Wednesday, July 15, 2009

Jim Cramer Generates 134.79% Return!

Recently, my email has been full of all sorts of Cramer-Spam, with stories about all these great stock picks he made. Here's a sample of bullet points from emails from "Jim Cramer (":

  • Model Portfolio Outperforms S&P 500: 134.79% Total Average Return*
  • On January 20th, I bought Goldman Sachs at $60. When it hit $85 on January 28th, I trimmed my shares, locking in a 41% gain
  • I bought GE at $8.78 when everyone thought it was going bankrupt — and now it's up 50%.
  • My subscribers were right on hand as I bought NKE for $44 on March 19th, watched the stock skyrocket, and pocketed my profits on June 2nd for a return of 34%.
  • RealMoney recommended China Green Agriculture (CGA) when its shares were trading at $5. The stock closed at $8.09 and subscribers who followed our advice netted a 61.8% gain
  • RealMoney advised subscribers to buy shares in Darling International (DAR) when the stock was trading at $4.54 a share. The stock then closed at $6.60. Once again, RealMoney nailed the market with a 46% return.
  • P.S. I can only extend this offer to you for 48 hours so please do not delay.... you have absolutely nothing to lose when you take us up on our $129.95 offer

Notice his example picks have an average return well above anyone's hurdle rate, with returns of 30% to 134.79% (love than .79). It's funny when people sell penis enlargement pills online for $50 because its silly and not a lot of money, but as John Stewart noted, the stock market isn't a game. This is disgraceful and CNBC should be aware this makes them part of his scam. It simply isn't plausible that 30%+ returns are representative, and they know that, and suredly would say they didn't mean every return is this high, but it's like lottery ads saying 'anyone can win'—true enough, but highly misleading.

The following is from my book on stock recommendations, where I note that in contrast to standard asset pricing theory, ALL stock recommendations promise above average returns. In theory, half of all stocks should be recommended with below-average returns because they have good 'risk adjusted' returns, but this doesn't happen. That this never happens highlights a profound mischaracterization of risk-taking by standard asset pricing theory. People only take risk to outperform, never to achieve a lower return with greater safety (excluding cash-like asset holdings, such as AAA bonds or short term paper).

Jim Cramer is now an internet hack shill. His encyclopedic knowledge of company details is impressive, and he did run a successful hedge fund for a decade, though as a hedge fund his performance claims are unaudited and implausible (24% annual returns with 1 down quarter over 10 years). Yet for some strange reason, like many famous investors, he quickly realizes it is more profitable to sell advice than invest on it. If he had anything like the edge he claims (5% out performance?), it simply makes no sense to sell this advice as opposed to invest on it, especially when you have capital to start.

So now the same company (CNBC) he used for his pump-and-dumps in the 1990s he uses to broadcast his highly popular show 'Mad Money', illustrating that the best salesman create willing dupes impervious to experience. Note that Cramer went on John Stewart's Daily Show, and instead of defending himself, obsequiously cried 'my bad' and hoped he could then buddy up with a witty and more popular celebrity. Stewart was having none of it, and just piled on the criticism, showing that some people have the integrity not to change their positions merely because they are offered a mutual public admiration quid-pro-quo.

As found in this YouTube clip, Cramer has a selective memory when it comes to his recommendations. And his bizarre claim that he manipulated the Spiders (SPY) by shorting them, is so inconceivable, it makes me skeptical of anything he says about his experience (this market is too large for someone running a small hedge fund, and after pushing it down, exactly how do you make money?).


Michael Stastny said...

SSRN lists three papers on Cramer

1. Market Madness? The Case of Mad Money, Engelberg et al.

2. The Performance and Impact of Stock Picks Mentioned on 'Mad Money', Lim et al.

3. Investing in Mad Money: Price and Style Effects, Bolster et al.

N N said...

His business model in the 90's was quite simple and explained in his first book, "Confessions of a Wall Street Addict", which I admittedly enjoyed.

Generate a large amount of commissions and volume to butter up research and investment banking arms of the large shops. Then receive large allocations of the best IPOs and access to information and research including analysts upgrades.

Simple model but highly profitable. I knew of one decent size fund in NYC that was running this model up until 2007 at least and possibly beyond.

Eric Falkenstein said...

Michael! Good references.

N N. I agree, but I suspect it's even more than that, in that he also got access to block trades in the 1990s. But he downplays this relative to fundamentals, which makes no sense given his trading horizon.

J said...

If Cramer is so good at investing, why he isnt?

(1) He loves being a "stock market genius" more than money.

(2) He is making his money in some other way than investing, having a TV program, or giving advice. I wonder what it could be?

David Merkel said...

If Cramer hadn't achieved such a performance record in his hedge fund, wouldn't it be easy for one his early investors to come out and say, "No way," and show the statements... really, it should not be that hard to prove one way or another. Find someone who invested with him long term, and get the K-1s.

Don't get me wrong -- I am neutral with respect to Cramer -- there are good and bad things about what he does -- and as I have said for a long time, he is at his best when he tries to write about long-term ideas, and at his worst when trying to predict what will happen tomorrow.

Anonymous said...

Cramer has emotion when he speaks.

That's the key.

Ask yourself, could you persuade anyone with your speech?

Cramer is successful because he's Cramer.

You're spot on. There is a pervasive Ponzi pyramid multi-level marketing- like scheme associatied with the internet, as it is so easy to flick on information. It goes like this: I sell you my know-how on how to "be like me" (successful). But truth is that my success relies on selling my know-how. So then when you sell information on how to "be like you" (using you're newfound know-how you got from me). By this means you can become successful.
And it continues down the pyramid.
The whole thing relies on passing on know-how and people paying to receive it.
If no one watches Cramer, he is not going to be nearly as successful.
It's not his knowledge of companies that's earning him $$, it's his publicity, his power to attract an audience. In the internet pyramid scheme we call this "self promotion". Self-hype.

One more thing:
Buy my book!

Anonymous said...

All Jim has to do is make the performance of his newsletter Action's Alert public. I asked
for the performance from and they would not give it to me.

Unknown said...

Cramer's returns from the 90 are legit. Falkenstein and NN have a good chunk of the reason why, plus he hired some good traders in his shop. His first book is a must-read.

However, he's sucked for years. His Action Alerts portfolio lost 12% from 2002 to 2008. It also lost money in 2001, but he scrubbed that portfolio and restarted it up again a few months later.

If you want a good laugh, check out the Ron Insana special services they're trying to sell at TheStreet.

And of course, their Lenny Dykstra mess, letting him lie about his results and be a paper trader, is just terrible.

David Kane said...

One of my readers claimed that the e-mail from Cramer might be fake, i.e., not actually from him. Are you sure it is from him?

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