Jim Cramer's Advice Slightly Worse Than A Coin Toss?
In a not-so-shocking analysis of one of the most-watched TV investment advisers, author Eric Tyson argues that Jim Cramer's actual stock-picking performance doesn't match the strength of his bellowing.
Besides his show Mad Money, Cramer is all over CNBC dispensing investment advice left and right. He's got to be out-performing other investment advisers and especially the market, right? Not really.
Tyson points out that Cramer's past hedge fund results (the basis for his claim of investment success) have never been audited or independently verified. Then Tyson starts his assault on Cramer's more-trackable public stock recommendations with the following:
There is a web site, yourmoneywatch.com, which, unbelievably, tracks all of the stock recommendations on Cramer's television show. The web site is operated by Michael McGown who has been tracking Cramer's television show picks since July, 2005. Over that time period, Cramer's picks, after being held accountable for trading fees, have performed worse than the broad market averages. His overall average with simply picking stocks that go up is pretty dismal. The most recent tally shows that out of more than 1500 stock recommendations, more than half have gone down!
A second source delivers similar, though more damaging, findings:
CXO found that Cramer's stock market predictions (monitored from 2000 onward) were worse than average and even worse than simply flipping a coin. Cramer's prognostications fared better than the market averages only 47 percent of the time. Regarding Cramer's predictions, CXO comments that, "His predictions sometimes swing dramatically from optimistic to pessimistic, and back again, over short periods. It is difficult to infer his guiding valuation theory, if he has one. We wonder whether he tends to be swayed by the arguments of forceful advocates with whom he most recently interacted...He seems more a stream of uncalibrated opinion than a stock market maven."
Finally, Tyson includes a link to a video where Cramer, "boldly proclaimed that the stock market lows hit in mid-July marked the end of the stock market's downturn!" We all know what's happened to the market since then — July was certainly not anywhere near the low point.
As with any advice, Tyson says it's "buyer beware" when listening to financial advisers who claim to have superior knowledge but no real proof of success. Media outlets build up investment "experts" (or "personalities" if you prefer) to generate ratings, period. If the advisers can do that, they're a success for TV. But that in no way means their advice will prove success for the viewer that applies it. Think about it this way, do you really want to take investment advice from an actor?
For our money, we'd go with Warren Buffet's advice and recommend index funds. Then again, our investment performance is yet to be verified as well. Time will tell.
The Worth of Jim Cramer's Advice [Eric Tyson]
Jim Cramer Deconstructed [CXO Advisory]
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Comments:
Jim Cramer's actual stock-picking performance doesn't match the strength of his bellowing.
How could it? If it did, he'd be bailing out GM, Chrysler, and AIG on his own.
This is the same jackass who said "No, no, no! Bear Stearns is fine! Do not take your money out. If there's one takeaway...Bear Stearns is not in trouble." and then they imploded 5 days later.
He who yells the loudest has the most to hide.
If you look closely "Mad Money" expands out to "You're Mad because I lost all your Money". Though almost everything is going down, so how can you make money?
LOL, this guy was saying to buy banks and homebuilders right at the peak. Thank god for guys like Cramer so I could buy puts so cheap on a guranteed win.
I've said it once and i'll say it again:
Jim Cramer is the Billy Mays of the financial World.
I'm no fan of Jim Cramer, but when I went to the link, it shows that he performed better than the indexes?
The running joke I've seen on stock boards is that you pull out your money when Cramer recommends a stock 'cause its just going to go down.
I'm not a fan of this guy either...I think he's rather obnoxious.
But out of fairness...has anyone paid any attention to what kind of market we're in right now and what the economy is doing? Saying - "half his stock picks have gone DOWN!" isn't a reasonable critic given the fact that nearly every stock out there recently has been performing poorly...
But the article main point is still valid...never take advice from someone who doesn't know what he's talking about...
Who gets stock advice from CNBC? If you're getting stock advice from TV, your an idiot.
Get a broker, get a book, learn on the internet, something, anything except for blindly following 1 persons advice on TV.
This reminds me of a theory of mine. There are a lot of "movers and shakers" in the world, but none of them are necessarily smarter than the next guy. If you have a gift for speech, and can convince people of your credentials, you have all you need in life to be successful. This is why the smart people typically don't make tons of money...soft spoken intelligent people don't go far in this world.
