> As the astute among you might have noticed, if you sum up all the stocks used in the analysis it would only come to 18.5k. I removed ~15% of the overall recommendations as either they did not have stock data present in Yahoo Finance/Alpha Vantage or the price data did not match with the one given on the Mad Money website.
That seems like a big caveat. Wouldn’t lack of stock price data be an indicator of delisting?
Yes, good catch, not taking delisted stocks into account is probably the most common newbie backtesting mistake.
Maybe so. But delistings probably wouldn't have a big impact on the 1-day results, and the analysis already concludes that Cramer's long-term returns are not good.
No, it's quite possible that delisted stocks behaved differently even on 1-day basis. For example, if I recommended only very risky stocks, the ones that stayed listed and survived likely paid off very well (let's say +40% in a year), while the ones that are no longer listed mostly went bankrupt (-100%). 1-day returns would show a very large difference on average.
In theory that could be true. But as others have pointed out, there are many other reasons for delisting besides bankruptcy. The scenario you paint is possible, but I still think it's unlikely---less than 15% of the stocks involved were omitted, and that includes not only delisted stocks but stocks omitted for other reasons, so the bankrupt firms would likely be much less than 15% of the total. And while stocks are unlimited on the upside, they can't go below zero on the downside, so there's a limit to how much those omitted losers could drag down the big outlying winners.
> Wouldn’t lack of stock price data be an indicator of delisting?
That's one reason. They may not have pricing due to licensing issues at the source, as well. Yahoo Finance is pretty good for a free resource, but it's not as comprehensive as paid sources.
But, even if it's due to delisting, delisting is not inherently a negative thing. It can happen due to mergers/acquisitions or a formerly public company going private, for instance.
It's not inherently a negative thing, but it's definitely a negative for this guys' analysis if none of that was accounted for.
Or they merged or changed a name, or were taken private. Searching for the SPAC PSAC shows nothing on Yahoo, because it’s now FFIE (Faraday Future) The poster was also measuring sell recommendations so those would be also be harmed by no data in delistings.
Yep, there's a reasonable chance this analysis suffers survivorship bias. Outliers whose stock-prices severally crashed are less likely to be represented. Hence, impactful sell recommendations are probably missing from the data, explaining why sell-side recommendations don't appear to to perform as well.
I do think that limiting yourself to 1 day, 1 week, 1 month horizons is... limiting. Making predictions on that horizon is essentially predicting events (earnings, mergers etc.) and market dynamics. For example, I've worked at a public company who I knew was in trouble from an engineering perspective. I left, over the 3 years before, and 3 years after I left, the stock performed very well. So in terms of stock market predictions, it's not about knowing he underlying performance of the business. It also lends itself to letting Cramer market his own homework - did the stock go up due to his influence for example? Could be the case for smaller cap stocks, and particularly over a 1 day horizon.
It's also rather comical that he's right a little over 50% of the time when making a positive prediction and a little less than 50% of the time when making a negative. Or to put it another way, the stock market goes up -so when you predict it goes up, you're generally right.
> I do think that limiting yourself to 1 day, 1 week, 1 month horizons is... limiting.
The feedback loop on whether you've made a good decision can be a long time:
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
Are you willing to stake your financial future on beating the odds that you're better-than-the-average/market? Especially over the course of multiple decades saving up for (e.g.) retirement, and then keeping your portfolio during the (hopefully) decades of retirement. (Of course you can do good enough to meet your financial goals, even if you could have done better using (say) index funds.)
I think one thing that your explanation is missing is that a skilled basketball player has technique. The reason he sinks 50 3 pointers in a row is because he has a technique that minimizes variance and muscle memory that allows him to move in a repeatable and predictable way. That's how you tell the difference between someone who is good and someone who is lucky. With the stock market, sometimes you can do the same thing. The reason that Cramer is famous/infamous is because so often the explanation for his stock picks are just trash. It may well be that he's manipulating the market and helping out his friends, or pumping stock he already owns, and actually in private he's a shrewd individual. The character on screen is a blithering idiot 90% of the time. It's not that we think his results are bad, it's that the method he's using to produce those results seems obviously flawed.
