Blindly follow Cramer’s stock picks? Don't.....
Seemingly, most individuals who become interested in trading start by following “gurus” in the mainstream media before realizing the pursuit is quite a bit harder than just riding the coattails of a self-proclaimed market genius. One of the realities of trading that we teach at TradeRounds.com is that as an initial step you need to recognize your opponent. Although market efficiency proponents would have you believe that movements in a given stock price reflect the rational behavior of buyers and sellers, the whipsaw price action in all time frames suggest frequent disconnects from the underlying intrinsic value of the stock. So, alternatively, we teach our students, through our premium newsletter and gold level membership stock trading education videos, that high-frequency traders and large institutions are constantly manipulating price action. Fortunately for the savvy trader, these market actors leave their fingerprints by the large volume in which they trade. To identify those hands, we utilize a modern adaptation of the teachings of Richard Wyckoff and David Weis, inventor of the Weis Wave.
Jim Cramer’s method of stock picking is significantly different than ours as he takes a fundamental approach seeking to buy companies at a discount to their intrinsic worth. We are not especially Cramer haters, because we feel his largest message is typically ignored. He is constantly stressing to do your own homework before buying any stock. That being said, we commonly hear inexperienced traders and investors citing Cramer’s picks as a basis for choosing to buy a stock. Thus, we felt it was worthwhile to investigate analyses of his stock picking accuracy from sources on the web. Here are some good sources that we found:
- LeCompte of CXO advisory group examined 8-years of Jim Cramer’s picks in a column that he previously wrote in New York magazine.
- Within these articles Cramer posted a 47% accuracy rate for stock price appreciation
- Jonathan Hartley and Matthew Olson, researchers from the Wharton School at the University of Pennsylvania examined Cramer’s Action Alerts Plus stock selections since inception in 2001-2016.
- The Cramer selections returned 64.5% cumulatively over the past 15 years, versus 70% for the S&P 500, when adjusted for the reinvestment of dividends
- Motley Fool rates Cramer’s accuracy (how often his predictions have been profitable) at 44.22%
- Pundittracker.com reported on Cramers picks (non-lightning round) from January 2011 through December 2012.
- 552 calls overall, of which 254 outperformed the index (46% hit rate).
- On average, Cramer’s picks returned -0.08% versus the 1.35% S&P 500 return over the corresponding period.
- 142 basis points of quarterly underperformance, or 568 basis points on an annualized basis, which amounts to an F grade in pundittracker.com’s grading system.
Unlike many of his haters, we actually find Cramer’s show Mad Money to be a very useful hour to develop stock ideas and hear from senior management. However, we believe in combining fundamental analysis with technical analysis, and, in particular with price volume analysis in the tradition of Wyckoff. The risk in merely choosing stocks that seem to be well valued is that the price can go lower in a value trap before smart money comes in and buys. Thus the video lessons that we teach here on TradeRounds help traders identify when a stock at solid value now has buying interest from institutional traders of adequate size to push the stock higher.