Enrich Your Future 35: Market Gurus Are Just Expensive Entertainers

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 35: Mad Money.

LEARNING: Investors are naive, and Cramer is an entertainer, not a financial advisor who adds value.

 

“Do not confuse information with value-added information. If you know something because it was in the newspaper, everyone else knows it as well. So it has no value.”

Larry Swedroe

 

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.

Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 35: Mad Money.

Chapter 35: Mad Money

In this chapter, Larry explains why investment advice from so-called market experts is often worthless.

The infamous Jim Cramer

Jim Cramer, a former hedge fund manager, has become one of the most recognizable faces in the investment world. He dispenses rapid-fire investment advice on the show “Mad Money.” Since it premiered in March 2005, it has been one of CNBC’s most-watched shows. But has his advice been as successful for the investors who follow it? Larry shares a couple of research studies that answer this question.

It pays more to invest in an S&P than in Cramer’s fund

Cramer manages a portfolio that invests in many of the stock recommendations he makes on TV. Established in August 2001 with approximately $3 million, the Action Alerts PLUS (AAP) portfolio has been the centerpiece of Cramer’s media company, TheStreet, which sells his financial advice, giving subscribers in the millions access to each trade the portfolio makes ahead of time. Jonathan Hartley and Matthew Olson, authors of the 2018 study “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution,” examined the AAP portfolio’s historical performance. Their study covered the period from August 1, 2001, the AAP portfolio’s inception, through December 31, 2017. The study found that the fund returned a total of 97%. During that same period, an investment in the S&P would have returned 204%.

No real stock-picking skill, just entertainment

In another study, “How Mad Is Mad Money?”, Paul Bolster, Emery Trahan, and Anand Venkateswaran examined Cramer’s buy and sell recommendations for the period from July 28, 2005, through December 31, 2008. They also constructed a portfolio of his recommendations and compared it to a market index. The researchers came to three key conclusions:

• Investors were paying attention, as the stocks he recommended had abnormal returns of almost 2% on the day following his recommendations.
• The returns...