> I think one thing that your explanation is missing is that a skilled basketball player has technique. The reason he sinks 50 3 pointers in a row is because he has a technique that minimizes variance and muscle memory that allows him to move in a repeatable and predictable way.
The only way the player, and everyone else, knows he has technique because it is obvious right away when the ball goes in the hoop. The point of the author's weblog post is that this instantaneous feedback generally does not occur with evaluating returns. One may have to wait weeks/months/years to see if a particular strategy works / will work out.
Do these compare performance before or after fees? Regardless, if you're comparing funds (that contain lower risk investments, like bonds) to the S&P500 then they're going to lose whenever equity markets beat bonds - which is most of the time.
If I actually (by picking stocks) have a lower expected return than the S&P, shouldn't I be sending all the hedge funds my stock picks so that they can short them (while being long S&P) - therefore beating the benchmark ~75% of the time?
> Or to put it another way, the stock market goes up -so when you predict it goes up, you're generally right.
Yes! If you compare to the coin toss baseline, you need to weight it by how the average stock (whatever that means) moves. So the baseline of a 50-50 coin toss is misleading, and should probably be 50+epsilon, 50-epsilon instead, in order to be a fair comparison. However, the S&P 500 baseline is solid, imo.
Jimbo is a TV personality and knows just as little as anyone else. The little positive correlation his recommendations have on a short term basis are from people buying in and pushing the price up. Casual market manipulation.
What caused you to come to these conclusions?
edit: Stop downvoting me. I did not realize parent commenter was OP of the reddit post.
Cramer tells everyone to buy, everyone buys. Price goes up, then smart people cash out in the profit taking. It doesn't matter what the recommendation is after that buy. Cramer can tell you to sit in a dark closet and fart for the rest of the week. He's successfully driven the price up on a very short term basis, and those that have caught on make easy money.
I like the assertiveness of this command to stop downvoting compared to the often passive-aggressive or hurt pleas.
"I analyzed 20k recommendations made by Jim Cramer during the last 5 years"
you can literally watch a tick-by-tick chart of a Stock/ETF that is talked about by any of the CNBC talking heads during market hours and watch this occur in real time.
Does HFT not make money off that?
My guess is that there are constraints that make it unattractive to institutions.
Only 20 trading opportunities a day, fairly limited alpha on each trade (1-3bps), limited liquidity since you're just trading against the small retail population watching Cramer at that time, the possibility of getting picked off by another institution who figures you out...
This might be a bit odd but I'm going to try and link this with Steven Seagal of all people.
Currently Steven Seagal is getting raked over the coals on Reddit due to some of the extraordinary claims he's made about his martial arts abilities, they don't quite line up to our current understanding of what is effective (think, less Aikido and more Ju-Jitsu, at least in the ring).
I think what has happened to Steven Seagal (and here to Jim Cramer) is that we're now in the era where it's possible to (somewhat) easily fact check the claims that you make and prove that they're wrong.
Your Seagal story reminds of a bit further back, in 1995. That was when Hillary Clinton went to Nepal, and along the way made the claim that she was named after Edmund Hillary. Ignore that she was born six years before his famed climb, and her mother unlikely to have heard of him in the U. S. Make of it what you will, that isn't my point.
My point is that in 1995, my first thought was, "you know, we can instantly check this stuff now, as the words leave your lips." I don't know that politicians have been made more honest as a result, but it's an improvement anyway.
In the case of Cramer, who cares enough to trade on his recommendations? Doesn't matter, that isn't the point (but thank you, TFA author, for the effort). The point is that instead of vague memories of how it turned out, like we'd have to make do with 40 years ago, we have folks that can make sense of 20K records and tell you whether Cramer is full of shit, generally speaking.
