Jim Cramer on Short-Term Trading: Mad Money or Simply Mad?

Mad Money's Jim Cramer recommends short-term trading. But studies have shown that 70% of traders who try this lose money.Jim Cramer has a new investment strategy for you: short-term trading. According to Cramer's Mad Money show last week, summarized on the show's CNBC blog, short-term trading can be a good way to make money.

Here's his recipe: Identify stocks in your portfolio that have "flown too high" and "take a little bit off the table," investing that money elsewhere and letting the hot stocks cool off before buying them back at lower prices. Cramer pointed to Chipotle (CMG), Netflix (NFLX) and Salesforce.com (CRM) as examples of stocks that have soared too high,and assured his viewers that short-term trading is a "tested strategy."

In my view, this idea is errant nonsense. How would an investor implement this strategy? Stock prices move in a random pattern, and there's no way to determine with certainty when they have "flown too high" and when to buy them back.

Who Knows the Future?

Take Chipotle as one example: The stock closed at $97.90 on July 30, 2007, marking a big gain from its price of $42.22 on Jan. 26, 2006. Was that time to sell and "take a little off the table"?

If you thought so, you'd have been disappointed when the stock reached $151.88 on Dec. 24, 2007. The shares did fall then, to a low of $39.90 on Nov. 17, 2008, only to surpass their December level to close at $178.60 on Oct 11.

But that's exactly the problem. Future events affect stock prices, and no one knows what those events will be or how they'll affect the price of a stock.

How difficult is it to guess? According to a summary of seven studies on day trading, 70% to 80% of day traders lose money. Another analysis, by investment consultant Ronald Johnson, concludes that 70% of the short-term public traders included in the study "will not only lose, but almost certainly lose everything they invest." As he puts it: "Numerous market studies have concluded that accurate market timing is not possible, even for professional money managers."

So Cramer's claim that short-term trading is "tested" is disingenuous. But consider the source: Cramer's employer, CNBC, derives substantial revenue from sponsors -- such as purveyors of trading systems and the securities industry -- that make money when you trade.

Don't be fooled. Cramer's trading advice really is "mad."

I'd encourage investors to heed the admonition of Vanguard founder John Bogle instead. As he told Bankrate.com during an interview about exchange-traded funds last year: "Trading is your enemy, because it's based on emotion."

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As an individual investor who has taught himself to trade longer term swings over the last decade I'd say your blanket statements are hogwash. Doing it the Boggle way has led to virtually no returns over that decade. I have overseen both an investment group and a trading club and both have used market timing since 1999 to handily beat the market and, in some cases, destroy market returns, AND with less volatility. And that's with no leverage, no shorting and no options. Timing had us completely in cash during the crashes of 2000 and 2008, and led us to great profits rebounding from those lows. Now it is true that it takes a lot of research understanding market movements, and novice investors can definitely get themselves crushed if they don't know what they're doing, but it's wrong to say that markets can't be timed. I've done it for over a decade and NEVER experienced the drawdowns that the S&P 500 has had! Oh, and if you're trading emotionally then you're not really trading, your guessing. A well-conceived trading system tells one what to do given the market situations that arise, so making decisions emotionally is eliminated. In fact emotions are the trader's worse enemy, but since you advocate Boogle's approach (an approach I would endorse until a budding trader learns how to properly trade) you wouldn't know about such things. As for Jim Cramer, yeah he's a shill and a showman but there is actually some pretty sound advice he dispenses if you apply the lessons yourself and don't follow the herd like those who call in.

October 13 2010 at 11:47 AM Report abuse -1 rate up rate down Reply
J.A. Smith

Cramer is a fool, not to mention a snake. His stock picks, by most all accounts, would've lost you money had you gone with his advice the majority of the time, the most infamous example being the recommendation of Bear Stearns right before it collapsed. He's admitted to manipulating stock prices when he was a hedge fund manager by spreading false information about companies, for which he was raked across the coals by none other than Jon Stewart at the Daily Show, because "real" news programs didn't have the balls to do so, or just didn't care. Granted, nothing the guy has done, that we know of so far, has been technically illegal, but he's highly disingenuous at the very least, and completely immoral at worst. Point being, he has no more knowledge about the going ons of the market than anyone else, even though CNBC would have you believe that's not the case. If you're just looking for information, or one man's opinion, or just like watching his theatrics, then by all means watch his show, but temper your expectations in the same way you would if taking ESPN's advice when betting on sports. The "experts" are good at convincing people they know what they're talking about, even when their actual records have nothing to show for it.

October 13 2010 at 11:34 AM Report abuse +6 rate up rate down Reply

I'd tell Bogle and Solin - they are the ones who don't know what they are talking about. As a buy and hold investor for over 12 years and two massive downturns, I can tell you that buy and hold does not work either. I hold companies like GE, MSFT, INTC, F, DEll, TWX(once AOL), and IBM. The only stock making me any real money after all this time is IBM. I've made so much more money in real estate and lost so much in the market that my advice would be to hold RE for the long haul and once you find a short term trading system like I have, trade like Hell to make up for thye bad years - the key is only trade with the market - long when its going up, short when the markets going down.

