USA Today has a great article about Jim Cramer’s ability to pick winning stocks that beat the overall market. You see, we think that someone who has made millions in the market has some kind of secret to building wealth. But the truth is that they aren’t any better than you or me. What they do have is time. Time to research and evaluate each stock trade.
Even the article in USA Today points out that Jim Cramer himself says buying stocks takes work: “Cramer recommends spending at least an hour a week researching each stock. That translates to more than 500 hours of homework a year.” The figure of more than 500 hours comes from the number of stock recommendations CNBC provided to USA Today.
In order to tell how someone is doing when it comes to stock picking you have to have a benchmark to compare it to. The benchmark in stocks is an index but as the article points out using just any index isn’t good enough. You can’t compare the S&P 500 index to small cap stock picks, they’re just not the same.
So how does Jim Cramer’s picks do compared to the equivalent index? Well not so good actually. The article found that his picks are mostly mid-cap stocks and so they compared his return to a mid-cap index. "What if we compare Cramer's results to a midcap index fund such as the iShares S&P MidCap 400 index exchange-traded fund (IJH)? Had you ignored Cramer and simply bought IJH on March 14, 2005 and held it until March 27, 2006, you would have been up 16.4%. That's dead even with Cramer's performance."
And what does Mr. Cramer say about index investing?
"Cramer himself has described how hard it is to beat index funds. 'After a lifetime of picking stocks, I have to admit that (Vanguard Group founder John) Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him,' Cramer said on the dust jacket of Common Sense on Mutual Funds, Bogle's 1999 book."
I’ve written this post on buying stocks versus index funds. The point of the article is that brokers and commission based financial advisors all what to sell you a product, and they make money on that sale, regardless of whether you make money or lose money.
And the dirty little secret of buying and selling stocks is that there are costs associated with it. The USA Today article points out that fees and commissions take a chunk out of any returns you might get. “Had you followed Cramer's advice, you would have had to buy more than 606 stocks, according to the CNBC data. Even if you use an online broker that charges just $5 a trade, you would have spent $3,030 in commissions.”
Index funds however can be bought without any cost whatsoever. I have an account with Vanguard and for most index funds I don’t pay any commission. And the fees are amazingly low. For one particular fund I own the fee is only .16 per cent. And you just can’t beat that.
Also to bring the title of this article into play, what’s up with Boo-Yah? I think any stupid catch phrase that does nothing to increase your success distracts from the real goal. Boo-Yah is popular but if Jim Cramer can’t beat my portfolio of mostly index funds why listen to him.
This got me thinking about how my investments did versus Cramer’s. According to the USA Today article Jim “Cramer's picks have gained 16.2%, on average, from the show's launch March 14, 2005, through March 27, 2006. That makes the Standard & Poor's 500 gain of 7.3% look pretty sad.” But it makes my gain of 18.4% from April 6, 2005 to April 6, 2006 look spectacular. I beat Jim Cramer and I did it with mostly index mutual funds. This is yet another piece of proof that the experts aren’t really that expert at all.