People have known Steven Seagal and most traditional martial arts have been largely ineffective (in comparison to things like boxing and later BJJ and MMA) for a long time. I'm not going to say they're useless as many of their techniques made it into things like BJJ (thinking of traditional jujitsu), but they certainly don't live up to their reputation from movies and what people like Seagal would have you believe with rediculous exhibitions where he effortlessly flips people around that offer no resistance and immediately take a rolling break fall.
You're absolutely right that the internet in general has made this much easier though. There's even an entire website that's been around for probably 20 years called bullshido that is a play on "Bushido" and "bulls**" that covers this topic in detail iirc.
Oh man, Bullshido! That was a classic 00s message board. Thanks for the throwback.
I think more than fact checking is the ability to share the results. 30 years ago, you would have needed to be a reporter or known one to have analysis reach that many people.
In the 90s, I thought that was a purely good thing but now I’m wishing we had an in-between version where stuff just shy of time cube has millions of fans.
Wait. What the heck? What's wrong with Steven Seagal? Under Seige is a great movie.
It is, but not because of Seagal's skill as a martial artist. Great castings for the villains, unique setting providing memorable action setpieces, grounded/realistic directing, and Erika Eleniak popping out of a cake half-naked all make it memorable. Seagal's bullshido? Meh.
> On average, he was making more than 20 picks per episode of his show . This is a staggering number of picks to be made by one person!
Presumably there's a small team coming up with a list, just as there's a team of writers for a comedy show.
The program is pure entertainment and as far as I can tell unashamedly so. I can't really find fault with that any more than I can with people, say, watching sports on TV.
Interestingly, the point about outperformance being due to only a few stocks is often true of the broader marker. In 2018 10 stocks contributed more than 100% of the S&P 500 gains.
> Before you go daytrade on his recommendations you should know that the numbers we are seeing here are heavily influenced by outliers. If you miss out on the top 1% of recommendations (~110 stocks out of the 11,000+ buy recommendations he had made), your 1-day return would be -0.062% instead of +0.034.
Pretty big caveat there...
It’s true of many good investment strategies that if you retroactively ignore the best winners (without also ignoring the worst losers) that your measure of performance drops dramatically.
If the one day gains are due to his viewers, that seems consistent with the sells not doing anything. I dont think the average investor does shorts.
That analysis shows his best performance is 1-day recommendations. How is that just not a plain simple pump and dump like crypto traders do?
I don't think anyone is claiming that Cramer is making money off others peoples' trading, except very indirectly (this behavior causes more people to watch, which increases advertising value, which increases his bargaining power with his network when negotiating compensation).
I can't see it's illegal, nor do I think it should be. I don't think it's wise for the punters, but I doubt that's terrible. If someone had sunk their life savings into one of these picks and lost their shirt, it would have been widely reported.
Wait, he's not? My assumption is that he always buys the stocks right before recommending them and then dumps them at the close of the next day. Why else would he spend all that time and energy making the TV show?
No, CNBC does not let Jim Cramer pump and dump stocks. That’s even a step too far for the SEC, they’d have no choice but to act.
Jim Cramer’s employment contract almost certainly excludes him from purchasing individual equities, I’d be willing to bet a large sum of money on it.
The TV show pays him, for one thing.
As corrupt and captured as the SEC is, even they wouldn't let that kind of thing fly.
Unless you are a member of the US Congress.
Members of congress make those rules that can override the SEC (much as they do for their own health care).
It’s not obvious what the right thing is. On one hand it’s important to remove conflicts of interest. On the other hand I wouldn’t run for congress* at all if it meant giving up my portfolio (not just giving up control for a while but actually, especially as I have a relatively high percentage in private companies that couldn’t meaningfully be put in trust).
* don’t worry, there are other reasons why this wouldn’t happen.
> I wouldn’t run for congress at all if it meant giving up my portfolio
No offense, but I think that would be working as intended. You can't serve two masters. It's the very definition of a conflict of interest.
Don’t worry; no offense taken.
