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 TheStreet.com 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.