Jim Cramer's bad bets

Selling Cramer short

Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?

Then there's the day-after-pop phenomenon. Our analysis of Cramer's picks over the past two years, from YourMoneyWatch, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days. This offered an opportunity to make money -- 5% to 30% a year -- by selling Cramer's selections short.

Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks -- a trade that he'd jump on if he still were at a hedge fund. "If you short the bump, you will do well," he said last week. "I've said it on the show many times."

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There's no doubt that Cramer is trying diligently to make you money. His advice is generally smart; his knowledge of individual stocks amazingly detailed. But the credible evidence suggests that the telestockmeister's picks aren't beating the market. Did you really expect more from a call-in host who makes 7,000 stock picks a year?

The 52-year-old Cramer has proved himself a Renaissance man, if you don't mind applying that term to someone who goes on TV donning everything from Rasta wigs to football helmets and, on a bad day, decapitates bobble-head dolls made in his own likeness. He struck it rich in the heyday of hedge funds, started a successful online media company and put up some of the best financial journalism in print and broadcast. Simultaneously.

Unconvincing proof

He's written several books, including "Confessions of a Street Addict," a wonderful memoir of his highs and lows as a trader and entrepreneur. It's peopled with the amazing old boy network that Cramer started building during his days as a student at Harvard: New York Gov. Eliot Spitzer, New Republic Editor-in-Chief Martin Peretz, Microsoft (MSFT, news, msgs) CEO Steve Ballmer. (Microsoft owns and publishes MSN Money.) And, it turns out, the screaming, chair-throwing character that Cramer plays on TV is based on the real-life person he was, as he pursued success through any obstacle, including those of his own making. In the memoir, Cramer freely confesses to his screw-ups, as he continues to do on "Mad Money." That self-flagellation makes him a lovable protagonist in a modern American success story.

After entering Wall Street as a Goldman Sachs (GS, news, msgs) broker, Cramer started his hedge fund in 1987. The market crashed, but he was in cash. His firm, Cramer Berkowitz, went on to rack up 24% annualized returns over the next decade or so, a performance for which Cramer generously shares credit with his former colleague, Jeff Berkowitz, and one of the firm's traders: his then-wife, Karen.

If "Mad Money" offers unconvincing proof of Cramer's long-term stock-picking prowess, so does his account of his hedge-fund activities. His memoir suggests that some of Cramer Berkowitz's profit came from clever trading. The $300 million fund might execute hundreds of trades a day, some of them a bit gimmicky. Cramer describes how they'd find a stock in which selling had petered out, then build a position. Next, they'd hunt up some bullish news on the company and feed it to sell side analysts and reporters. On the subsequent rise, Cramer could profit by selling out his position. "Buzz merchandising," his book calls it. Smart and effective, but definitely not in the fuddy-duddy style of Graham & Dodd.

In December, Cramer made a video for TheStreet.com describing the ways his hedge fund had used tricky trading techniques. He said hedge funds could pass negative rumors to "bozo" reporters. When the video circulated through Wall Street, it caused an uproar. Cramer said that he'd only been talking hypothetically, to blow the whistle on the hedge-fund industry's bad actors.

Continued: New kind of participant journalism

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