I think it’s important to recognize that there’s a dynamic tension in the system. Typically, people have expertise in a domain through their experience in it. People who worked in the oil industry know more about oil exploration than, say, I do. Rules I would make about the oil industry would be uninformed, and would likely be terrible. Yet you can’t have 100% self regulation or you end up with regulatory capture.
People are complicated and these are hard issues. In my experience few people show up intending to be completely selfish about their activities.
While I get your point about tension, I actually don't think these are hard issues, it's just that our current attitudes have shifted so much. Just watch the movie "Mr. Smith Goes to Washington." A different era, to put it mildly. Public servants should be expected to put personal considerations (and the considerations of their buddies, colleagues, industry) aside, and focus on the good of the society that elected them. That is clearly no longer a universally held attitude. Instead, we've suffered a whole generation of capitalist inculcation that holds as its core value that "enlightened self interest" is all that is necessary to drive society forward (and to be honest, the enlightened part has been pretty much dropped these days). Nothing matters if representatives are endless "positive-summers" who feel that their own good benefits society's good, no matter what they do. They'll believe (all the way to the bank) that they are doing honest good. They are that deluded. I blame the shift towards this on Ayn Rand and her ilk.
> People are complicated and these are hard issues. In my experience few people show up intending to be completely selfish about their activities.
Intentions don't matter as much as actions. The norm in Washington is self-serving, and the watchdogs and anti-corruption mechanisms have corroded and are breaking down. Corruption has taken over, and the system is rotting. The only thing that can fix it is going back to the rules, not the intentions. Consequences change behavior, and those require a functioning system that fights corruption and a dedication to keeping that system functioning. Instead, neither rules nor attitudes seem to matter these days.
Mr Smith Goes To Washington was a hit film because it described an ideal nobody believed existed.
The situation you described is as old as the republic, and probably for all of human history. The American revolution itself succeeded through bribery in Whitehall.
> His sell recommendations did not pan out so well. Even though they dropped in price the next day, over the next week and month, they returned inline or even better than his buy recommendations!
Given that there is a counter-intuitive trend in the returns
That trend should be viewed in context.
The DJIA over the 5 years of the study went from 20,812 to 36,407, a rise of 75%.
Any pick of Cramer's (or anyone else) would have to rise by more than that rate to beat the market.
He appears to significantly outperform the market if you only hold for 1 day. We need someone to create an ETF that does this and we can all join the fun.
> On average, the Buy and Positive mention stocks went up by 0.03 and 0.05% respectively
You would get eaten alive by transaction costs, the bid/ask spread, and, if trading in large quantities, the market's response to your buy & sell orders.
The more people know about your secret sauce, the less tasty the sauce becomes.
This almost reminds me of the typical /r/WSB stuff that "literally can't go tits-up"
On average the S&P increases by 10% annually. Across 250 trading days, it increases by 0.04% daily on average.
So his picks do not beat the market on average.
You're right, that seems to contradict the author's assertion that Cramer's 1-day performance beats the S&P 500 by a factor of ten. Maybe he made a simple math error somewhere---forgetting to adjust the daily SPY return by 10x when converting the units to a percentage, perhaps? Multiplying the stated .003% daily return by 250 yields .75% annual return, which seems wrong. Pretty sure the average annual S&P return from 2016-2021 was higher than that. Investopedia says the annual return is around 10% since 1957.
Outlier returns. A few picks give you a 1000x return that overweights the entire portfolio strategy.
That doesn't explain why the 1-day SPY Buy row is 10x the 1-day SPY Positive Mention row---they should be about the same, as they are in the other rows, since they're essentially random samples over the timeframe.
Jim Cramer is an entertainer. Not a financial analyst.
He’s a very good entertainer.
Precisely, this is one of the few fields where actually being able to do it will make you more money than becoming an 'influencer' who talks about the field to other people. The fact he is doing the latter says a lot.
