A statistical look at Jim Cramer's skill level

NEW YORK - JANUARY 16: TV personality Jim Cramer appears following the NASDAQ stock market opening bell on January 16, 2008 in New York City. (Photo by Scott Gries/Getty Images) Scott Gries

Commentary:

(MoneyWatch) There have been many pieces written by others as to whether Mad Money's Jim Cramer's stock picks outperform markets as a whole, and some of them by me. In one such column, I examined two strong sell recommendations Cramer made about six months ago and assigned a statistical probability to the accuracy of these predictions.

Specifically, on Nov. 20, 2012, Jim Cramer's urgent message was to exit two stocks immediately -- Hewlett Packard (HPQ) and Best Buy (BBY). Fast forward six months and three days through May 23, 2013, and how did these two stocks do? Well, considering Hewlett Packard was up 115.62 percent, while Best Buy gained 124.64 percent in total return, you be the judge.

I asked the folks at S&P Dow Jones Indices where the performance of HP and Best Buy ranked in the S&P 500. Though they responded that they didn't have the data readily available, the folks at Wilshire Associates did on their large cap index. Of the 749 stocks in the Wilshire U.S. Large-Cap Index, since Cramer's urgent sell message, Best Buy ranked the 3rd best performer while Hewlett Packard came in 4th. I ran some numbers and the probability of being wrong enough to get two of the four best performers was 1 in 35,062.

As a side note, in Cramer's book "Getting Back to Even," Hewlett Packard was one of 12 stocks highlighted in his chapter on how to invest for the recovery. Between the Oct. 13, 2009, publish date of his book recommending Hewlett Packard, and his Nov. 20, 2012, sell immediately recommendation, Hewlett Packard's total return was a loss of 73.83 percent. In other words, investors who listened to Cramer, and acted upon his advice, would have first lost nearly three quarters of their investment and then missed out on more than doubling it.

Wilshire was kind enough to provide the top four stock performers over the roughly six month period. They were:

Netflix: NFLX is #1 with 174.49 percent

Green Mountain Coffee: GMCR is #2 with 161.68 percent

Best Buy: BBY is #3 with 124.64 percent

Hewlett Packard: HPQ is #4 with 115.62 percent

Now I'd give Cramer the benefit of the doubt if he had recommended buying either Netflix or Green Mountain Coffee. As it turned out, however, Cramer advised selling Netflix on Nov. 2, 2012, and selling Green Mountain on Sept. 20, 2012. Yikes.

By now I'm guessing you won't be surprised to know that by April 23, after Netflix gained 182 percent, Cramer was recommending buying Netflix. Though he noted that Netflix performed in a way that Wall Street didn't expect, he made no mention of his own stated expectations.

Being a numbers guy, I couldn't resist calculating the odds of making four sell recommendations on what ends up being the four best performers out of 749 different stocks. Can we have a drum roll? The odds are 1 in 13.1 billion. By comparison, the odds of winning the Powerball jackpot are much better at 1 in 175 million, or 75 times more likely to happen than picking four stocks that poorly. Thus, picking the four best performers as stocks to sell is the next closest thing to being statistically impossible.

My Take

Admittedly, Cramer came up with other sell recommendations and I didn't do a thorough search to see what those stocks were and how they performed. Which is to say I'm not painting all of his advice with the brush of statistical impossibility. With these stocks, however, his recommendations to buy after they surged and sell after they plummeted, appear to be driven by nothing more than recent performance.

I emailed CNBC's senior vice president of public relations, Brian Steel, asking whether Cramer publicly acknowledged and address his bad calls on Hewlett Packard and Best Buy and, if not, how that reconciled with Cramer's stated mission of education? No response was received.

By any measure of statistics I can think of, these four awful stock calls are telling of Cramer's incredibly poor ability to call stock sells. It not only surpassed my wildest imagination of just how bad anyone could be, it gave me an idea. I'm going to launch a new long-short hedge fund called Remarc (REMC). It's the reverse spelling of Cramer's name and the reverse of his advice as well, buying long positions in stocks Cramer says to sell and shorting any stocks Cramer calls a buy. If the odds also reverse, this fund will make the Powerball jackpot look like spare change I found between my couch cushions. So forget about "Mad Money" and jump on Remarc, it would be mad to miss out on this action.

Author's note: Though I'm kidding about the hedge fund, I have personally profited by investing opposite of Cramer's recommendations. I also would not be surprised if institutional investors were profiting by using the Remarc strategy.

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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