October 13 2010 at 11:32 AM Report abuse rate up rate down Reply
1 reply to gttdux's comment

I guess you listened to Will Rogers. To make money in the market, buy a stock and when it goes up, sell it. If it doesn't go up, don't buy buy

October 13 2010 at 12:08 PM Report abuse +4 rate up rate down Reply

OOOOH your Soooo Smart!!!

October 13 2010 at 11:09 AM Report abuse +1 rate up rate down Reply

It is really easy to second guess some good advice using the benefit of hindsight. Short term trading was not advocated. What was recommended is to take some profits when they are achieved and then let some remainder of the position ride for awhile. Those who bought the "blue chips" - GM, GE US Steel and the others will require ten more years of growth in their positions to breakeven, except for the "premier" names that are bankrupt. The author of the article clearly misrepresented or maybe just misunderstand what Jim Cramer said on that show. Edward Fields Professor of Finance New Jersey

October 13 2010 at 10:49 AM Report abuse +1 rate up rate down Reply

DANIEL SOLIN's article reads like an essay written by a freshman in high school. It complains about Jim Cramer, but in the end provides us with absolutely no useful information and fails to back up any of his complaints with compelling arguments. I can assure you that Jim Cramer wouldn't just talk about a stock's price or %'age gain to determine whether it has "flown to0 high." He would have looked at where the stock was trading compared to current and projected earnings to determine if it was trading rich or cheap. It seems however that our expert Daniel Solin interpreted his analysis to be based only off stock price or % gain. My favorite part of Daniel's pathetic essay bashing Wall Street's crazy man was when he pulled out the stat: "70% to 80% of day traders lose money." Wow...it take a real moron to find a stat like that and think it is important enough to republish. I would actually bet that 100% of day traders lose money...at least on some days. It doesn't matter that you lose money sometimes, only that you've managed your money properly - ride the winners, cut the losers and you can actully lose on 70% of your trades as long as you made more on the 30% that are winners. What do I think of Daniel Solin "Retirement Columnist"? I think it is time he entered the ranks of the folks that he writes to. If this guy considers himself a profession at what he does...he is certainly already senile.

October 13 2010 at 10:45 AM Report abuse -1 rate up rate down Reply
2 replies to houfro's comment

"... ride the winners, cut the losers and you can actully lose on 70% of your trades as long as you made more on the 30% that are winners." That statement might sound insane to many on the surface but that's actually quite correct. It's all about your edge. If I lose $10 on trades 70% of the time but make $30 on trades 30% of the time I have and edge of $90 to $70 for every 10 trades. Of course real trading is much sloppier but if your performance characteristics matched this or better you'd be like the house in Vegas. And it is done every day by small investors/traders who take the time to teach themselves properly.

October 13 2010 at 12:09 PM Report abuse +1 rate up rate down Reply

My brother has made a fortune day trading (heavy into 7 figures, and he does it as a hobby). Of course, you must be very good at it - most people don't make much, and you have to have disposable income you can afford to put at risk. I'm not smart enough and don't have the money to do it. He lost $800,000 at the crash, but that was about 1/4 of what he had accumulated (he said it was monopoly money). He never has the whole pot into stocks. He also keeps his day job.

October 13 2010 at 3:44 PM Report abuse -2 rate up rate down Reply

The man is an idiot. A loudmouthed one at that.

October 13 2010 at 10:13 AM Report abuse +4 rate up rate down Reply
1 reply to brennemanbelkin's comment

Get this idiot off the air.

October 13 2010 at 11:06 AM Report abuse +1 rate up rate down Reply

Cramer is little more than a "tout". He, Motley Fool and others send out E-Mails every day pushing one stock or another. CNBC has shills every day telling you what they like.....not what they're about to buy. I have a feeling they already own the things they're pushing. After all, if you can't get the sheep in to buy what they already own, how can their prices (and profits) go up.

October 13 2010 at 9:52 AM Report abuse +4 rate up rate down Reply
1 reply to vshogun30's comment
J.A. Smith

Technically, stock analysts are not allowed to own stock for themselves by SEC regulation, because it would be too easy for them to manipulate prices through mass media. But as you will find, many of them, like Cramer, have "charitable trust" portfolios, not to mention corporate sponsors, so in all actuality they still have a vested interest in the happenings of the market.

October 13 2010 at 11:37 AM Report abuse +1 rate up rate down Reply

This hatchett job on Cramer is the nonsense. I trade us steel all the time. right now you buy it in the low 40s sell in huigh 40s. if i just boughgt and held like this idiot seems to think i should do i wouldnt have made anything. This guy had probably never owned a stock in his life

October 13 2010 at 9:47 AM Report abuse -4 rate up rate down Reply

I like Cramer. I am not a trader,but Cramer always says only trade with what you can afford to lose, maybe 5-10%. He says many times this is not for your entire portfolio. he has an enjoyable show and you might learn from watching him,but you don't bet your entire IRA.

October 13 2010 at 9:14 AM Report abuse -2 rate up rate down Reply