Stock Pickers Flame Out Again

It’s always fun when investment gurus or media talking heads put together a list of their top investments to buy. History has shown no one, from professional investment manager to average Joe, can consistently outperform the market. Yet despite the litany of evidence against stock picking, many in the media are still prepared to chance their arm – often hoping the rest of us will forget how their last load of picks turned out.

Unfortunately for the gurus, there are plenty of pedants (like ourselves) out there, who continue to collate their lists and periodically check in on them. It should be embarrassing, but a bad list of stock picks has never shamed anyone into not offering more bad picks.

One of our favourites is Jim Cramer from US financial news network CNBC. Cramer also runs his own website called ‘The Street’ and this time last year Cramer wrote a column called “Here Are 49 Stocks to Buy Right Now”.

Cramer’s list piqued the interest of a retired finance professor, Dave England, who wanted to see if Cramer would stand behind his picks with a friendly challenge. England would put $1000 of play money into each of Cramer’s “49 Stocks to Buy Right Now” and measure their performance.

If more of Cramer’s picks were up than down after a specified period, England would fly Cramer to his home town, put him up in a hotel and buy him dinner. If more of Cramer’s picks were down than up, Cramer would have to fly England to New York, put him up in a hotel and buy him dinner.

Cramer never responded to the challenge.

It’s no stretch to suggest Cramer didn’t respond because he’s no fool and knows historical data shows stock pickers’ success rates are abysmal. More specifically, Cramer participating in an event that keeps track of his picks undermines the chances of his audience listening to his future picks or even watching his TV show and reading his website.

How did Cramer’s “49 Stocks to Buy Right Now” turn out?

Trusted Investment Adviser Sydney


Between April 7, 2015 when Dave England issued the challenge and a year later when he checked in on the performance of Cramer’s picks, the list was down a combined 9.18%. In the same period the S&P 500, the index benchmark for these stocks, was down only 1.38%.

If an investor had just bought the index they’d have more of their money left.

Out of the 49 picks, 33 were losers and 16 were winners. 25 of those losers were down by double digits, while 9 of the winners had increased by double digits. All up it was a 32% success rate for Jim Cramer’s “49 Stocks to Buy Right Now”.

This is another one of those lessons that the guy on the TV or in the newspaper has no authority when it comes to investment forecasting and their picks should be considered nothing more than entertainment.

Finally, the results from Cramer’s list also highlight two other important points.

Firstly you won’t find diversification in a handful of companies. Cramer’s list was 10% of the S&P 500 and its return was nearly 8% worse. Diversification not only helps capture the gains, but also protects against the downside. The fewer companies an investor holds, the more volatility they’ll experience because it takes a smaller number of poor results to derail their return.

And secondly, costs are a drag on investments. To buy Cramer’s list it would have taken 49 purchases all with individual transaction fees. To exit Cramer’s list it would be 49 sales all with individual transaction fees. To buy a fund tracking the S&P 500 it would have been 1 purchase with a single transaction cost and the same to exit.

If every buy and sell was $10, based on this challenge, Cramer would have needed an extra 2% return just to cover transaction costs.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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