The article doesn't provide some key details regarding the one-day returns, particularly the precise timeframe used. If the price of a stock rises sharply the instant it's mentioned on the show then decays gradually, and the basis price being compared is the pre-mention price, then the returns would largely be illusory---you'd have to beat the near-instantaneous initial rise to make any money. Otherwise, you'd be likely to lose money by pursuing this strategy because your buy would be executed at or near the local peak.
On the other hand, if the basis for the buy is the price say, an hour after the show, and the sell is priced 24 hours later, then it would be a viable trading strategy for an individual investor.
The article presumes that show airs after market close. So they model they one day timeframe as the market open-close the next day. This doesn't work with international stocks, but I suspect they tossed those out with the "we didn't find the data" picks.
He noted that the show is only aired after the close of the market (6 - 7 pm Eastern, to be specific). So the stock could not rise the moment it was mentioned except in after-hours market trading.
That still presents the same problem, just deferring it to the start of the next trading day. It's not really a viable strategy for the ordinary day trader if almost all of the gains come in the first milliseconds of trading.
As an aside, it also looks like there's a decimal error in the 1-day SPY Buy row, it's unlikely the SPY Buy return would be 10x the SPY Positive Mention return---the difference between them should be small, since for SPY it's largely a random 1-day sampling over the 5-year timeframe.
> That still presents the same problem, just deferring it to the start of the next trading day. It's not really a viable strategy for the ordinary day trader if almost all of the gains come in the first milliseconds of trading.
If these are stocks traded on major exchanges, you can place a market buy at open order, and get the opening price. You can then place a market sell at close order and get the closing price. Not that either of those are a particularly good idea, but they are available if that's what you want to do.
Right, but the opening price will be gapped up from the previous day's closing price, which was before the show. It actually makes the situation worse, because the rise is truly instantaneous, without even milliseconds to get an order in before it goes up.
Sure, the opening price will be different than the previous day's closing price, but if Cramer comes on after the market closes and tells you to buy, and you're sensible enough to ignore the after/before market, then the earliest price you can get is the opening price (you could do an analysis with early/late trading, but I don't think the data is available, and only crazy people trade outside of market hours). And that's the price that was used for the analysis. So fair's fair.
Would Cramer's advice be better if you could retroactively buy or sell before his show? Maybe, but that's not a realistic question.
Ah, got it---I completely missed that they used open-close for the day after.
No mention of the cost of getting in and out. There's not one price "the opening price" there's the best bid and a little higher, usually a tick, the best ask. Does it still win if you trade with prices you can actually get to get in and out?
>we can generate excellent 1-day returns following his buy recommendations (even beating the market in doing so!)
From having tried this sort of stuff, no you can't! What happens is stock X has people say willing to buy at 90 or sell at 100. Before Cramer or whoever recommends it it's trading at 90, as soon as people start buying they end up buying at 100. Hence Cramer can look brilliant if you just glance at stock he tipped went from 90 to 100 but if you try trading you buy at 100 and if unluck sell at 90.
Here's a fun ethical question: The OP mentions in the article and here in the comments that most likely his 1 day performance is better than the market because people buy the stocks he recommends, pushing the price up. One person here called it "casual market manipulation".
Assuming that's true, would it be unethical/illegal if you knew what he was going to recommend and then buying that ahead of his announcement?
Further, would it be unethical/illegal for Cramer himself to buy all the stocks ahead of his own recommendations?
And further still, would it be unethical/illegal for Cramer to sell a service where you could give him money and he'd make the trades for you ahead of his own recommendations?
Research departments of major banks regularly issue public upgrades or downgrades of public company stocks. These move stock prices. The banks sell these research reports early to their investors and 20 minutes earlier or so to their most invested investors. And those can play on the recommendation against all the other suckers. This is legal.
How is that not the literal definition of insider information and trading on non-public information? I suppose they will claim that they make their predictions based on publicly attainable information and therefore anyone else could have made the same pick even before the announce it. But in that case aren't they admitting that releasing the information manipulates the market?
