How much money would taking Jim Cramer’s advice have cost you?

[lame54]

http://econ4u.org/blog/index.php/2009/03/13/how-much-money-would-taking-jim-cramers-advice-have-cost-you/

How much money would taking Jim Cramer’s advice have cost you?
By now I am sure you have seen Jon Stewart eviscerate Jim Cramer on last night’s Daily Show. If not, all 23 excruciating minutes are available at thedailyshow.com. In one of the highlights (lowlights) Stewart shows clips of Cramer in 2006 explaining how he would manipulate the price of Apple stock by “fomenting.” Fomenting, according to Cramer, is when a trader puts out false information or rumors about a company in order to change its price one way or another. If you have a “short position” on a stock, you will make money if the price goes down. Thus you would want to foment bad news (in the clip Cramer says he would tell people that there were problems with the upcoming iPhone).

Manipulating the market is technically illegal, and the SEC’s regulations specifically include “spreading false or misleading information about a company” as an example of manipulation. But as Cramer said on camera:

Now, you can’t “foment.” That’s a violation. You can’t create yourself an impression that a stock’s down. But you do it anyway, because the SEC doesn’t understand it.

The SEC missed a lot of calls in the past few years (Bernie Madoff, R. Allen Stanford, etc.), and so these kinds of violations have gone unnoticed and unprosecuted. This interview shines a light on why you should take “expert” stock trading advice with a truckload of salt. Hedge fund managers and other Wall Street figures who go on CNBC don’t necessarily disclose their own agenda, and they know that what they say on TV can move a stock price significantly. Unless you think you know more than those guys, with their own dedicated research departments stocked with Ivy League mathematicians, don’t try to trade on their advice.

What happens when you follow a TV show’s stock tips?

Imagine you owned 1,000 shares of Apple (AAPL) on December 22nd, 2006, the day Cramer talked about fomenting his short of the company. Based on his advice, you decided to sell your Apple shares, which on that day were worth $82,200. Your Apple stocks had risen from a low of about $50,000 earlier that summer, so you would have felt pretty good about the sale. However, if you ignored Cramer and held on to your Apple stock, you’d have about $95,000 today. Ouch.
On March 11th, 2008, Jim Cramer recommend buying Bear Stearns. If you took your Apple stock (worth $127k at that point) and put it in Bear Stearns, you would have had a very rough week watching your investment drop 96%, to $7,499. If you want to lose $120,000 in a week, you don’t need anyone’s help. I recommend Las Vegas, but I hear Macau is nice too.
The stock market can be a dangerous place. That’s why it is important to diversify your assets and not leverage too much of your family’s income. And just like you don’t invest your kids’ college fund based on Terry Bradshaw’s Sunday morning football picks, don’t treat financial television “experts” as if they were preaching the gospel.

[nichomachus]

1. No different than the folks

who -- when the big lottery goes over $300 million -- take their life savings and buy lottery tickets.

Or like the supposedly smart people who took all their money and put it into Bernie Madoff's little black box.

Madoff wouldn't answer the most basic questions about how he operated. Anyone who invested even 10 percent of their money with him was either greedy or incredibly stupid or both.

Madoff didn't burn any institutional investors because they asked him questions, he wouldn't answer them, and they walked.

[phantom power]

2. That gives me an idea.

In theory, somebody could use the historic data, and combine it with every piece of advice that Cramer ever gave on his show, and compare his recommendation performance against the performance of a diversified investment strategy.

[lame54]

3. w/o the annoying bells and whistles