Archives For April 2007

I don’t usually publish guest posts but today I’m going to make an exception. The following post was submitted to me by John Hinchey of H and K Services. This is NOT a paid post. Also, please feel free to leave a comment about your impressions of Cramer’s Mad Money.

Jim Cramer’s nightly “Mad Money” program has a huge, and expanding following and not just among traditional investors. According to a January 14th story in the Boston Globe:

“If ‘Mad Money’ is a business primer, it’s a crash course designed for the ADHD set. Cramer has a penchant for madcap props — he has eaten cereal drenched in soda pop and worn diapers to drill in a point — and he presides over a busybox of noise machines, pushing buttons like a crazed suburban father. His bulging-vein energy, along with his ability to move markets with yelped suggestions, has drawn the ire of Wall Street traditionalists.

But among college students, Cramer has developed a cult following since the show began broadcasting in March 2005. “Mad Money” is CNBC’s top-rated show among 18- to 54-year-olds — something that surprised the show’s producers when they first noticed that college students were calling in. About 60 colleges have asked to be part of an occasional tour that has broadcast from Harvard, the University of Michigan, Columbia, Georgetown, and Boston College.”

Cramer seemingly has inexhaustible knowledge of the corporate world, he provides self initiated recommendations and is always able to deliver a relevant comment and guidance on live caller’s queries regarding specific companies. But just how valuable is this entertaining advice? We went back and analyzed all of the ‘Buy/Sell’ recommendations Cramer made on ‘Mad Money’ during 2006 – the results are stupefyingly mediocre? For example, Cramer made just over 4600 ‘Buy’ recommendations in calendar year 2006 that could be evaluated (some stock symbols he put forth are not currently recognized by Fidelity, Yahoo, and MarketWatch, the quote services used in this study) which, if followed to the letter, yielded a paltry net return of 3.36% through March 1, 2007. Annualized, this ranks behind even good money market funds. More discouraging, this result was obtained using a pricing algorithm most favorable to Cramer. The basis for stock ‘Buys’ in this series of computations were market closing prices on the show date i.e., BEFORE Cramer’s picks aired. Moreover, this under performance occurred in a sustained up-market where stock and bond funds worldwide gained 12.94% on average according to Morningstar.

Methodology

As described the ‘Basis’ for all stock ‘Buy’ recommendations were at the closing market price on the show date. In general, the ‘Market Value’ was the closing price of the designated date which, in the above instances, was March 1, 2007 before the big correction. If, however, Cramer made a ‘Sell’ recommendation for a previous ‘Buy’, the ‘Market Value’ was the closing price on the ‘Sell’ show date.

Short-Term Kicker

Perhaps the stocks he recommended received a short term up tick from a positive mention by Cramer? Not according to the data. If all stock ‘Buys’ are sold at a fixed short term interval the up-tick should be apparent. For the same period (Jan 1, 2006 through December 31, 2006) we calculate:

Cramer's Mad Money Picks - Periodic Performance

This indicates, for instance, if every stock endorsed by Cramer was purchased at the last price on the show date and then sold 5 days later a only a 0.72% return would accrue for the year, even without consideration of the Buy/Sell commissions!

‘Mon Back’ Picks

Cramer assigns a special tag to stocks that are especially attractive to acquire at times, the ‘Mon Back’ or ‘Back-Up-The-Truck’ designations. For 2006 we found 106 of these strongest ‘Buy’ recommendations and again, valuing this aggregate portfolio as of March 1, 2007, the computed return is 4.90%

‘Special Mention’ Picks

‘Special Mention’ is another attribute assigned to Cramer’s picks of escalated significance. For 2006 he ascribed this ranking to 1415 ‘Buy’s that could be rated. They did the best achieving a 5.85% return; again, however, this was over a fourteen month period (January 1, 2006 – March 1, 2007). Annualized it amounts to 5.01%.

Good Months and Bad

In our study we did find good months and bad months but it is pretty much a crap shoot. Here are the results for each month of 2006 using a ‘holding’ period of thirty days:

Cramer's Mad Money Picks - 2006 Monthly Performance

Because of the market correction in early March we are not reporting results for the first quarter of 2007 but will provide an update later in the year.

Summary

Jim Cramer’s enthusiastic predictions were initially viewed as a potentially valuable investment decision-making tool but cursory follow-up indicated caution was appropriate. Hence the in-depth analysis leading to the conclusion that, at least so far, there is little gold in that mine. We solicit and welcome any and all or your personal experiences, observations, and comments.

It seems in this case you get what you pay for!

John A. Hinchey
Pres. H&K Services, Inc
JohnHinchey@HandKServices.com

© 2007 H&K Services, Inc.

