| || |
Marketing Strategy of Cramer, Berkowitz & Co. -
December 16th, 2010
Founded: 1987 as Cramer & Co.
Total Assets: $265 million (1999 est.)
NAIC: 52599 Other Financial Vehicles
1987: Former Goldman Sachs trader James ('Jim') Cramer founds hedge fund Cramer & Co.
1996: Cramer assumes 35 percent ownership of Internet information service provider TheStreet.com.
1999: Firm is managing some $265 million in assets.
Cramer, Berkowitz & Co. is a private limited partnership that runs a Wall Street hedge fund named Cramer Partners. The general partners are its managers, James J. Cramer and Jeff Berkowitz, while the limited partners are a small number of wealthy people who have each invested millions of dollars. Cramer, Berkowitz has a record of outperforming the returns of a broad stock market gauge, the Standard & Poor index of 500 stocks. Its high profile on Wall Street is due to Cramer, who frequently appears on television, writes columns that appear in print and online publications, and is the founder of TheStreet.com, an online financial news company. He is considered an inspiration for the growing number of Americans who spend their days buying and selling stock on the Internet.
Cramer's interest in the stock market began in the second grade, when he started keeping meticulous records of the trades he would have made if he had the money. A graduate of Harvard College in 1977, he was president of the Harvard Crimson, generally considered the most prestigious post in college journalism. After four years as a reporter, he enrolled in Harvard Law School, but following graduation went to work instead for the elite Wall Street investment banking house of Goldman Sachs & Co. While in law school Cramer had begun to play the stock market for real, reportedly tripling a $500,000 investment made by Martin Peretz, publisher of the liberal weekly the New Republic and the husband of an heiress to the Singer sewing-machine fortune. Peretz was the best man at Cramer's wedding, and when Cramer formed his own firm in 1987, Peretz was one of the first two clients. The other was Michael Steinhardt, a legendary hedge-fund operator who also donated office space to the new venture.
Cramer & Co.: 1987-96
Cramer & Co., the firm he founded, was a hedge fund rather than a mutual fund. Unlike a mutual fund, a hedge fund only takes as a client someone willing to make a large initial investment--generally at least $1 million--and only allows redemption of funds during a limited period rather than at any time. Asked by Kathleen Doler of Upside in 1998 why he had made this choice, Cramer replied, 'The compensation's better. And there are fewer clients. It's easier, and it lets me focus more on doing what I like to do, which is pick stocks.' Cramer said that his future wife, a Steinhardt trader, advised him a week before the 1987 Wall Street crash to sell everything. He did so and broke even for the year, while the Standard & Poor index lost 18 percent. Cramer & Co. gave its clients a higher yield on their money than the S & P or the Dow Jones Industrials average every year between 1988 and 1996&mdashcording to the firm--and all but two years in that period, according to another account.
Cramer was also writing for the New Republic and contributing a financial column for Manhattan Lawyer. In 1993 he also became a columnist for SmartMoney, a new personal finance magazine. This became an issue in 1995, when a front page Washington Post story charged that the Cramer & Co. hedge fund had made $2.5 million as a major stockholder in three thinly traded small companies whose stock soared in value after favorable mention in a SmartMoney column by Cramer. Moreover, Cramer had bought large amounts of shares in these companies after submitting the column to the editors but before the magazine reached readers. As a result of this incident, SmartMoney added disclosures about the stock holdings of its contributors and barred them from writing about stocks in which they held large positions or that were thinly traded.
Cramer denied any conflict of interest and pointed out that he had not cashed in during the rally. 'I have the most strict disclosure rules of anyone in the business,' he was later quoted by Suzanna Andrews in Vanity Fair. 'I am a commentator, not a journalist, who is trying to explain what he sees. I don't recommend stocks. I try to teach people the hows and whys of investing.' The Securities and Exchange Commission implicitly supported this position by taking no action after investigating the matter. Joseph Nocera--a friend of Cramer's--in a Time column, also backed the money manager, writing, 'The value of Cramer's column lies precisely in the fact that its author is a professional trader, not a professional journalist. The fact that he has his own firm's money at risk gives his work a credibility that is largely absent from the bland and scattershot advice so often parceled out by the personal-finance fraternity.'