It's fine to trade when you know something that the general public doesn't. Indeed that's really the only time you should trade: you presumably want to make a profit, and society wants relevant information to be incorporated into prices. The thing that's not fine is trading on secret information that belongs to someone else. Insider trading is about theft, not fairness. https://www.bloomberg.com/opinion/articles/2015-04-01/anothe...
It should be illegal, in theory? Insider trading doesn't require a company insider, only that you have non-public information that can reasonably affect the price iirc. Proving that may be difficult in practice.
IANAL yadda yadda.
> Oh yeah! I was as surprised with the results as you are. I ran the numbers again and then one more time but got the exact same result! Cramer’s Buy recommendations beat the S&P 500 by a factor of 10 for the one-day time frame. But, if you held the stocks for anytime longer, you would have underperformed the market significantly.
On the contrary, this is the least surprising thing in the world. Most professional fund managers cannot beat the market in the mid to long term, let alone a TV personality like Jim Cramer. I'd instead be very surprised if the results had shown him to be a competent stock picker.
Surprise! he's always been a pump-and-dump market manipulator. A TV personality with no particular insight into the market. He should be ignored.
Based on that data, I'd be curious to see a strategy that takes his "negative mentions", waits a day, and then buys and holds for a month.
There are a bunch of caveats to the research that others bought up here. But my reading is that over greater than one day holding periods you would lose money, and/or under perform against S&P.
That’s my reading of the wall of text as someone with no real interest day trading, or really individual stock picking in general
I read a similar analysis on Cramer’s picks in 2007. IIRC on average There was a transient increase (lasting several days) in the stocks he recommended…however sometimes the increase would begin several hours before his show aired. Also the magnitude of the effects scaled negatively with market cap of the stock (small caps moved more).
What's missing from this analysis (did not read it in detail, I could be wrong) is a comparison to a Monte Carlo approach. In other words, throw darts and issue buy/sell recommendations based on a stochastic selection process. It could be uniformly distributed or some other approach.
Its beennknown he is a shill/hack for decades. I think there have been cramer vs monkey, cramer vs coin toss, cramer vs dog pooping and he did equal or lost to all of them
"Following Jim Cramer's advice will make you a millionaire, if you start with 100 million dollars". Jon Stewart
It should be noted that most stocks suck (emphasis added):
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
Of course those top-percentage stocks also change over time, so even if you pick the top 2% today, you have to make sure they're still the top ones in the future.
You also have to have a strong stomach at times: AMZN dropped 90% after the Dotcom Bubble. Further, a good portion of stocks that do have such extreme declines do not recover:
> Risk of permanent impairment. Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. For Technology, Biotech and Metals & Mining, the numbers were considerably higher.
Some of us have been through a couple of ups and downs.
The second study has used data going back to 1926, which would be a time period where interest rates were quite varied.
Since there is a fee for making a trade, how much are you investing before a 0.03% return makes back that overhead?
Very neat, surprising it was somewhat effective. To make it more robust, make sure you’re capturing delisted stocks, and running multiple Monte Carlo simulations with varied parameters (like hold length, etc) helps. Watch for slippage and fees too.
I do these things all day at Quantbase. We tend to focus on longer term strategies with more “moat” so to speak, but have the shorter term plays like a Nancy Pelosi tracker you can throw some money in. A Jim Kramer tracker would fit right in there!
> a. One-day
> b. One-Week
> c. One-Month
Yikes! I know it's fun, but you're never going to make money investing this way. Your daily/hourly buys and sells on scottrade will never beat the institutional investors.
Here's the obligatory mention of A Random Walk Down Wall Street  if you want to learn why.
TL;DR: Put your money in an index and keep it there _forever_. You'll make more money and retire sooner than your day-trader friends.
Isn't this a type of cherry-picking fallacy? The analyst should have had a hypothesis before crunching the numbers. Instead they looked at three windows and then chose to highlight the one that would be the most attractive to Reddit audiences.