The Evidence-Based Investor

Warning — this man could seriously damage your wealth

Posted by Robin Powell on October 23, 2015

Jim Cramer has one of the most famous faces on US television. A former hedge fund manager and best-selling author, he’s now a full-time celebrity who imparts his stock-picking expertise to anyone who will listen. And they do. The CNBC presenter is fast approaching a million followers on Twitter — many of them presumably hanging on his every stock tip.

The odd thing about Cramer’s status as America’s most famous stockpicking guru — and there’s no gentle way of saying this — is that he’s frankly not very good at picking stocks. Sure, like most financial pundits he’s had his moments. But when you analyse the risk-adjusted returns of the stocks he’s recommended, they’ve actually been no better than those delivered by the S&P 500 for most of his career.

I say most, because Cramer’s been having a bad run. Nothing strange about that. Media pundits have losing streaks all the time, and in most cases, their employers aren’t too fussed about checking whether their predictions turn out to be accurate or not.

But when, in April this year, Cramer wrote an article with the headline Here are 49 Stocks to Buy Right Now, a retired finance professor from Illinois called David England decided it was time to put his forecasting ability to the test. He bought $1,000 of each stock on Cramer’s list and began to monitor their performance.

In his article, Cramer waxed lyrical about his chosen stocks. “Every single one of these companies reported excellent last quarters, and with no exceptions their charts are pretty much perfectly made for this downturn,” he wrote.

He was wrong. Six months later, just 14 (or 28%) of Cramer’s 49 stocks had climbed higher than their April trading price. The overall portfolio was down 7.09% compared to a fall of 3.88% in the S&P 500. The full results are published on Mr England’s blog.

“It bothered me that so many experts publish buy lists,” Mr England is quoted as saying, “but you never hear about the list again. I wanted readers to know that buying stocks based on a list is often a recipe for disaster.”

Let’s keep this in perspective. Six months is a very short time span; over the coming months and years and, who knows, Cramer’s portfolio may well pick up. But the bottom line is that Cramer assured readers that these stocks would survive any short-term downturn and they didn’t.

David England has taught investors two valuable lessons. First, be wary of gurus, and especially their recommended buy lists. Secondly, be on your guard against anyone who claims to know which stocks will provide more “downside protection” than others. The overwhelming evidence is that stockpickers are no better at outperforming when markets fall than when they rise.

A cheaper, easier and far less risky strategy is to avoid the cost and effort of buying individual stocks and invest instead in the whole market, via a diversified portfolio of index funds, and (for the cautious) to hold a cash reserve as well.

And whatever you do, stop paying attention to the likes of Jim Cramer. There have, incidentally, been several attempts to contact Cramer about this story, but just for once he’s not been available for comment.

 

(Featured image: Wikimedia Commons)

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Robin Powell

A journalist and broadcaster, Robin Powell is a campaigner for positive change in the investing industry. He runs a communications company for the evidence-based investing sector called Regis Media.

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