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Conniptions over Cramer miss the mark

Posted by: Aaron Pressman on August 21, 2007

There are at least two critical parts to making money in the stock market. The first, the obvious one, is picking stocks which will do better than the market. The second, less obvious side is deciding how to prioritize your picks. How big a bet do you place on this position in your portfolio versus another? Legg Mason fund manager Bill Miller often cites poker legend Puggy Pearson that gambling is all about knowing the 60/40 end of a proposition and managing your money. Figure out how much the odds are on your side and bet accordingly — big advantage, big bet, small advantage, small bet.

If you’re an individual investor, you quickly realize that while there’s an abundance of advice about which stocks to pick, there’s almost no advice about weighting those picks or assembling a portfolio beyond simple rules of thumb. We tried to play off the frequently offered “no more than 5%” rule in a piece last year. Even when you read an interview with a top money manager, you’re getting a slice of their wisdom out of the context of their portfolio. It’s a huge blind spot in the media, though one that’s difficult to address. No matter how hard we try, the mass media can’t tailor its advice to the individual (which probably explains some of the trend towards using professional financial advisers, too).

It’s with all of the preceding in mind that I turned my attention yesterday to yet another hatchet job on wacky TV host and former insanely great hedge fund manager Jim Cramer. It turns out that if you measure the performance of every utterance that comes out of Cramer’s craw, the result either matches the overall market or trails it or maybe beats it for a few milliseconds. This vision of a fallible Cramer is hardly news and I’m not sure why it merits a cover story. It could be, as Cramer himself has posited, that some people are offended by a guy mixing serious investment talk with giant diapers, the sounds of a dump truck and throwing chairs. Knowing how media works, I’d say it’s also an easy attention grabbing way to stir up controversy and bolster newsstand sales. Not that many people actually watch Cramer’s show but everybody knows who he is.

And as I started out saying, it’s mindless to consider a string of stock recommendations in isolation as a track record that can be usefully assessed. As Jon Ogg over on the 24/7 Wall Street blog says “creating a ‘Full Basket of Cramer Picks’ and trying to assign a performance to it just seems beyond reality.” Cramer’s typical defense against these kinds of critiques is that not all his picks should be regarded with equal weight. If you look just at just his major discussions, the performance record is less mixed. Even Barron’s had to admit that this group beat the S&P 500 over one and two month periods.

The bigger point about Cramer, though, is that there’s a method behind his madness. He’s trying to enlighten the viewer with lessons about how Wall Street works. Why do stocks that report good news go down sometimes? Why do some analyst reports move a stock price and others don’t? The stock market is much like a fashion show, as Cramer likes to say, and taking the psychological factors into account along with the fundamentals is a sound strategy. I don’t think many of his viewers are collectively buying and selling the thousands of stocks a year Cramer mentions. But they should be gleaning a sharper method to hone their own buy lists.

The Barron’s story, like the many that preceded it, doesn’t prove that Cramer’s show is worthless. If you’re buying a stock ten seconds after some chair throwing guy on TV called it a buy, you probably should have your head examined. It’s no different than the doctor buying wheat futures and shorting Amazon shares that the Journal so helpfully enlightened us about last week. Clearly, Cramer is not everyone’s cup of tea but there is much to be learned from his show even if his bazillion stock ratings don’t add up.

Full disclosure: BW ran an absurdly adulatory cover story on Cramer two years ago and I worked at for less than a year in 2004 as senior market columnist though not in the New York office and I had no dealings with Cramer.

Reader Comments

Aaron Pressman

August 23, 2007 9:50 AM

Reader Greg MacArthur takes issue with my defense of Cramer and gave permission for me to post his email as a comment:

Would suggest you do a little more homework on his performance numbers and you will find they are sub par. Would also ask your Editor(Stephen Adler) his thoughts since he did an interview on him in the Dec 25-Jan 1 2007 issue. In it, Cramer made comments on both Dow Jones and Avon Products-Dow Jones he didn't like (it is up 70% to date) and and AVP "would not go up until the Ceo was replaced" (up 30% and guess who had a buy on it at $39-Cramer) It's now $34. Net-net, the article on him was factual and if anything easy on him.

Lastly, you have in house on of the best stock pickers in the business - Gene Marcial. His record speaks for itself which is far superior to Cramer's and most others on the street. Gene vs Cramer - class vs talk and with the numbers to back it up. Read Gene's column on 8/13/07 about buying into opportunities like this (1,000 pt drop in the Dow). On the other hand, at the same time, Cramer was whining about the Fed and bearish saying to buy CL, KMB, PG as defensive plays! Cool heads prevailed and Gene was right on!

-Greg MacArthur


August 27, 2007 9:18 PM

To me Cramer seems on target with his main thesis. In particular his use of a cyclic chart. Also unlike others in his field he has actual experience in making money. When you consider that his advice is free and you can make serious money with it what exactly is the basis of the criticism? If you read his books they are thoughtful, well written and sound.


December 26, 2008 1:03 AM

Cramer missed about all of 2008 and he is still calling the bottom every other week. He called it in july......along with a few other mouths.......and check bill Millers record now....Cramer is a complete fraud. I watched him religiously for over a year and could believe he could stay on the air with crap he says. ....He lost investors tons of money in 2007 and 2008. He has also called a housing bottom about 10 times too. He plays by the old rules and he missed the meltdown and the further declines over and over again. Anyone who defends him could not have watched the show closely or tried to make money off of his picks. He is so arrogant and self absorbed that it blinds him from reality. His website articles are just as horrible. He changes after the fact and tries to cover his tracks all the time. If the sec didn't suck so bad they wouldn't let guys like him on the air but then again they are all in on letting criminals run wall street.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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