Cramer's impact on Wall Street trading became even stronger in 1996, when he and Peretz each took 35 percent ownership of TheStreet.com, a publication for investors appearing on the World Wide Web. In order to quell any further conflict-of-interest controversy, Cramer made an arrangement with the SEC by which he was removed from the publication's editorial management and agreed not to tell its reporters about individual stocks unless he refrained from buying and selling these stocks for 30 days. Staffers of TheStreet.com also agreed not to discuss stocks with any of Cramer's employees at his investment firm, which was now Cramer, Berkowitz & Co., with the addition of co-partner Jeff Berkowitz, a former Goldman, Sachs colleague who was put in charge of research.
Cramer's Frenetic Schedule in 1997
By the spring of 1997 Cramer's profile was higher than ever. In addition to his daily contribution for TheStreet.com he was writing for Worth and for Slate, Microsoft Corporation's online magazine. He was also appearing on 'Bull Session,' a television show on CNBC, a cable network, and other programs. Cramer, Berkowitz was now managing about $250 million for 70 clients, with about half the money&mdashcording to Melanie Warner of Fortune--in small companies that he considered undervalued. The other half was employed in making about 200 trades a day through five staffers. Evaluated another way by Alan Deutschman for GQ/Gentleman's Quarterly, Cramer, Berkowitz was keeping about half its portfolio in what Cramer considered long-term investments--stocks and bonds held for at least one year.
In his 1997 profile on Cramer, Deutschman wrote, 'There's no quick and easy key to Cramer's style of investing, no simple set of commandments or rules that encapsulate and explain his stock market philosophy. ... Cramer characterizes his style as `eclectic and chameleonlike,' with a willingness to adapt his strategy to changing circumstances in the market.' Deutschman continued, 'He also thrives on understanding and outwitting the psychology of the market and has a strong contrarian bent for knowing when the market has overreacted to news about a stock. Perhaps most important, he benefits from his experience and frame of reference--his ability to compare market situations to similar ones he encountered weeks or years ago, taking advantage of his Rain Man/Mr. Memory acuity.'
A typical working day for the hyperactive Cramer--who claimed to sleep three hours a night--started with an hour or two of work at home, beginning at 3:30 in the morning, followed by a chauffeur-driven trip from his Long Island home to his Wall Street office. He read 26 newspapers--including more than one edition of the Wall Street Journal and New York Times--noting changes in emphasis--and hundreds of research reports and news releases every day. He also called chief executive officers and responded to the dozens of daily e-mail messages he received from the public. During a typical trading day, viewing six computers on his desk and barking orders to seven staffers, he would make 100 stock and 50 option trades&mdashcording to Deutschman--buying and selling constantly to earn a profit of 50 cents a share.
'The vast majority of what I do,' Cramer told Jill Dutt of the Washington Post in 1997, 'is try to assess whether the market itself is wrong [that is, too optimistic or pessimistic] on a short-term basis.' But his frenetic trading also had another purpose--earning large commissions for brokerage houses that in turn afforded him access to their best analysts. After the markets closed, Cramer would depart for home, where he would write as many as six columns each evening for TheStreet.com under the contrarian heading Wrong!
In one example of profiting from the market's pessimism, Cramer bought 300,000 shares of Philip Morris stock after investors, in just one day, had taken its value down $10 billion following an adverse court ruling. When the stock quickly rose again, he earned $1.05 million. 'Morris is a hugely emotional stock,' he explained to Deutschman. 'People trade it with emotions, not brains.' Cramer described as his best trade the purchase, in 1989, of Intel Corporation shares. Following the 1994 news of a flaw in Intel's Pentium chip, Cramer chose to double his investment in the company. As the price of Intel's shares continued to fall, Cramer tripled, then quadrupled, his holdings. 'At one point I had 60 percent of my assets in Intel,' he told Dutt. 'I just didn't believe this flaw could matter that much. At one point I thought, `Oh, my God, I have to sell everything because all I have is Intel.' By the spring of 1997 Intel's stock had risen more than fivefold from its nadir.