While I don't use Cramer to pick my stocks. You all have to realize that his show exists to make money for MSNBC and he will do what he can to make that money.
In the past Cramer was a successful investor working for Goldman Sach's and even had his own hedge fund. He himself is a smart person, he just needs to make good TV.
Ben, I'm not sure if you've ever cracked a financial textbook if you bolded this passage: Cramer's prognostications fared better than the market averages only 47 percent of the time.
That's pretty good, much better than expected for a guy that I badly dislike. It runs contrary to your headline. It's also limited - they should construct a portfolio of his recommendations and determine the MPT variables - alpha, beta, sharpe ratio, r-square, and std. deviation.
I need to start my own tv show and call myself a "Wall Street Expert" because after seeing how these people just talk off their rears, then I think I can pull it off too. All these so called experts are nothing but silly clowns spinning the wheel as to what to say next. Cramer is indeed, as mentioned by another post above, the Billy Mays of finance. After all, they do have plenty of similarieties. They both talk loud, are too animated to have a normal conversation with. And, both sell you junk that never works.
I never even heard of this guy before Iron Man
The headline alone made me blow my coffee through my nose..
Ow! It burns!
I've always called this the "Bill O'Reilly principle", where the louder somebody says something on TV, the less reputable I consider their message. Works for Billy Mays as well.
This is a shock?
Cramer makes NBC-Universal money, if he didn't they would can him. When he stops making money for them they'll get rid of him. Nobody cares about the fools who took his advice.
@number9: I dislike him immensely, but this is an unfair characterization of what he said. He said that you did not need to worry about stocks/bonds/money that an investor held at Bear Stearns, as it was protected by SIPC insurance. He was NOT telling the caller to hang on to an investment in Bear Stearns stock.
Part of the problem is that people are looking for that one sweet ride to the top. The company that will multiply your money tenfold and keep going and not drop like a rock.
.
They do happen, but they're rare and they look like a lot of other promising companies that are never going to turn a profit.
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In other words, it's like playing the lottery.
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Smart investors look beyond returns to look at the costs of a stock and the costs of continual trading. They pick a good balance of funds, rebalance occasionally and realize that this crisis will pass and they'll have gotten more shares for their dollar.
@Troy F.: One important strategy of the floor traders is keeping your losses small and have low tolerance for risk. You can lose 70% of the time in small amounts if you are capable of winning big. This is what a good stop-loss order is all about. It's what keeps the day traders away.
@RurouniX: I was thinking the same thing. It would be more telling to show how were his picks doing last August relative to the market indices.
I don't think you can find any financial guru at the moment whose stock picks aren't currently tanking.
I stopped listening to this guy after he rated The Bluth Company as a "Don't Buy."
As for index funds, they're junk. You haven't performed in 10 years. The era of indexed buy-and-hold strategies is and has been over - you can't count on the general performance of US equities anymore and need to focus on best-of-breed baskets of stocks in a variety of industries.
@Underpants Gnome: I do have to say one thing: my wife bought mighty putty a while ago (don't ask), and a couple weeks ago I had one of the tow loops break off my jeep . I actually (partially as a joke) fashioned a tow loop out of mighty putty and let it set overnight. It's still there.
I laugh at Billy Mays as much as the next guy, but I have to say that stuff does work as advertised.
He reminds me of Limbaugh in many ways. The masses rely on his "wisdom" and parrot his world view until he's demonstrably proven wrong, wrong, WRONG.
Then these same crowds shrug, say, "Tee-hee - but he's there just for entertainment value - he's not supposed to be right."
Cramer's career can best be summarized as, Here lies a man who knows the price of everything*, but the value of nothing.
* Well, not really, but damn it, I'm on a roll here!
@Troy F.: I knew he was full of crap when he recommended selling stock in Stark Industries after they announced they were getting out of the weapons industry.
Oh I'm sure Cramer makes a lot of money but it isn't from investing in Stock.
It's like those self help books on how to make millions of dollars. The actual content of those books is close to useless. The way to make millions of dollars is to write self help books on how to make millions of dollars.
I'm sure you could look at any handful of stocks and find diminished performance over the past 4 years.
