Jim Cramer Might Be a Liar

We admit, Jim Cramer's CNBC show Mad Money is an addictive guilty pleasure for The Stalwart.  His frenzied 5-second analysis on hundreds of stocks never ceases to amuse.  But we won't turn to him for investment advice until we invent a time machine and as most of what he says simply describes the previous day's market action. 

The excellent finance and economics blog Mahalanobis read his book, and raises some serious doubts about the veracity of his own claims for sucess:

But nothing is so impressive as his hedge fund performance.  He claims to have generated a 12 year track record with 24% annual return after fees. With an average hedge fund taking out 20% of the pnl, and traders taking out 10%, that would be an even higher 34%. Let's assume he and his traders didn't take the 10% trader bonus because he was not only the head trader, but the general partner. That implies a 30% average annual return for 12 years.

Now 30% is plausible, but he also states in the book he had only one down quarter. If we assume the probability of a down quarter is p, and he traded for 48 quarters (12x4), that means a maximum likelihood estimate for p of a mere 2.08%. If his 30% returns were normally distributed, one down quarter out of 48 is consistent with an annualized volatility of only 4.25%, for a Sharpe of 7.05 (using a simple Sharpe that ignores the risk free rate).

That has to be the best 12 year hedge fund performance ever. So high, it rings untrue. Warren Buffet's Berkshire Hathaway generated a measely Sharpe of about 1.1 over that period.

Quite impressive, and quite surprising but there's good reason to believe it's either untrue or misleading:

I suspect there are at least three things going on. First, these are unaudited results, and he's exagerrating somewhat. Secondly, his strategy (which he describes pretty well, though he downplays this versus his fundamental analysis) of paying lots of money to brokers and getting and giving them lots of information, with only $300 million in capital, might generate some abnormal alpha. It's a unique strategy that probably worked well in the 1990's when broker upgrades and downgrades had more patent insider information--brokers would leak their recommendation changes to accounts generating lots of commissions. Lastly, he admits receiving lots of IPOs, and again, back in the 1990s that was pure arbitrage for anyone smart enough to understand the game. The quid quo pro is commissions to brokers for underpriced IPOs to the trader, all paid for by the issuer (because they only issue new stock once, and are afraid of challenging conventions). Again, with only $300 million in capital, a well executed IPO quid pro quo strategy might have been a viable and highly profitable strategy.

But he's clearly not telling near the whole truth when he says in interviews he mainly outperforms by using fundamental analysis.

I'm willing to accept that his claims are true, but that via IPO's and special relationships with brokers he was able to finagle unordinary profits.  That rings true with some of the things he says on his show, about how the difficulty in squeezing information out of companies at times.  Given his past at Goldman, and his stature in general, he clearly knows many people in a position to help him out.  Of course that doesn't make me want to listen to his advice on his show, and others should be wary.

Comments

[Ed]

i think this close reading of cramer's performance claims in wrong; i've heard equally or more aggressive claims in a number of places, all from respected funds. and, i don't think he is lying; it was a team effort running a small amount of capital.

if you want to analyze jim's public advice, check out these, from cxo advisory:

http://www.cxoadvisory.com/blog/reviews/blog6-29-05/

http://www.cxoadvisory.com/blog/reviews/blog7-25-05/

here's my two second explanation of cramer:

the autobiography shows his wife was key to his trading strategy, and she's not on the show. i imagine, without her or a partner like berkowitz to check his rantings, he's subject to all the errors he would have made on his own in his career. his action alerts plus portfolio seems to bear this out, as it is basically underperforming the market right now, and the analysis above shows his advice has about a 50/50 chance of being right.

[A Stalwart]

Thanks, I'll check out those links.

[eddy]

You have to remember rule #23, "Beware of Wall Street's hype."

Where'd I get that from? Cramer's 25 Rules of Investing, of course.

By the way, #21 is "Just because someone says it on TV doesn't make it so."

[SkiDad]

Cramer can not be underperforming this year he is heavy in oils which have been up huge.

From Cramer's past record where he traded a lot of derivates, imagine where his performance would be if those were calls he had in HAL, CHK, ECA, MOT, and the like. Remember his restrictions prohibit him from using calls and puts.

