James’ Grade for Jim Cramer B/B-.

I like Jim Cramer. He’s done a lot for the investing public. I’ve listened to his podcasts and a lot of people call in and complement him for inspiring them to learn more about stocks.

There are some problems associated with his popularity. For example, a few months ago, Cramer made some vague statement regarding Hansens Natural Soda (HANS). Cramer’s comment was misinterpreted, and the price of the stock dropped by 12 dollars after his comments were aired. Hansens was otherwise a great company and reported blowout earnings the following quarter. What this suggests is that because Cramer is so popular, his predictions sometimes become self-fulfilling prophecies. E.g: he says the price is going up, so everybody buys the stock and the price goes up. Cramer says sell and the price goes down. This is totally independent of the intrinsic value of the stock in question.

The second major problem is that Cramer makes too many predictions. Since he has a media organization, Cramer needs to produce content, so he gives a lot of opinions. The major problem is that a thorough securities analysis can take week. It includes reviewing the companies SEC filings, taking with customers, surveying the companies market, and interviewing corporate management. In fact a lot of the big wall street investment houses take up to 6 months to come up with reliable opinion of only a few stocks. Cramer makes hundreds of picks a week. Some of these have been wrong. In fact, one study has show that the long term track record of Cramers choices was about as good as flipping a coin, in otherwords, that it wasn’t any help at all.

Here is the link to the coin flip study:

All, in all, I’m awarding a grade of B/B- to Cramer. He is good entertainment, especially on his television show, but his value as a stock picker is limited.

Best,

James