Monday, November 26, 2007

Mad Money = Money-Losing Investment Advice

In the December 2007 issue of the Quarterly Review of Economics and Finance, there is an article "Does Mad Money make the market go mad?"

From the abstract: Our analysis of returns and trading volume around stock recommendations aired on charismatic host Jim Cramer’s Mad Money program reveals statistical evidence of response to both his buy and sell opinions, with most of the full-day return following an on-air buy recommendation captured by that day’s opening price. Trading strategy analysis suggests that individuals with limited funds should be wary of short-term trading to exploit the show’s suggestions.

From the conclusion: Heightened investor activity around stocks discussed on the show is indicated by statistically significant abnormal and raw returns, as well as trading volume increases, on both the day 0 air dates of buy recommendations and the day +1 trading day, with the day +1 effects being stronger as expected. However, since almost all of the average raw return on day +1 is captured in the difference between the day 0 close price and the day +1 opening price, a change likely induced by the weight of pending buy orders placed by viewer investors before the market opens, the average investor is unable to benefit from this effect and, further, the aggregate impact is to increase the cost of acting on these recommendations for all investors.

From the text: Table 6a (shown above, click to enlarge) shows that the 127 buy recommendations are distributed across twenty-eight different show air dates within our 7/26/2005 to 9/16/2005 sample. On each day, the $10,000 is allocated equally across all of the buy recommendations. Share purchases are rounded to the nearest whole share. As a result, the amount invested on each day is never exactly $10,000 but is more than $10,100 only twice. If an investor had executed this strategy twenty-eight times on the days covered in this sample, a loss of $861.32 would have been realized, not counting the per-trade commissions.

(MP: Add in $10 per trade for 127 buy orders, and your total loss would be $2,131.)

(HT: Mike Munger)


At 11/26/2007 12:51 PM, Blogger VH said...

I do watch Cramer's show and it is fun to watch; I think that his analysis of stocks and companies at the beginning (20-25 minutes)of the show is interesting. However, I would not just plop down hard earned cash in any stock solely on his recommendations.

At 11/26/2007 1:01 PM, Anonymous Anonymous said...

I think Cramer is an....well I don't care for his advice.

But is it Cramer's advice to go out a buy the stock the next day and then resell it within 48 hours?

Therefore the title "Mad Money = Money-Losing Investment Advice" is not entirely accurate or fair.

At 11/26/2007 2:13 PM, Anonymous Anonymous said...

While I do not care for the style of Mr. Cramer's show - I tend to prefer a quiet reasoned discussion instead of sound effects, shouts of BOOYAH, warp speed speech, etc. - I don't think looking at 1 day returns is a meaningful test of his recomendations. Six month returns and longer would be much more usefull.

At 11/26/2007 5:27 PM, Anonymous Anonymous said...

Here's my expert strategy. Any time Mark J. Perry crows about how the bank stocks are rebounding, I short the Nasdaq bank index (IXBK).

I am making a killing right now.

At 11/26/2007 8:30 PM, Anonymous Anonymous said...

If you look at financial stocks over any meaningful period - like 10 years or more, they kill the DJIA and the S&P 500.

They even out-performed over the last 5 years until this recent bit of turmoil.

To loosely paraphrase Ben Graham: In the long term the market is a weighing machine; In the short term, it's a voting machine.

At 11/27/2007 11:43 AM, Anonymous Anonymous said...

To be fair to Jim, he does say on his show that you should wait a couple days to purchase the stocks he recommends because of this bump effect.

The title is pretty misleading as well, since a one day analysis only shows he is affecting the stock.


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