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Beat the Market By Lying

This article was written by in Investing, People. 18 comments.


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.

Photo: Tulane Public Relations
Wall Street Journal

Published or updated June 6, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 18 comments… read them below or add one }

avatar cashflowmantra

There are lies, damn lies, and statistics. Of course the quote popularized by Mark Twain has been heard by many. This is just one of those examples in which you can use statistics to prove whatever you want.

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avatar tbork84 ♦1,867 (Half-Dollar)

That is one of my favorite quotes to use when people start throwing around statistics. That and “did you know that 43% of statistics are made up on the spot?”

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avatar rewards ♦31 (Newbie)

A great easy-to-read primer on how statistics are abused is the softcover “How to Lie with Statistics” by Darrell Huff. What I find most damning isn’t when people selectively choose data (as exampled in this Cramer post) but when people selectively display data (like not showing the zero point on a y-axis, or improper bin sizes).

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avatar David Avraamides

It’s a little ironic that in Google Reader, where I read this post, there was an ad for TheStreet.com…

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avatar Investor Junkie

Actually it’s not. It’s based upon Fexo’s content.

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avatar David Avraamides

I know. It’s just funny to be reading an article that is critical of something and then see that very something advertised right next to the article. It’s more of a comment on how automated ad selection can be dumb sometimes.

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avatar Investor Junkie

Though it doesn’t cost The Street anything to display the ad. Granted it’s not best light to display the ad while reading something discussing something negative about your company.

But who would click on the ad after reading flexo’s article?

The Street loses nothing. Google is the one loosing ad revenue because of an improper ad banner. I’m sure Google is aware of this issue, but how do they know the content is “good” or a “bad” viewpoint? While not impossible to determine, is not easy to program this.

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avatar Luke Landes ♦127,455 (Platinum)

If you’re seeing the TheStreet.com ad, it’s because Google AdSense has determined this post was written about TheStreet.com, and Google delivers the ads they determine will perform best based on that content.

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avatar Bobka ♦13 (Newbie)

I have an old never read copy of Cramer’s Mad Money sitting right now on my desk. Oops! It just somehow fell over and landed in the waste basket.

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avatar Krantcents

Anytime someone is trying to sell me something, I distrust all of their words. Their words are called marketing and will leave out details and shape what they say to sell the product or service. This is one of the reasons, I perform my own research and make my own decisions regarding products and services. If there is a trend from my research, I decide if I want to go along or reject it. Have I missed out on anything? Of course, but I take responsibility for that too because it was my decision.

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avatar Echo

The same can be said for manipulating dates to make the stats work out in your advantage. Active investors picking on passive investors will use the period of 1998-2008 to point out that indexers didn’t make any money over those 10 years. Almost anyone’s strategy can look good over a specific period of time.

At least with dates the results are factual though, but they can definitely be manipulated to sell your strategy or product.

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avatar Evan

Your point is exactly why I don’t get why everyone does a little bit of everything!

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avatar UH2L

Combine marketing and statistics and you have numbers that shouldn’t be believed without further validation.

This quote I wrote in my blog explains it all…
“Why use statistics when you can use logic? Statistics can lie; logic is always valid.”

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avatar Ceecee ♦53 (Newbie)

I like Cramer for the entertainment factor, and occasionally I feel that I learn something. The few of his picks that I have invested in have not performed as well as some of my own picks.

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avatar shellye ♦107 (Cent)

Hey Flexo – maybe Cramer should have been included in your post about infomercial scams…LOL

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avatar wylerassociate ♦162 (Cent)

I no longer drink the CNBC koolaid after the financial crisis. I spend more time reading and doing my own research. Cramer no longer has the same clout that he used to after the jon stewart interview.

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avatar skylog ♦368 (Nickel)

i used to appreciate cramer for the comedic value, but at this point, i can not even take a minute of him even for that. now that is funny!

i think the best part of your post is the comment about preconcieved notions. confirmation bias at its finest.

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avatar lynn ♦155 (Cent)

Do I believe what I read? Absolutely not. Most reading is for entertainment purposes only. i adapted this view a while back when I noticed my favorite magazine was backtracking on everything it backed in the previous 10 years. As far as people like Jim Cramer are concerned, if the masses like him, I run as far as I can. The masses are always wrong.

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