THE BLOG
12/25/2012 06:58 pm ET Updated Feb 24, 2013

It's Time for Cramer to Short His Show

Allan Roth's recent blog was the tipping point for me.

Roth, a respected journalist, author and investment advisor, reported on his investment gain of 22 percent in 22 days, using money from his gambling portfolio. How did he achieve these stellar results? By doing the opposite of what Cramer recommended on his aptly named Mad Money show. According to Roth, in November, Cramer advised his viewers to "immediately" sell Hewlett Packard (HPQ) and Best Buy (BBY). Instead, Roth "immediately" bought them. He sold them 22 days later and earned a 21.9 percent gain on HP and a 22.5 percent gain on Best Buy.

I am not cherry picking here. Obviously, Cramer is not always wrong. He has picked many winners, but overall his record is no better than one you would expect from random chance. As I noted in a previous blog, two studies by Barron's on August 20, 2007 and February 9, 2009 found that his stock picks underperformed the markets. You would have done better in broad based index funds.

In a much publicized spat, Paul Farrell took aim at Cramer, noting that "lazy portfolios," which are index based, stacked up extremely well against Cramer's frenetic stock picks.

A study by three researchers from the Kellogg School of Management of 246 of Cramer's stock picks concluded that the price of his picks had a short term run-up but then reverted back to their pre-recommendation prices within twelve trading days. After trading costs, those acting on his recommendations were negatively impacted.The authors refer to investors who rely on Cramer's stock picks as "uninformed," noting that Cramer's recommended stocks "become overpriced overnight and earn negative cumulative abnormal returns over the next two weeks."

Finally, Paul Merriman did a thoughtful blog entitled: "Ten Reasons to Ignore Jim Cramer's Advice." He noted that Cramer ignores the high cost of active trading, uses shaky evidence, ignores proven basics, misses real diversification and extolls the virtues of "research," despite data indicating it is a waste of time.

The harsh reality is that relying on Cramer's stock picking or market timing advice is no more reliable than basing your investment decisions on the picks of a monkey throwing a dart at a board filled with all the stocks in the Wilshire 5000 index.

Cramer's hyperkinetic personality is particularly appealing to young, high testosterone men. It has made him a hit with the college crowd and a popular, cult figure. That's precisely the problem. The quest for ratings has trumped responsible financial reporting. I have seen no evidence that entertainment value is a component of intelligent, responsible investing. It has the opposite effect by distracting you from engaging in a careful analysis to determine how much risk you can take in order to achieve a maximum return.

It's simply irresponsible for CNBC to continue to air a show that appeals to younger investors and starts them off on their investing journey by providing a daily dose of misinformation. Please give us a Christmas present. It's time for this harmful and destructive show to go off the air.

Happy holidays!

Dan Solin is a senior vice president of Index Funds Advisors. He is a New York Times best selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now: How to Defend Yourself Against Rigged Markets, Wall Street Greed, and the Threat of Financial Collapse, will be published on December 31, 2012. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.