market with individual stocks is futile.
In a recent episode of "Mad Money," Cramer questioned the efficient market hypothesis, which says that all available information about a stock is already reflected in its price and that it's impossible for investors to consistently beat the market by picking individual stocks. He called the efficient market hypothesis "bogus," adding that the market has a lot of "anomalies" which can be used by individual investors to their advantage.
Don't Miss:
- The AI Marketing Platform Backed by Insiders from Google, Meta, and Amazon — Invest at $0.85/Share
- Americans With a Financial Plan Can 4X Their Wealth — Get Your Personalized Plan from a CFP Pro
"I did consistently beat the averages nearly every year at my old hedge fund, giving my clients a 24% compound annual return after all fees over the course of 14 years, versus 8% for the S&P," Cramer said. "The simple truth is that markets are not perfectly efficient. In fact, frankly, they’re often irrational. They ignore things, make mistakes, misvalue information every day. And that’s a major reason why anyone can make money picking individual stocks."
‘The Safest Way'
However, Cramer acknowledged that low-cost index funds remain the "best" option for individual investors to gain exposure to the stock market. He advised his followers to put a "big chunk" of their savings into a low-cost S&P 500 fund because picking individual stocks requires a lot of work.
"It’s the safest way to give yourself equity exposure," he said. "It’s perfect for your retirement accounts. You can gradually contribute over time with every paycheck and as long as you believe the US economy can keep growing over the long haul, you can park that money in an index fund and check in on it maybe once or twice a month."
Trending: $100k+ in investable assets? Match with a fiduciary advisor for free to learn how you can maximize your retirement and save on taxes – no cost, no obligation.
Cramer's Version of Efficient Market Hypothesis
Cramer said that even though the efficient market hypothesis isn't entirely correct, when used as a "rough guideline," it can still lead us in the right direction.
Cramer shared what he called his own version of the efficient market hypothesis, in which the market almost always mirrors the majority’s consensus. He told his listeners not to stress over events that everyone believes will happen, because when investors are certain of a positive or negative outcome, the market usually prices it in.
"When all the talking heads and journalists and media-friendly money managers are telling you to be afraid of the same thing, that might be the one thing you don’t actually need to be worried about," Cramer said. "From the stock market’s perspective, the fact that most investors believe something’s going to happen means that Wall Street’s already treating it as a reality."
Read Next:
- An EA Co-Founder Shapes This VC Backed Marketplace—Now You Can Invest in Gaming's Next Big Platform
- Buffett's Secret to Wealth? Private Real Estate—Get Institutional Access Yourself
Image: Shutterstock
© 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
