The cover story on this week's Barron's is likely to get attention for a long time, and may even serve to drive down the price of TheStreet.com (NASDAQ: TSCM), Jim Cramer's company. Journalist Bill Alpert takes a look at the track record for Cramer's picks on his show Mad Money.
According to Alpert, "a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher."
I would never dream of buying any stock based on Cramer's recommendation, and here's why: Warren Buffett, one of the greatest investors in the world ever, has often said that he can only find a few good investment ideas per year. All you need is a few in your life to do well. How about Jim Cramer? He gives a few stock picks per show, five days a week, and then gives dozens more buy and sell calls on the Lightning Round each week.
This flies in the face of what most people understand about the markets. We can argue about the extent of their efficiency (Burton Malkiel would argue that nearly every stock is perfectly priced all the time) but the idea that anyone, even a guy who bites heads off of bears, could find so many market inefficiencies each day is absurd. If Cramer can do that, how come almost no one can beat the market? Cramer makes it too easy -- except, according to the Barron's report, he doesn't really. He just pretends to on TV.
Here's something I've never seen on the Lightning Round: "Booyah Jim!!!" "Booyah Allison in Galveston! What's ya stock?!?!" "I'm looking at POS. Is it a buy here?" "Well Allison, it looks fairly valued here and, like most stocks, will move up or down based on future unpredictable events. So it's hard to say. I would own it as part of an index fund so you can keep with the long-term growth of the economy."
The fact that I practically fell asleep writing that is part of the reason Cramer would probably never say that: As he often says, he is there not just to educate but also to entertain. But by giving so many picks and buy/sell calls, he is providing entertainment at the expense of education. The result? A lousy track record.
I'd like to see Cramer take some time to explain the idea of efficient markets to his audience: Most stocks are neither buys nor sells -- they are fairly priced. I have tremendous respect for Jim Cramer. He's obviously a brilliant guy, and I genuinely believe that he wants to help small investors. But he isn't, and the reason is the format. He's trying to do way too much for the sake of entertainment and ratings.
See also:
Douglas McIntyre Leave Cramer Alone
Peter Cohan : Fed Chair Cramer's stock pix lag the market
Closing Bell: Can't go up every day (BAC, HE, HPW, COMS, BRCD, WMT, AMD)
Wal-Mart grows profit and cash flow in Q3, but comps still ailing
Chasing Value: Ten stocks for 2010 -- Part 2
Reader Comments (Page 1 of 1)
8-19-2007 @ 12:39PM
Jon said...
Cramer always says to not look so closely at the lighting round and to focus on the days lesson in the beginning of the show. Is there any company that only tallies Jim's personal picks and not the picks of callers. That'd be an interesting look, since theoretically what he picks himself has far more value, since he has done research into those stocks.
8-19-2007 @ 1:05PM
Ethan said...
Whenever Cramer recommends a stock, it immediately goes flying up in the after market. Therefore, I have to ask, did the Barrons people use the last closing price prior to Cramer making the pick, or did they start with the opening price the next day? The opening price is often 2-4% higher, and will surely come down lower due to profit taking. By the way, I don't think Cramer ever claimed that he would beat the S&P results, he just states "let's make some money", and even with just a 12% return, that's what he did!
8-19-2007 @ 10:01PM
larry said...
WHETHER SOME ONE SAYS "TRUST ME" OR SOME ONE YELLS TO MAKE HIS POINT. I DISREGATD THAT PERSON.
THE PEOPLE WHO INVESTED IN SUB PRIME ARE "QUALIFIED INVESTORS". NET WORTH OVER $5M AND OTHER REQUIREMENTS. THEY WANTED EXTRA HIGH RETURNS AND UNFORTUNETLY FAILED AND NOW WANT TO BE BAILED OUT.
HOW MAY OF YOU HAVE HAD A PURCHASE IN THE MARKET NOT PAN OUT AND DID YOU HAVE SOME ONE BAIL YOU OUT?
8-19-2007 @ 11:17PM
joe said...
apparently this BILL ALBERT is not much of a writer, thinker, or anything or he would have mentioned the fact that - MORE THEN LIKELY - WARREN BUFFETT'S stock buys generally do well BECAUSE many investors buy what he has purchased & therefore keep driving the stock UP for a MUCH MUCH longer period the CRAMERS recommendations etc etc... and to think some people THINK that they are knowledgeable & are a writer -- NOT..