It's not Cramer's fault, just an overly sensational press.
50% average on returns right now is nothing to be ashamed of.
@RurouniX: Yep, the headline of this post is misleading, though probably through an understandable misunderstanding of statistics. Choosing 10 stocks, 6 of which go down, is not comparable to a coin flip since you should actually be looking at and accounting for the thousands of stocks that weren't chosen. It would only be comparable if there were 10 total stocks in the market, 5 of which would definitely go up and 5 of which would definitely go down.
This doesn't really surprise me much. In the long run, you just can't beat the system. You can get lucky, but the increased potential reward always comes with increased risk, and so you can also lose your shirt. Returns in an index fund are more conservative, but so are the risks. If you want to put your fun money into a trading fund, that's one thing, but the last thing you really want with your retirement is risk.
It's basic finance-class stuff. If you're a billionaire you can stand a lot of risk, go ahead and play the game. If you're a working-class person with an IRA and a 401k, you don't want risk, you want your money to be safe until you need it and hopefully make a little in the process. If you can't afford to end up with nothing out of that investment, you've got no place picking stocks.
Folks, Cramer is just ENTERTAINMENT. I used to laugh at his antics while my wanna-be stock broker buddies would nod knowingly at the screen and take notes.
I remember being in Chicago once and he was on some big screen in a hotel or the airport and all of these powersuit guys waiting there were rivetted to the screen, but not one smile on their faces... I really wonder if they were in on the joke or were the actual punch line themselves.
People - especially rich ones - are often very stupid.
This is not terribly surprising.
Cramer was a hedgie whose advantage was that he could leverage large sums of cheap money from his deposits, allowing him to turn positions doing moderately to mildly well into substantial gains.
For instance, if you borrowed $100K based on $5K in collateral at 2% interest and got a 3% return on your investment, then your net profit is 1% of the $100K = $1K, or a 20% return on your original $5K.
So even if his picks as a hedge fund manager underperformed, he probably could still generate better-than-average returns, provided he had access to cheap money. The problem is, most of us don't have collateral that would allow us to leverage ourselves to the hilt like Cramer did.
Only 1,500 stock recommendations? Jeez, I thought Mr. Boo-Yah made at least 3,000 picks in the last 4 years. Saint Warren Buffett once said that you should imagine you only have 20 investment choices in your whole lifetime. With only 20 shots you would be very careful and prepared when you invested your money. No willy nilly careless picks. Senor Cramer makes those 20 picks in 1 week.
@RurouniX: I think it's looking at his stock picks since July of 2005, so it isn't just a matter of the downturn of the past months.
IMO, what Cramer does on TV is little more than a pump and dump scheme. He's paid to push a stock that has already peaked to ensure there will be demand for the stocks when current shareholders wanting to cash in have someone to sell against.
Sure, some of his picks continue to go up even after he's picked them, but the majority of the time, the money has already been made, and the people jumping in based on Cramer's bellowing are making the smart, rich investors more money on their way out.
Guess what people? With the exception of Warren Buffet, NO investment manager can consistently beat the market, and once you add in the fees for managed funds, you're doubly screwed. Read The Four Pillars of Investing, A Random Walk Down Wall Street, or anything by Jack Bogle and get thee to an index fund.
CNBC just announced a new stock market pundit shown...
Toss Up with Susan B Anthony.
And it's really a Susan B Anthony dollar.
FWIW, Eric Tyson's financial advice saved me over $2000 a few years back. I was a recent college grad who had taken out a loan (at 8%) against a whole life insurance policy my parents had established for me when I was a kid. I was reading Tyson's book Personal Finance for Dummies and ran across the chapter on life insurance. He explained that I could terminate the loan by terminating the policy. So I did. Saved me not only the $2000 of the loan, but also all the interest I would have paid over the life of the loan (and since I was making under $25,000, it would have taken me years to pay it off).
@Bladefist: ironically, brokers tend to watch CNBC and then charge you for parroting the same advice.
Screw brokers.
The key takeaway is:
I'm no fan of Cramer, but Tyson says that Cramer does not beat the market after brokerage fees, but such a claim seems to be no more independently verifiable than any of Cramer's claims about himself.
So perhaps they are both full of crap.