Monday, August 27, 2007

Shorting Cramer - Barron's Online

You all know my take on Cramer--he is a really smart guy and great marketer, but whether he can beat the market or not is very much in doubt. (And please do not tell me he did and therefore he can--past performance does not guarantee future performance...survivorship bias....etc.)

But that said, many people do think the world of him so I was especially interested when a former student texted me the following:

Shorting Cramer - Barron's Online:
"Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But 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. We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks -- Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market."
3,458 picks? Wow. Talk about transaction costs.

1 comment:

Anonymous said...

You may be much better off with an index fund that tracks the market, but only if the fund truly "tracks" "the market."
It's pretty difficult to design a fund that matches, perfectly, the S&P (or any other benchmark) for a number of reasons, or that will truly reflect overall market gains.

Are there enough shares of the stock available? Probably, but if, say, P&G or GE has a great quarter, tons of investors will swoop in and drive up the share price.
Conversely, fund managers may dump a stock that's a component of "the index" and your carefully crafted portfolio would reflect that volatility, probably for the worse.
The "bell weather" stocks may then look a lot less like bell weathers. Remember, a few decades ago everyone wanted holdings in the "Nifty Fifty." Are we getting a lot of gains from Coca Cola today? How about GE? AT&T? McDonalds?
These were, fairly recently, regarded as the best places to put your money - they were major components of the indices and yet they've slogged through a number of both bear and bull markets with often less than stellar returns.

Are utility stocks great positions to have? Some are, probably, but many are top-heavy, unionized dinosaurs and others are dicey firms that have a risky, tech-like profiles. (World Comm comes to mind, as does Enron, Adelphia, and other utility providers that turned out to be a bit nutty and loose.)

Yet all or any of these firms can be in an index, or be out of an index at a time when they DO reflect bull or bear markets.

And which index do we mean? The Dow? The FTSE? The DAX? MSGCI? Each of these is a little different. What if it's the NASDAQ? Hold on for a wild ride. The Nikkei? Try to stay awake as those low returns are eaten up by inflation. (Currency exchange issues are another curveball here -domestic or foreign central banks can add, reduce, or eliminate volatility - affecting both gains and losses.)

In other words, what is, exactly, a representative index? Should it include tech stocks? Industrials? Consumer goods? If so, how should they be weighted? What sectors are most representative of western economies? What about Chindia? Petro-states? The Euro zone? Where, exactly, is the region that best represents current "market conditions?"
And what about commodities? Energy companies? The permutations are endless, and any one portfolio could reflect a "market return" or vary (wildly) from the true state of "the market" or "the economy."

Trends come and go in the markets -portfolio insurance, mutual funds, IPO's, growth vs value, synthetic (options only)portfolios, etc - and some things stay the same - caveat emptor, discounted cash flow, rumor trading, buy and hold -but there's never been a good substitute for sound, fundamental analysis and accurate, timely information.
I fear that any true believers in EMH who feel they can simply purchase an index fund and throw the plan prospectus in a drawer for 30 years will find themselves disappointed, with holdings in low return, correlated sectors, and in "indexes" that don't really match the market.

While Cramer (a close friend of Eliot Spitzer, by the way)is certainly more of a showman than a good manager or analyst, it's a bit much to say he's typical of all fund principals, or that no asset manager can beat "the index."
About 30% of asset managers do meet or beat markets, benchmarks, or indices - nearly 1 in 3, which is enough (for me, at least) to seriously question any strong or medium-form EMH gospels.