November 27th, 2012

Long-term Performance of Cramer’s Action Alerts Plus

I’ve been feeling a little guilty for not having written many posts recently nor making many trades (other than peeling back the worst stocks in my Portfolio and building the cash position to around 40%) and wrote members of my Instant Alerts service the following explanation:

“it’s a very apprehensive time for the market and that uncertainty is reflected in the performance of the [S&P 500] Index.  The market close on Friday is only 3.34% higher than the close at the end of April, 2011, nineteen months ago.  That’s an annualized rate of a little more than 2%.  It’s very difficult to consistently make profits in markets like these unless you’re willing to take a lot of risks or are extremely lucky.  Since there’s no easy money to be made in this market, many individual investors remain seated on the sidelines.

Based on the extensive analysis in constructing my Market Momentum Meter (you can read all about it in my book, Run with the Herd), I find Jim Cramer’s continual optimism bewildering and somewhat disingenuous, if not outright dishonest.  How can he claim that “there’s always a bull market out there” and he’s going to find one for us when he should probably be instead telling his viewers to pare back their holdings, raise cash and reduce exposure to risk for opportunities to buy back later somewhere down the road at more attractive prices?

I find the same to be true for the venerable Investors Business Daily who always seem to be fully invested and continually promoting their list of top-50 market leaders, being fulling invested without regard to market conditions.  As a matter of fact, I wrote extensively about extremely volatile results from their failing to explicitly time the market (see “IBD and Market Timing? I Don’t Think So” of October 22, 2010).

But let’s get back to Jim. I understand that his show is for the very novice individual investor ….. they’re the only ones who would put up with his fast-paced prattle.  Of course, I assume his facts to be true but the quantity of what he says is way beyond what most investors need to know or can reasonably absorb.  He’s more like a salesman (or can I say huckster) who will continue selling long after he’s closed the deal.

He may claim to be the individual investors’ helper (those “home gamers”) but either there aren’t that many individual investors left in the market or they just aren’t watching Cramer any more since his nightly viewership remains between 100,000-200,000 as contrasted with nearly 2 million viewers at Fox News at that time (see “The Cramer Metrics: Return of the Individual Investor” of January 4, 2011).   The viewership statistics for the 6:00 hour on the cable news networks haven’t changed much from what they were two years ago other than the fact that MSNBC has nearly doubled viewership by adding Rev. Al at 6:00pm EST.

The measure of Cramer’s true value is in his results. I decided to accept his invitation to a trial subscription to Action Alerts Plus, his instant alerts service. Fortunately for me, the site offers a recap of the service’s performance since its launch in 2001. The results confirm what I wrote to my subscribers this weekend (“It’s very difficult to consistently make profits in markets like these….”) and my view that the only real way to outperform the market in the long-run is to avoid the crashes while running with the herd when the bulls are running.

The Action Alerts Plus portfolio is currently 93.83% invested (6.17% cash) in 30 stocks.  Twelve of the 30 stocks, or 40%, have losses with the greatest loss being -13.53% in LRCX.  The largest position is WFC (4.2%) and the largest gain is AAPL (97.9%).  However, the most important statistic is how the portfolio has performed over the long-run relative to the S&P 500 benchmark (this is exactly how I measure the performance of the Model Portfolio in my Instant Alert Service):

Bottom line, you could have put your money into SPY or an index mutual fund and saved shelling the monthly subscription fee over to Jim because the Action Alerts Plus portfolio, with all of his trades, wisdom and extensive hedge fund experience behind it, has performed no better than the Index itself.  As a matter of fact, the 2011 mid-year mini-crash caused him to fall behind the benchmark (as it did for many of us) and it will be very difficult for him to make up that shortfall.

This again proves the point that success in the market comes less from stock selection than it does from market timing.  Ignore and any financial adviser, investment service or news service “talking head” who exclusively offers stock ideas in the absence of any market timing context.

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