Monday, February 09, 2009

Cramer's Star Outshines His Stock Picks -

I get more questions every year from students is on Jim Cramer than any other topic (well except "will this be on the test"). Most such questions come in two main flavors: "what do you think of Cramer" or "did you see Cramer talking about ....".

My stock answer is that while I think he is a really smart and hard working person, I have my reservations that anyone can consistently outperform the market and further most of the evidence suggests he can not.

My points were strengthened by Barrons this week:

Cramer's Star Outshines His Stock Picks -
"The guy is a hardworking genius with a word of advice for everyone...many words of advice, actually. He dispenses thousands of Buy/Sell recommendations a year.....From May to December of last year....Cramer's Sells "made money" by outperforming the market on the downside by as much as five percentage points (depending on the holding period and benchmark). His Buys, however, lost up to 10 percentage points more than the market."
But the article went on to discuss much more. For example Cramer's "prepared buys and sell recommendations" did (SLIGHTLY) better than the lightning round picks. Which might be because of more rigorous analysis but the differences (especially on buys) makes any theory speculative.

Further, recent price movements appear to be a factor in what stocks get discussed and their recommendations. While I am usually not a fan of charts, this one may show why he does not do very well; his buy recommendations are usually for stocks that have gone recently (while his sells are for those that have gone down).

All in all a good article and definitely worth reading.

Two past FinanceProfessor blog articles on Cramer that are of interest:

1. A Barron's article showing his stock picking was not not much better back in 2007.
2. A tirade (which turned out quite prophetic) from 2007 saying that rising rates and falling real estate markets were going to cause a major problem with liquidity.

Unrelated to Cramer but one tidbit in the article that I am looking forward to using in class: Seems like an easy way to do event studies that could be used in several classes. Stay tuned on that!

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