Jim Cramer has a show called Mad Money on CNBC where he makes (or screams) numerous stock recommendations amid strange sound effects while jumping around. This can be entertaining for a while, but a more serious thought comes to mind. Can we make money from Cramer’s picks?
Bill Alpert analyzed Cramer’s results in an interesting short article on page 34 of the December 2007 issue of “R News”. The main result of Alpert’s analysis is that Cramer’s stock picks jump quickly the day after his show, and then tend to trail off over the course of the next month.
The earliest opportunity for the average investor to buy these stocks is the day after the show, and so it is clear that buying right away is not a good strategy. Alpert looked at various other strategies such as waiting an extra day or two or five, but none of these gave good results.
I haven’t watched Mad Money enough to know whether Cramer’s picks are intended to make money in the short or long term, but it is clear from Alpert’s analysis that things don’t look good for making money in the first month.
But what happens to Cramer’s picks over the longer term? I don’t bother to try to make money from short-term trading because I don’t believe that I can do it. There is only a limited amount of money available that short-term traders are fighting for, and because of trading commissions, it is necessarily the case that most short-term traders lose money.
I would prefer to know how Cramer’s picks do over say 3 years. Maybe we could start a mutual fund that buys each of Cramer’s picks and holds them for exactly 3 years. The important question is whether this fund would do better than the overall stock market. Cramer might like this analysis too, because he could keep his show going for a few years before the results come in.