Immediately after the stock market plunged in October 2008, hundreds of thousands of loyal viewers tuned into Jim Cramer's "Mad Money" (CNBC) for advice on where the market was headed and what they should be doing with their money. Cramer has gained considerable celebrity and a large following because of his entertaining presentation and super confident stock picks.
But do his picks actually pan out? Are you better off when you follow his advice? According to an article recently published on Barron's website "Cramer's Star Outshines His Stock Picks" there is no good evidence that Cramer's picks outperform the market.
In fact, more than one study demonstrates that on the average "Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally."
In other words, following Cramer's advice to the letter would have resulted in a greater loss than if you had just ignored it and put your money in an index fund. Of course CNBC claims that the people at Barron's are out to get Cramer in order to drive viewers towards Fox Business News. Both Fox Business News and Barron's are owned by News Corp. But the CNBC responses to what appear to be fairly straightforward facts is not reassuring.
One significant trend noticed in Cramer's picks may explain the underperformance of his recommendations. The Barron's study points out that Cramer's bullish picks had actually risen about 4% in the two weeks ahead of his recommendation, while the bearish ones had dropped about 7%. In other words, the research team behind Cramer's show may tend to default to momentum plays.
This seems like a reasonable strategy - go with the stocks that are rising, dump those that are falling. In fact the study showed that when viewers acted on this advice the day after broadcast they did better than if they waited the five days that Cramer himself recommends.
But over the longer term those recommendations turned out to be losers relative to the market - perhaps because of the longer term tendency of the market to correct for those moves that took place prior to the recommendation.
Two other things are noteworthy about Cramer's picks. First, his "lightning round" picks where he responds to viewers' calls did not fare much better or worse than those he had prepared for prior to the show. Lightning round sell recommendations did slightly better than prepared picks, while lightning round buy recommendations did slightly worse. But both underperformed the market in the longer term.
Second, when Cramer interviews executives of companies he usually endorses their stock. On average those endorsed stocks dropped six points when compared to the S&P in the 45 days following the interviews.
This tendency has led some analysts to suggest an alternative strategy: betting against Cramer's picks. For example, University of Dayton finance professor Carl Chen came to the conclusion that you could make over 25% in a month by betting against Cramer's buy recommendations by using what are called short-term in-the-money puts.
So maybe savvy investors can profit from Cramer's advice after all. Just don't expect to hear him crowing about it on his show.
Author Resource:-
When you're buying stock, the best advice is to listen to respected stock market analysts. But be careful to look for objective investing information you can trust.
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