On the other hand, Cramer lost $8 million as the largest stockholder in Rexon, a producer of backup computer tapes that filed for bankruptcy protection in 1995. In addition, five months after buying 1.1 million shares of Dow Jones & Co. in early 1997, he sold almost all of it because, he said, he was tired of waiting for the company to sell its unprofitable electronic financial information unit, formerly named Telerate. At one point Dow Jones stock comprised about 15 percent of Cramer, Berkowitz's portfolio. Cramer took a $4 million profit on the investment, but Dow Jones sold the unit in early 1998 and Cramer was said to have conceded that he had made a mistake.
Falling Out with Peretz: 1998-99
Besides managing his investors' money for Cramer, Berkowitz and writing columns for TheStreet.com, Cramer was, in June 1998, appearing as a guest cohost on CNBC and a commentator on ABC's 'Good Morning America,' plus also writing columns regularly for GQ and the New York Observer. By this time all his writings and television appearances were accompanied by some kind of disclaimer to the effect that he did not intend to, and would not be allowed to, profit as a money manager in his capacity as a journalist. During the summer he said he had cut down on his activities, rejecting most requests to go before the TV cameras and even taking a two-week vacation with his family.
A new conflict-of-interest controversy developed after Cramer, appearing on the CNBC program 'Squawk Box' in December 1998, said that he had called his broker to say that he wanted to short-sell the stock of WavePhore Inc., a developer of online broadcasting technology, 'because I think this is a big speculative bubble.' When WavePhore's stock immediately sank in value, the company demanded an investigation, and CNBC temporarily suspended Cramer from its show. He returned after the network confirmed that Cramer had not actually shorted the stock, either before or after the program. A CNBC spokesperson said Cramer always submitted his financial holdings before he appeared on the air.
More serious to Cramer's credibility was a February 1999 New York Times article that reported Cramer, Berkowitz had earned only two percent in 1998, after fees, for its investors, compared to about 29 percent for the S & P index. The Times said it had obtained a letter to the fund's investors claiming that Cramer, Berkowitz's performance had been damaged by redemptions that forced it to sell stocks at the bottom of the 1998 market--during concerns over a possible Asian financial collapse--when it intended to buy. (During this period Long-Term Capital Management, a larger hedge fund, suffered heavy losses and had to be rescued by a consortium of banks and brokerage houses.)
According to a Vanity Fair article by Suzanna Andrews, Cramer was enraged by the Times story and was convinced that only Peretz could have leaked the fund's letter to its investors. Her article reported that Peretz--who denied leaking the letter--had withdrawn all his money from Cramer, Berkowitz and that his differences with Cramer stemmed from disputes concerning TheStreet.com. Peretz told her that he had closed his account because Cramer had abruptly resigned as a trustee from several Peretz family trusts without telling him. Cramer, in turn, called Peretz's account a 'canard' but conceded he had resigned because, he said, he was not being consulted. Bitter over Peretz's defection and his alleged leak to the press, he told Andrews, 'They all pulled out, and I had to sell into the worst market possible,' in order to raise the money needed to pay off these investors.
Peretz also closed his Crimson Investments account with Cramer, Berkowitz. This account consisted of a pool of small sums invested by Harvard graduate journalist friends of his and Cramer's, among them Jonathan Alter, Fred Barnes, Eric Breindel, Michael Kinsley, Charles Krauthammer, and Leon Wieseltier. Journalists not in this pool but later brought into the fund by Cramer included Kurt Andersen, Steve Brill, and James Stewart. The minimum initial investment in Cramer, Berkowitz for the firm's 70 or so limited partners was $2.5 million. A staff of nine principals was assisting Cramer and Berkowitz in late 1998. The fund reportedly had $265 million in assets in March 1999. The firm was taking as its profit the standard 20 percent charged by hedge funds on what they earned for their clients, plus a one percent asset management fee, also standard.
Principal Competitors:Long-Term Capital Management.