[Mel Feinberg]

I would like to see Mr Cramer post the status of his Investment Trust that he eludes to have great performance each Friday. I subscribed to his service early in the game and lost my posterior. He started with $3 million wonder what it is today.

[allan]

dear fellow bloggers,
has anyone checked kramer's n record of recommendations for say the last 6 months? my guess is that maybe 50% made money and 50% lost according to the law of numbers. unfortunaely, we don't hear too many booyahs from the losers.

[lawrence]

CRAMER IS THE MAN SO ALL YALL HATERS OUT THERE NEED TO DO SOME HOMEWORK INSTEAD OF RUNNING YALL MOUTH

[Kevin]

Cramer is a blowhard and a liar. There's no proof of his hedge fund returns and all of the audits of his public calls should he is at best mediocre.

[stockTagger]

In Nicholas Maier's book, trading with the enemy, he claims that at least 5% of a years earnings came from flipping tech IPO's to the public.

See my analysis on Jim Cramer's Mad Money takeover targets at:

http://www.stocktagger.com/2007/05/jim-cramer-takeover-targets-performance.html

[POB]

I am a professional investor for a large company and all you need to know is that Cramer is an ego driven crackpot. Yes he entertains you and he can even sound sincere, but frankley he is a nut and if you really listen to him you will mots likely lose money. As he says, don't use his methods to invest all of your money his way. Well most folks watching his show don't have that much money. Trust me. He is a god given nut that people like to watch. Also understand that as a nut he likes the attention he is given by being "out there". Please, watch him and be entertained, but go to a professional that hasn't been sanctioned by the SEC like him. Also remember his former sidekick Larry K got kicked off Wall Street due to the white stuff up the nose. He is lucky to have a job since he can't work on Wall Street any more. Its a shame the GE isn't more considerate in who NBC hires.

This is the honest truth. Fans can call it crap, but its the truth.

POB

[james belochi]

This is an embarssement to the Stalwart! Finding reasons to bash someone who is trying to help out middle class americans like my self!

[bob]

buh buh buh buh boooooo Yaaaaaaa!

[TradeDance]

I agree, his was never a real trader but a journalist who covered trading. He got his start by the help of a man call marty perez who invested some money with JC. The only thing JC did was to create thestreet.com
which is a horrible site for traders. Basically JC lies out stocks and makes poor investors suffer. The best way to see if he is a liar is to write down all the companies he says are going to do well and watch them for 3 months just see what happens

[Dave Mazz]

Jim Cramer is now running his "Action Alert Plus" porfolio. Does anyone have some idea how "Action Alert" has done, over the past several years? A registered, publically-traded mutual fund, or ETF normally shows 1-year, 3-year, 5-year, etc. annualized returns. It would be interesting to see how Jim's "Action Alert Plus" portfolio compares to popular stock funds, or an index like the S&P 500.

---Mazz

[Gary]

I had just started trading stocks lost year when I came across Cramer's mad money. In one of his recommendation, he pumped SLT an Indian mining company. I bought 100 shares and the next day the stock went down. After an other month, Cramer came on the show and out of blue again he recommended the same stock. The stock spiked for a couple hours and then again tanked. I ultimately sold the stock at 40% loss and got out. Similarly I lost a lot of money last year on Natural gas which Cramer was pumping almost every day.

[Jack Broms]

I purchased Cramer's MAD MONEY in Oct 2008. I then tracked his 11 recommendations for one year. They included CAT,COP,XTO,RIG, IMA,CVS,MCD,FCX,HP,PEP,and BA. As of Jan 2010, the increase was 59.1% for the portfolio with no losses. I would be happy to submit the tabulation or you can do it yourself with a chart program. Cramer is for real.

[Jack Broms]

I made a mistake...the book was STAY MAD FOR LIFE, not MAD MONEY.

[Kendall Koon]

Funny how he keeps talking up his buddy's company CY. This company is a dog. His recommendation of CY just after they screwed the investors with the spinoff of Sunpower that they valued at ~$80/share. The real market took one look at this spinoff and valued it at less than $30. What a ripoff. Thanks CRAMER and CY. (a real bunch of crooks)
Then Cramer recommends this stock. I can only conclude Cramer is a LIAR and his show is designed to make money for himself and his buddies like the CEO of CY at the expense of his gullible followers.

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