Getting Investment Advice From Jim Cramer's Mad Money Is Mad

Jim Cramer's Mad Money show on CNBC is a ratings hit. In the show, Cramer does his stock-picking shtick, pacing around the set, yelling random facts about companies. Watching, you'd think he's got some magic ability to pick the winners and losers. Indeed, that's pretty much the whole point of the show - people watch it to find out what stocks to buy and what ones to avoid. He even sells a $15 a month newsletter subscription with his picks.

The problem is his stock picking skills suck. He can't beat the market.

Proof Is In The Pudding

An independent analysis by researchers at the University of Pennsylvania shows Cramer's Action Alert Plus portfolio has under-performed the S&P 500 by 2.5% over the past 15 years. It's worse in more recent years: it lost 9.5% in 2011 when the S&P 500 was flat and it gained only 1.3% in 2014, a year the S&P 500 gained 11.4%.

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CNBC claims Mad Money isn't a show about stock picking. According to their website, their goal is "educational, to teach you how to analyze stocks and the market through the prism of events." Yet, when the show features segments such as The Lightning Round, where Cramer reels off two or three sentences about the company and then proclaims it to be a "sell" or a "buy", how educational can that be? This is entertainment, not education.

Jim Cramer's claim to fame, before he became a big TV star, was that he managed a hedge fund and made millions of dollars. That, one would think, means he must be great at picking stocks. The only problem is he didn't make money by picking stocks. He made money by manipulating the stock market. He admitted this. He admitted all hedge funds do it. And while he claims nothing he did was illegal, he says other hedge fund managers are not adverse to illegal market manipulation. When you have the ability to manipulate the market, you don't have to be good at picking stocks.

Yet More Evidence Of This Basic Fact

The bottom line is no one can consistently beat the market by picking individual stocks, especially frequent traders. Transaction costs and taxes will eat away any profits you might manage to get. John Bogle has proven this. Warren Buffett made a $1 million dollar bet on this and, with 2 years left out of a 10 year time frame, he's winning - by a lot. This analysis of Cramer's picks is just one more piece of evidence. Stick with low cost index funds.