The May issue of Money has a short interview with Laurence Kotlikoff, who is sort of the new ambassador of the consumption-smoothing movement. I’m not that familiar with consumption smoothing but I remember Scott Burns mentioning it when I interviewed him last year. Anyway, I thought this little tidbit from the Kotlikoff interview was interesting:

Q.: Do you really think we’re saving too much?

A.: I’m not saying everybody is oversaving. What I am saying is that online calculators advise most people to save too much. The same is true with the software that planners use. They start with the assumption that you need 70 percent to 85 percent of your current income to maintain your lifestyle in retirement.

While I understand what he is saying, I STILL think it is better to save too much rather than too little unless people aren’t able to enjoy life now because they are saving too much for retirement. It’s called b-a-l-a-n-c-e and I think any reasonable financial planner would recommend balance. When it comes to planning for something that is years or decades away, it is difficult to estimate how much is going to be necessary to fund income needs. I’m pretty sure that’s why most planners use the 70% – 85% rule-of-thumb. They know that some expenses will drop during retirement and others like healthcare and long-term care will likely rise during retirement. Personally, I’m running my numbers based on replacing 100% of our current income without social security. Although I’m sure we could make it on less than that during retirement, I don’t think I would be comfortable with planning on anything less. I mean, who wants to retire and live in poverty?

UPDATE: Vanguard Responds (Thanks Trip!)

Video.

I used to work in a grocery store and am quite familiar with food stamps. The lady’s buying habits in the video are MUCH better than I remember of the typical food stamp user, which is a shame since those with poor shopping habits are most likely to become those with poor health. I always thought they should limit what people can buy with food stamps. I know this goes against personal freedom but do people who are on food stamps need to buy soda?

Lenders require car owners to carry collision and comprehensive insurance coverage on their vehicles as long as there is a lien against them (meaning, while they are being paid off). Then, once the vehicle is paid for, it is usually up to the insured to choose whether or not to carry the extra insurance. I’m blogging about this because our Buick will be paid off in June, which means there will no longer be a lien against it and we will be free to drop our comprehensive coverage and collision insurance.

Since our Buick is still worth $10,000 – $12,000 and the premium for collision and comprehensive coverage is only $425 per year (with a $1,000 deductible) it’s a no-brainer to keep the coverage. I will probably keep the coverage until the value of the car is around $3,000. Why $3,000? It just seems like a good number to me. It’s low enough that we could cover it out of our savings. In other words, if something happened to our car when it was worth $3,000, it wouldn’t put us in financial strain to pay for it out of savings.

I dropped both comprehensive and collision on our Honda Civic last year, which reduced our premium by nearly $500. It’s nice to have an emergency fund!

I read a very interesting article in today’s Wall Street Journal titled How Much is Your Dog’s Life Worth? (free) The article talks about how the laws dealing with pets are outdated because pets have a new, higher place in the lives of their owners. In other words, people want to be able to sue for “emotional damages” when they lose their pet.

This bugs me because how do you value “emotional attachment?” Does a huge sum of money won in a law suit take the place of an emotional loss? I don’t get it. I think this is more a result of our litigious society than it is about emotional attachment.

Take a minute and read the article and tell me what you think.

Sam over at Getting Finances Done has put together a list of Dave Ramsey-related links and resources. He even linked to a couple of Dave Ramsey-related posts I recently published. Anyway, if you’re a Dave Ramsey fan (or if you can’t stand him and like to make fun of him) you should head over to GFD and check it out.

I’m pretty sure I have made my stance clear on payday loans. They’re expensive and I hate ’em. That said, I do take issue with an editorial (pdf) I read today in my local paper. The piece was written by Don Baylor who is a senior policy analyst at the Center for Public Policy Priorities. Here’s the part of his editorial that bugs me:

Nationwide, many workers are falling victim to “payday” loans—short-term loans that give workers a cash advance on their paychecks. Large numbers of military families use these loans to help make ends meet between pay periods. So do millions of low- and middle-income people across the country. The problem is that these loans come with a major catch—exorbitant interest rates that begin at 400 percent Annual Percentage Rate (APR) and can surpass 1,000%.

It is typical for a worker to pay $180 in interest on a 10-day, $700 loan.

These high interest rates make it nearly impossible for workers to repay the loan on time, causing many workers to refinance and borrow again just to pay off the interest on the first loan. One emergency can lead to a debt spiral, as borrowers take out an average of nine loans per year. The result? More loans, more debt, and more bankruptcies.

Like I said, I hate payday loans. But, why is it that every time there’s a problem, it’s always because people are victims of something? What the heck happened to personal responsibility? If people are victims of anything, it’s their own lack of sound judgement. Seriously, if people didn’t use payday loans there wouldn’t be payday loan companies.

I think the number one problem in our country right now is the victim mentality!