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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • “Nobody Ever Lost A Dollar By Underestimating The Taste Of The American Public.” ― P.T. Barnum 5 comments
    Jan 4, 2013 6:30 PM

    I have never watched Jim Cramer's Mad Money, so I will try to be careful to avoid judging it too harshly. However, a casual glance at its ads on CNBC appear to show someone who is hysterical, clownish, and somewhat drug-addled. In other words, it does not give a first impression of thoughtfulness. He makes it very clear that this is entertainment and not news or analysis. But the important question is, "can an investor make any money off of his recommendations?"

    Overnight returns following his stock picks are +3% on average and as much as +7% for smaller capitalization stocks. He moves the market capitalization by over $50 million with his picks. Typically, this show is taped an hour or so before it is aired. Historically, there has not been any price response during taping, but there is an observable spike in both volume and prices during the airing. Such spikes dissipate over time; after a few days the abnormal returns are gone.

    There is no evidence of any skill in security selection. In fact, a portfolio of his ideas purchased the day following the recommendations would underperform the market by over 1% a month. His underperformance is statistically significant enough that one could profitably short his long ideas.

    While I have not watched the show, in its earlier years I was a regular caller. One could simply call in to the show, disconnected when it was picked up, and redialed until one is placed on hold. Alternatively, one could call in on several lines simultaneously to guarantee getting put on hold at least once. And the hold music? It featured an only partially muted feed of the taping.

    One could listen for the ticker symbols and have one hour to purchase his recommendations in the after hours market before immediately placing sell orders on positions at prices from 3 to 8% above their cost basis. An hour later when the show aired, sell orders would mostly execute. Occasionally, one could clean up any residual positions on the next morning. If price spikes exceeded 7%, one could occasionally short the stocks that I had just sold.

    If you want to learn about someone whose investing style is antithetical to mine, consider reading Confessions of a Street Addict.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

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Comments (5)
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  • Doyle3000
    , contributor
    Comments (1257) | Send Message
    When he was so bullish on CMG and it cratered he took no accountability at all. People lost $150 -$200 per share and he said "we were paying for a growth stock and now they slowed their growth. Buy back at $270"


    But CMG had stated that same store sales were going to be single digits. They didn't hype themselves at all! He hyped the living crap out of it and then it crashed.
    6 Jan 2013, 12:17 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
    Author’s reply » Stock promoters tend to have such characteristics, but it is a shame. CMG is a big faddish now, but for a while there was an attractive share class arbitrage opportunity.
    6 Jan 2013, 12:22 AM Reply Like
  • Applocrat
    , contributor
    Comments (757) | Send Message
    Any data on his longer term picks? I have watched the show early on in my attempt to study the market. I found he advised sound principles study the company, study the balance sheet and the sector, trade on business prospects, not hype.


    But he consistently belies his own advice. He simply follows trends and dresses that trend following as fundamental analysis. Fundamentals is exactly what we are supposed to use to spot false trends, not reinforce what the price action is doing right now.
    9 Feb 2013, 12:17 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4040) | Send Message
    Author’s reply » Well said; I couldn't agree more.


    Here are two recent papers that might be worth reading on the topic:


    9 Feb 2013, 01:15 PM Reply Like
  • David at Imperial Beach
    , contributor
    Comments (3259) | Send Message
    Second link is now gone.
    11 Jul, 12:05 PM Reply Like
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