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Brett Arends’s ROI: You may be betting one-sixth of your retirement portfolio on TV’s Jim Cramer

“The Magnificent Seven are the real deal,” Cramer told Mad Money viewers on Thursday. “Seven brilliantly run companies, with amazing sales and earnings. Great balance sheets. So what if they lead the way? I mean, a win’s a win.”

Cramer is so bullish on these stocks that Matt Tuttle, who runs a mutual fund that bets on Cramer’s picks, tells me that after Thursday’s program he decided to move 50% of the fund’s entire holdings into those seven stocks. And meanwhile Tuttle is moving 50% of another fund, which bets against Cramer’s picks, into “short” positions on the same seven stocks, meaning he is betting that they will go down.

So far, so inside baseball. But here’s what most of the public don’t realize.

Those seven stocks have now soared so high that they currently make up a staggering 27% of the entire S&P 500 SPX, -0.27% by market value.

And that means they now make up 16% of a standard U.S. retirement portfolio, which is typically invested 60% in the S&P 500 and 40% U.S. bonds. If you own any kind of standard, benchmark or plain-vanilla retirement fund you are almost certainly heavily invested in seven sky-high stocks that Cramer loves. On average, you’re likely to have $1 of every $6 in them.

Yikes! Or should I say, “booyah”?

Is this a problem?

As usual, it depends on who you ask. Many on Wall Street, and in the financial planning industry, will swear blind that the market is perfectly “efficient,” meaning share prices always make sense. Therefore, they argue, if these seven companies account for one-sixth of a balanced 60/40 portfolio then that’s perfectly sensible.

Others will say that’s total rubbish.

The question of Cramer is a thorny one. Cramer’s critics say he is often a reverse indicator, turning most bullish on a trend right at the peak and most bearish right at the bottom. The “curse of Cramer” is a running joke on Twitter. If he is now all-in on the booming Magnificent Seven, critics say, it’s time to start eyeing the exit.

This is the rationale behind Tuttle’s Inverse Cramer Tracker ETF ( SJIM, +1.70% ).

I asked CNBC if they, or Cramer, wanted to comment. They declined.

But let me offer some defense. I actually like Cramer (despite, or maybe because, he once called me an idiot on NBC, in conversation with…Matt Lauer). I once worked for him at TheStreet, and had a fabulous time under the late, great editor Dave Morrow.

Cramer gets a lot of criticism. But the problem isn’t that he does his job badly — it’s that he tries to do a job that is completely impossible. Every night he is picking stocks, offering fresh insight, and responding to an insane blizzard of viewers’ calls about their portfolio holdings.

Nobody could do his job and beat the market. Nobody. Not Buffett. Not Renaissance’s Capital’s Jim Simons. Not the late Sir John Templeton. It’s amazing Cramer can do it at all.

Dave Morrow, the late editor of TheStreet.com, once told me he couldn’t bear to watch more than about 10 minutes of the program at a time.

Tuttle, who says he has been watching the program every night all year in order to monitor his funds’ portfolios, jokes: “I am doing long-term damage to my brain.” 

The issue is that in the end Cramer becomes — unwittingly or not — a very powerful indicator of the “conventional wisdom” on Wall Street. It’s inevitable. 

(It is noteworthy that when Cramer finally felt so despairing of the stock market that he went on The Daily Show and let himself be berated by Jon Stewart, it was early March, 2009—the exact bottom of the crash.)

“Basically it’s a short-term momentum strategy, sometimes what’s strong continues to be strong for a while,” says Tuttle of Cramer’s stock picks, adding: “To his credit he has been on NVDA, META, AAPL all year.”

And let the record show that since the launch in March, the fund that bets on Jim Cramer has done better than the fund that bets against him: The Long Cramer Tracker LJIM, +0.77% is up 3.2%, while Inverse Cramer is down 3.6%.

But even putting Cramer’s bullishness aside, betting 16% of your retirement on seven companies makes no sense. It flouts basic common sense about diversification, if nothing else. It makes even less sense when those companies’ stocks are already expensive, and popular, and being chased to new highs by the hot money.

Some numbers may put this in context.

According to FactSet data, those seven companies in total are now valued at more than $10 trillion. Their stock market value is now more than twice the annual GDP of Japan.

They have gained $3.6 trillion so far this year — which accounts for 85% of all the rise in the entire U.S. stock market, and more than half the total rise in the entire global stock market.

They are valued, collectively, at about six times the next year’s expected revenues. 

They now trade on an average of 30 times forecast per-share earnings of the next 12 months. That’s about twice the historic stock market average.

These seven stocks also account for 23% of the total U.S. stock market by value, when you add in all the midsize and small companies as well as the S&P 500. And a slightly more sane 10% of the total global stock market.

Make of this what you will. My own take is that at the bare minimum this insanity pretty much proves the case for holding a global stock portfolio, not merely one invested in the U.S. The truly basic, plain-vanilla 60/40 portfolio should be 60% in a global stock fund like Vanguard Total World Stock VT, -0.35%, not in the S&P 500 or even the total U.S. market. (Actually, I’d go even further in investing in non-U. S. stocks, but that’s another story.)

As for the battle between the ETF that bets on Cramer and the ETF that bets against him? Stay tuned.

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