Jim Cramer’s TV stock-picking evangelism: Does it work?
Jim Cramer’s “Mad Money” program on CNBC is getting a lot of attention. In conversations with clients and acquaintances, the most asked question is, “what do you think of Jim Cramer?”If you’re not familiar with Mr. Cramer, or his one-hour TV show, you’re definitely not into stock-picking. Cramer’s hyperactive personality goes over the top with his non-stop stock recommendations, accompanied by exaggerated sound and visual effects. For the record, my personal view of Jim Cramer is positive. He’s a really smart guy. His mind is encyclopedic when it comes to stock and market details. However, I wish he wasn’t doing the “Mad Money” show. I’ve read other comments by admirers of his who have similar feelings. For me, mixing hyperbolic entertainment and investing advice is inappropriate, particularly for the less-experienced investor.Jim Cramer is a trader, and market timing, which is deadly for the non-professional investor, is a big part of his very being. He can pull this off, but I question how many of his viewers and Cramer wanabees can effectively act on his recommendations. USA Today’s financial markets reporter, Matt Krantz, writes a daily “Ask Matt” column, which responds to readers on all kinds of investing questions. I’m a regular reader of his articles. I’m interested in both the questions being asked as well as Krantz’s well thought out and informative answers. You’ll find his column in the “Money” section of the print copy of USA Today or online at http://www.usatoday.com. In the newspaper’s April 3rd edition, Krantz addressed the question, “Is Jim Cramer really a stock-picking genius?” His well-researched answer is worthwhile considering, which I’ll try to summarize using the following excerpts from his article, permitted me, by USA Today.Krantz tracked Cramer’s picks from his shows from March 14, 2005 through March 27, 2006, which gained, on average, 16.2 percent. He says, “that makes the Standard & Poor’s gain of 7.3 percent look pretty sad.” However, Krantz quickly questions the appropriateness of the comparison because Cramer’s stock picks are more heavily weighted toward mid-cap and small-cap stocks rather than the large-cap bias of the S&P 500.Using an independent investment research firm, Krantz asked for the return on a basket of index mutual funds it recommends for risk tolerant, results hungry ‘mad money’ type investors. The return of this portfolio, after fees, was 21.8 percent, trouncing Cramer’s return.Krantz points out that even Cramer says that “after a lifetime of picking stocks, I have to admit that (Vanguard Group founder John) Bogle’s arguments in favor of the index fund have me thinking of joining him rather than trying to beat him.”Here’s another point to consider. Krantz cites Cramer as recommending “spending at least an hour a week researching each stock in his ten-stock portfolio,” which translates into “more than 500 hours of homework a year” for his followers. From my experience with individual investors, that requirement amounts to a mission impossible type of assignment.Lastly, Krantz makes the point that “had you followed Cramer’s advice, you would have had to buy more than 606 stocks, according to the CNBC data provided. Even if you use an online broker that charges $5 a trade, you would have spent $3,030 in commissions.”Summarizing, Krantz poses the question, “What’s the lesson here? Be skeptical anytime someone claims to have the ability to predict short-term movements in stocks or the stock market and make them prove their returns to you. Almost always, the best thing to do is plug your ears and run away, fast.”I admire Jim Cramer’s smarts, but it’s hard for me to believe that the “Mad Money” show’s message, and form of delivery, makes much sense for the vast majority of individual investors. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached by emailing to email@example.com or calling 328-5591.Vail, Colorado