Update: The Worth of Jim Cramer's Advice

Many pundits appeal to our fears and greed. We'd like to make more money by knowing and buying what's about to rise and dumping what's about to fall. That's largely the basis of the modestly "successful" CNBC program "Mad Money" with Jim Cramer. By successful, I mean for the network CNBC and its host Jim Cramer, but how about for its viewers? Anyone who has done some channel flipping can't help but notice Cramer's flailing arms, loud voice, and crazed looking expressions. I have watched his show on numerous occasions and had followed his career for years prior to his arrival on cable television.

Hedge Fund Success?

SmartMoney magazine did a big article on Cramer in the 1990s, which purported to show what a great stock picker he was with the hedge fund that he ran at the time. The article stated Cramer's supposedly high hedge fund returns. However, when I inquired, I learned that all of those returns were self-reported by Cramer.

I tried on several occasions to contact his company and get more details and documentation and my calls were never returned. I have long counseled that you should never believe a claimed return unless it has been independently audited (the way that all mutual fund returns are). To date, I have never seen an independent audit of Cramer's claimed hedge fund returns but I have found several sources which track his public stock picking recommendations.

"A couple of years ago, they asked us if we wanted to be on the distribution list for their Action Alerts Plus online newsletter and they sent us emails for about six weeks and then stopped. Mark Hulbert sent them a reminder six months ago and they still haven't sent it," said John Kimble, Senior Analyst with the Hulbert Financial Digest when asked about Cramer's online newsletter. Hulbert Financial Digest is the only independent organization, which tracks the recommendations of newsletter writers.

CXO Advisory evaluated Cramer's recommendations in his regular column in New York Metro. CXO found that Cramer's stock market predictions (monitored from 2000 onward) were worse than average and even worse than simply flipping a coin. Cramer's prognostications fared better than the market averages only 47 percent of the time. Regarding Cramer's predictions, CXO's Steve LeCompte comments that, "His predictions sometimes swing dramatically from optimistic to pessimistic, and back again, over short periods. It is difficult to infer his guiding valuation theory, if he has one. We wonder whether he tends to be swayed by the arguments of forceful advocates with whom he most recently interacted...He seems more a stream of uncalibrated opinion than a stock market maven."

Bad Calls, And More Bad Calls

In this piece (and video clip) from July 30, 2008, Cramer boldly proclaimed that the stock market lows hit in mid-July marked the end of the stock market's downturn! The worst part of the 2008 stock market decline didn't take place until the late summer and early fall and in fact the market dropped another 30+% from the low which Cramer predicted was the bottom!

You might think that Cramer's advice on investment banks, where he has lots of contacts and used to work, might have led him to have some insight before that sector imploded in 2008. I went back and researched his advice on investment banks and here's what I learned:

  • Bear Stearns. Cramer recommended buying this stock on 8/17/07 at $118.20 per share. He lost 95 percent on this one - selling at just under $6 per share on 3/20/08.
  • Morgan Stanley. Cramer recommended buying this stock on 9/15/06 at $70.95 per share. Its recently been trading around $25.
  • Lehman Brothers. Cramer recommended this stock on 10/17/05 at $55.18 per share. On 9/5/08 with the stock trading at $16 per share, on CNBC, Cramer selected Lehman as a "screaming buy" and said things couldn't get any worse for the company. The firm went bankrupt and the stock trades for pennies per share for more than a 99 percent loss for Cramer.
  • Merrill Lynch. Cramer recommended buying this stock on 9/19/05 at $60.17 per share and sold it on 9/12/08 for $17.05 per share for a 72 percent loss.
  • In the 12/30/07 issue of New York Magazine, Cramer made investing in Goldman Sachs his #1 recommendation for the year. He said looking ahead through the end of 2008, "Goldman Sachs makes more money than every other brokerage firm in New York combined and finishes the year at $300 a share. Not a prediction-an inevitability." Goldman has been trading in the $150s.

In summary, Cramer's advice on investment banks has been horrible. Investors following his advice in this sector have lost huge portions of their investment. And, by the way, Cramer recommended buying financial services giant AIG on 11/7/05 at $1326.80 per share and the stock currently trades around $37 per share for a 97 percent loss. Comedy Central did this funny but true compilation of poor CNBC prognostications (including some of Cramers') from the financial crisis.

So, buyer beware of prognosticators claiming market beating returns who have no proof of their supposed superior performance. Ignore predictions - unless you know the maker's track record and it's worthy of your respect!

Unfortunately, the news media has no shortage of nicely dressed, articulate lads and ladies willing to spout off and make predictions - that's how Cramer got his regular gig - he used to be a guest on CNBC and never was shy about his stock picking opinions. The public fascination with talking heads is what gets the talking heads on the air, and it gets enough viewers to stay tuned in. (Rex Sinquefield of DFA refers to this as "financial pornography.") But in the months and years down the road, few will remember who predicted what. There's little if any accountability, and that's the beauty of the game for the market gurus - especially when they can falsely claim excellent returns.

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Copyright Eric Tyson, 2008 - 2020 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.