Selling newsletters offering stock-picking advice is a big business. This is how sites like The Motley Fool survive, and it’s also a big draw for products carrying Jim Cramer’s name. You may remember Jim Cramer from such CNBC entertainment broadcasts as “Mad Money.” This is a fun show where Jim runs around, punches in sound effects, and yells his buy/sell advice at the camera. Every once in a while, he reminds viewers to consider the long term, but the message contained in the remainder of the broadcast is of more use for people who are looking to trade frequently. His picks haven’t always played out to beat random performance; there have been more than a few websites and videos comparing the stock-picking prowess of Cramer and that of a monkey. The monkey is just as likely to outperform the market.
But monkeys don’t sell stock-picking newsletter, so they can’t get in trouble when they lie. In a recent email newsletter from TheStreet.com, Jim Cramer’s company, there was a chart that showed Cramer’s performance compared to the S&P 500, stating that the portfolio is “crushing” the S&P 500. It was a faulty comparison. The chart didn’t include dividends in the S&P 500 return, while Cramer’s number did include dividends. According to Jason Zweig at the Wall Street Journal, Cramer’s 39.2% did barely beat the accurate benchmark rate of 38.3%. Fees and commissions would eat into that portfolio return, however, if a real investor followed Cramer’s advice. Just squeaking by isn’t as compelling an argument than doubling the S&P 500, Cramer’s marketing team’s original claim.
To approximate Mr. Cramer’s return, you would have had to make an average of 774 trades annually over the past three years, Mr. Barton said. Meanwhile, you could have bought and held an S&P 500 index fund and then done utterly nothing except reinvest your dividends. And you, too, would have more than doubled the market’s return — calculated without dividends.
It’s relatively easy to manipulate numbers to use them to your advantage. People trust numbers, so when a trustworthy source claims a number is true, it’s easy to accept without independent research. I’m not immune to this; I am taking the numbers mentioned in Jason Zweig’s article at face value, much like newsletter readers take Cramer’s numbers without a second thought.
Do you trust what you read? Preconceived notions are sticky. If you read something that agrees with your preconceived notions, you’ll generally accept it as fact, but if something you read goes against what you believe to be true, you’ll assume the writer is wrong or has an agenda to pursue.
Published or updated June 6, 2011.