While the focus in this article is on Cramer’s stock-picking skills, thanks to research by CXO Advisory Group, we also have insight into his market-timing skills. CXO set out to determine if stock market experts, whether self-proclaimed or endorsed by others (such as in the financial media), reliably provide stock market timing guidance.
To find the answer, from 2005 through 2012, they collected and investigated 6,584 forecasts for the U.S. stock market offered publicly by 68 experts (including Cramer), employing technical, fundamental and sentiment indicators. Their collection included forecasts, all of which were publicly available on the internet, that went back as far as the end of 1998. They selected experts, both bulls and bears, based on web searches for public archives with enough forecasts spanning enough market conditions to gauge accuracy.
The researchers’ methodology was to compare forecasts for the U.S. stock market to the return of the S&P 500 Index over the future interval(s) most relevant to the forecast horizon. They excluded forecasts that were too vague as well as forecasts that included conditions requiring consideration of data other than stock market returns.
They matched the frequency of a guru’s commentaries (such as weekly or monthly) to the forecast horizon, unless the forecast specifies some other timing. Importantly, they took into account the long-run empirical behavior of the S&P 500 Index. For example, if a guru said investors should be bullish on U.S. stocks over the current year, and the S&P 500 Index went up by just a few percentage points, they judged the call incorrect, because the long-term average annual return has been much higher. Finally, they graded complex forecasts with elements proving both correct and incorrect as both right and wrong (not half right and half wrong).
Following is a summary of CXO’s findings:
- Across all forecasts, accuracy was worse than the proverbial flip of a coin—just under 47%.
- The average guru, and Cramer specifically, also had a forecasting accuracy rate of about 47%. Cramer finished 39th out of the 68 experts.
- The distribution of forecasting accuracy by the gurus looks very much like a bell curve—what you would expect from random outcomes. That makes it difficult to tell if there is any skill present.
Of course, there were a few with fairly good records, which is what you would randomly expect. But only five of the 68 gurus posted scores above 60% (the highest score was 68%), while 12 had scores below 40% (the lowest score was 22%). Remember as well that strategies based on forecasts have no costs, but implementing them does.
The research shows that whether it involves predicting economic growth, interest rates, currencies or the stock market, or even picking individual stocks, gurus’ only value is to make weather forecasters look good. Keep this in mind the next time you find yourself paying attention to some guru’s latest forecast. You’re best served by ignoring it.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.