>Magicians are the most honest people in the world. They tell you they’re gonna fool you, and then they do it – James Randi
Jason Zweig, author of Your Money and Your Brain and editor of Benjamin Graham’s The Intelligent Investor highlighted three ways to make money:
1) Lie to people who want to be lied to, and you’ll get rich.
2) Tell the truth to those who want the truth, and you’ll make a living.
3) Tell the truth to those who want to be lied to and you’ll go broke.
There is a massive audience for No.1 and that’s what you see with the “Top 10 tech stocks to buy now” or “Secret stock picks of billionaires” posts popping up every day on your feeds. People want to believe in the impossible – that they will be able to beat the market by following a financial guru or that riches are just one stock pick away.
During the war in Yugoslavia, two professions were in high demand: soldiers and fortune-tellers. Given that we might be moving into another tough year for the stock market with high inflation, a looming recession, and ever-increasing interest rates, investors will be looking towards these “experts” more than ever to tide them over the rough times. Don’t believe us? Right now, there are more than 1 million paid subscribers to Motley Fools’ stock advisory service and \~20 Million monthly visitors to Jim Cramer’s TheStreet website.
There is an endless supply of stock pickers out there and Jim Cramer is arguably the most famous one! So, it’s only fair that we put his stock picks to the test.
Jack of all trades
An equity research analyst usually covers at most 10-15 companies annually and issues directional calls every quarter. But, Cramer has made an incredible 21,653 stock picks \[1\] over the past 7 years averaging close to 3,000 calls per year. He was making more than 20 stock picks per episode of his show. We can clearly see the classic bullish bias on the calls made by Cramer with 74% of the picks in the buy/positive mention.
https://preview.redd.it/pcumogafngba1.png?width=513&format=png&auto=webp&s=faaf634d7be0b08b4156ab3aa062120d4cf92d99
One concerning behavior exhibited by Cramer is how frequently he changes his mind. Consider the case of Netflix. He ended 2021 by stating Netflix is a buy but then changed his tune after just a month. Once again in March, he said that it was a buy and then changed it to a sell rating just 2 weeks later. Consistently following his calls would be a nightmare for even the most seasoned stock trader!
https://preview.redd.it/kpkk3v7gngba1.png?width=444&format=png&auto=webp&s=fdd57b04acc06b064eb8471eb08b951179f2710c
Since Cramer frequently contradicts his own picks, we are only evaluating the short-term performance (up to a month) of his calls \[3\].
Cramer’s Performance
Surprisingly, if you had followed Cramer’s picks to the T, you would not have lost money. On average his buy recommendations went up by 0.87% after a month and his sell recommendations went down by 0.15%. One possible explanation for the brief outperformance is that Cramer’s Mad Money has more than 200K viewers – even if 1% decide to act on his stock tip, it’s big enough to move small stocks. This phenomenon is well-studied and is known as the Cramer Bounce.
​
>In January 2009, graduate students from the University of Pennsylvania published a study claiming that over time, the average next-day increase for a stock that Cramer recommended was 3% for the entire study sample, and almost 7% for smaller cap stocks.****They proved through the use of electronic communication networks (ECN) that most trades came in after 7 p.m. ET, when "Mad Money" concluded.
https://preview.redd.it/2amdlsbsngba1.png?width=1080&format=png&