Jim Cramer’s Stock Picking Advice

Update: I’m watching The Daily Show right this minute, and John Stewart is going after Jim Cramer.  I didn’t know he was going to be on Stewart’s show, but this piece couldn’t have come at a better time.  Watch a repeat of the show over at the show’s site.

I’m pretty wary of investment gurus that are sharing their “wealth” on information and knowledge with the public at large.  I do think there are some people that truly have knowledge and ideas that are extremely valuable and feel a calling to teach and share their ideas.  Benjamin Graham was that kind of person.  I think it’s rare though.  There are more people out there who made their money from writing books and marketing them than there are legitimate teachers, like Graham.  I’ve written before what I think of Robert Kiyosaki.  I think these “gurus” are extremely common in real estate.  In general, I think you have to be wary about anyone who claims they will make you rich with very little time or effort put forth on your part.  Don’t pay for expensive seminars put on by gurus.  Take what they say with a grain of salt. 

That’s not to say that you can’t find valuable information out there, because you can.  You just have to be a filter, not a sponge.  One place I specifically don’t think people should be getting their investment advice and/or business news is CNBC.  Lots of people were wrong about a lot of things with regard to the meltdown.  That’s just a matter of fact.  Even the people who predicted it lost a lot of money (Peter Schiff’s portfolio lost something like 60%).  If you want to find someone who has consistently been wrong over the course of his public career, look no further than CNBC’s host of Mad Money, Jim Cramer.

As a preface I’d like to say I don’t believe in what Jim Cramer is attempting to do in general.  He’s encouraging people who have no business trading stocks (and should be in index funds) to actively trade stocks.  I know it isn’t personal.  He has an entertaining show and has entertainment value.  The market must value a stock picking show – since it exists.  I’d just like to weigh in to encourage you to ignore his recommendations and predictions.  Here is a February 2000 quote in which he takes a shot at Graham and Buffett, the heroes in our story, proclaiming that internet related companies,

“…are the only one’s worth owning right now.”  These “winners of the new world” as he called them, “are the only ones going higher consistently in good days and bad.  You have to throw out all of the matrices and formulas and texts that existed before the Web…If we used any of what Graham and Dodd teach us, we wouldn’t have a dime under management.”

We all know what happened next.  Calls like these have become the norm for Jimmy Cramer.  For instance, check out this prediction on March 21, 2008:

“I call it a bottom.  Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market…mind you, I don’t think we’ll have a meaningful rally up from the current levels until we’re closer to the election…”

Wrong.  Completely wrong.  The company/stock he can be heard recommending, Bear Stearns, was purchased by JP Morgan for about $10/share (down from it’s 52 week high of about $133/share).  I don’t think anyone can consistently predict the markets.  It’s important to recognize this if you want to maintain any semblance of credibility.  I understand the strategy.  Make a bold prediction.  If you’re right, you look like a genius.  If you’re wrong, people will forget – especially with a lot of distracting props and noises on your show!  The problem with this strategy is that it’s irresponsible.  There are people looking to Cramer for investment advice, putting perhaps what counts as a lot of money to them on the line based on his recommendations.  I’m proud to say I’ve never been one of those people.  Check out lots more Cramer quotes (incorrect, for the most part) here.  At least one commentator has made a pretty strong case for Cramer’s general dishonesty. 

Not only is Cramer a poor source of economic predictions, his stock picks offer poor performance as well.  CXO Advisory Group did a study of Cramer’s picks.  It’s a bit dated, but let me summarize some of the data for you.  Cramer’s “buy” recommendations significantly underperform the market.  Buying an index fund of the overall stock market would crush Cramer according to this study.  Further, if you bought Cramer’s “sell” recommendations, you’d be beating the market by a decent amount.  So, to summarize that summary – buy what Cramer suggests you sell and sell (or ignore) whatever he tells you to buy.  Over at MarketWatch they found that passive portfolios outperform Cramer’s Mad Money picks.  Seeking Alpha pointed out that some investors have been able to make money by simply shorting all Cramer’s picks.  It’s a basic contrarian strategy, and it makes perfect sense that it would work with Cramer.  In my opinion, Cramer is a Wall Street insider who makes recommendations based on the general climate on Wall Street.  He’s the type of weather man who can tell you if it’s raining outside, but is apt to change his mind as conditions change.  You can look out the window on your own.  Keep that in mind.  Thanks for reading.

PS – The Playbook was included in a blog carnival over at MoneyNing - check it out.

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Tagged as: Benjamin Graham, day trading, Jim Cramer, Value Investing, Warren Buffett