August 20, 2007

Barron's: Screaming Madman's Picks Result in Negative Alpha

BARRON'S MAGAZINE, one of America's top business publications, has published a beautifully nasty article about Jim Cramer, America's favorite business pundit.

Mr Cramer, as many readers may know, has his own show, "Mad Money," on CNBC. On "Mad Money," Mr Cramer essentially runs around screaming and imparting his market wisdom amidst a bevy of sound effects and calls from enthusiastic stock traders. And Mr Cramer's picks, Barron's found, made money: 12 pc over the last two years. Unfortunately, the magazine also found the NASDAQ made 14 pc, the S&P 500 made 16 pc and the Dow Jones Industrials were up 22 pc over the same period of time.


But it gets better. Oh, does it get better.

Barron's Bill Alpert goes after Cramer and his CNBC bosses with every tool in his journalist's arsenal, whether it's neatly dissecting Cramer's stock picks with surgical precision or beating up Cramer and CNBC with a sledgehammer for their reactions to Mr Alpert's investigative efforts, which range from contempt to calculated evasiveness. Mr Alpert writes:

When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.

CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections -- about 12 a week -- that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.

If the show's "mainly educational," why does it have a legal disclaimer that runs prior to the show -- for like thirty seconds? Come on, now. Also, CNBC's analytical criteria are a bit -- well, let's just say they're a bit selective. This inspires about as much confidence as CNBC's afternoon crew does. Two months' history. Christ. Mr Alpert's response to this, as you'll see in the story, is to tell CNBC to put up or shut up. "Even cheerleaders," Mr Alpert writes, "need to be held accountable." Ouch.

But perhaps the nastiest part of the story comes when Mr Alpert tells his readers they could have made between 5 pc and 30 pc per year using a trading strategy entirely based on shorting Mr Cramer's stock picks. Now that's poetic justice, particularly given Mr Cramer's background in hedge funds.

Speaking of which, Mr Alpert also cheerfully looks at Mr Cramer's own trading past and some of the techniques he used to make money over the years. Mr Alpert writes:

If Mad Money offers unconvincing proof of Cramer's long-term stock-picking prowess, so does his account of his hedge-fund activities. His memoir suggests that some of Cramer Berkowitz's profit came from clever trading. The $300 million fund might execute hundreds of trades a day, some of them a bit gimmicky. Cramer describes how they'd find a stock in which selling had petered out, then build a position. Next, they'd hunt up some bullish news on the company and feed it to sellside analysts and reporters. On the subsequent rise, Cramer could profit by selling out his position. "Buzz merchandising," his book calls it. Smart and effective, but definitely not in the fuddy-duddy style of Graham & Dodd.

In December, Cramer made a video for describing the ways his hedge fund had used tricky trading techniques. He said hedge funds could pass negative rumors to "bozo" reporters. When the video circulated through Wall Street and caused an uproar, Cramer said that he'd only been talking hypothetically, to blow the whistle on the hedge-fund industry's bad actors.

I don't know why the video would have caused an uproar, unless it was the typical reaction people have when one of their own sells them down the river for no appreciable gain. Of course hedge funds and other insiders peddle shit to reporters -- and supposedly objective equity analysts. Why these reporters and analysts do not properly account for their sources' motivations is beyond me -- in business, the cui bono question is not just an old saying -- but that is a post for another day.

But let's get back to the matter at hand. The gist of all this is that Cramer made you 12 pc and the NASDAQ made you 14 pc and the S&P 500 made you 16 pc over the past two years. While Mr Alpert's story doesn't have the technical numbers to say this with absolute certainty, it would seem probable that Mr Cramer's stock-picking results in negative alpha for "Mad Money" viewers. Meaning that it would be entirely mad to watch Mr Cramer with the idea of getting some winning stock-market picks.

However, even I won't deny Mr Cramer is fun to watch on television -- if only because his antics are so outlandish. It is arresting television viewing -- and I'll admit I've watched segments for far longer than I otherwise would have because I want to see if, finally, this is the day Mr Cramer throws out his back, goes into cardiac arrest, beats up one of his producers or does something really outlandish, like challenging Bob Pisani to pistols at dawn. YAAAAAAAAARGH!

Posted by Benjamin Kepple at August 20, 2007 10:58 AM | TrackBack
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