Jim Cramer is not really that bad. Many people cite Jim Cramer as offering poor advise because his predictions have a poor track record.
However, it misses the point in a few ways. First, he gets people excited and interested in investing and second, my understanding, is that he bullish most of the time. And, that works most of the time.
More importantly, the belief that Jim Cramer’s service is poor hinges on what I believe is the belief in a false counter-factual. That counter-factual is the idea that if Jim Cramer had a stellar prediction record, the kind that most people cannot believe can even exist, that his service would be highly valuable because everyone would profit.
The reality is that most people even given extremely accurate and quantified predictions would still lose money attempting to trade. They would, based on my knowledge and experience, be likely to lose even more.
As for the reasons, they are numerous. First, we start with an assumption of rational expectation. Namely, most people will bet according to their ability. A trader without much ability will probably not lose much based on this hypothesis because they are rational. They know they do not have much ability.
The professional trader who is well capitalized and has strong risk controls is, also, likely constrained by outside expectations, risk controls, and may have more experience.
On the other hand, the independent under-capitalized trader who has gained a greater degree of ability is more likely to over bet. Because trading is always uncertain, it means that the probability of a group of more skilled traders getting into trouble is actually more likely then lesser skilled traders.
If you disbelieve, there are analogous scenarios in other aspects of life. Some studies shown that strong swimmers are more likely to drown in rip currents because they fight until they exhaust themselves. On the other hand, weak swimmers are more likely to float. Now, obviously if I were to be caught in such a rip current I would hope to be both a strong swimmer and have the proper knowledge to swim parallel to the shore or failing that float with the hope it is one such current that will return to the beach.
All that said, do I believe people should follow Cramer? No, not really. Does it mean that traders should not keep developing and trying? No, I think as long as the will to trade exists then it is worth pursuing.
It does suggest, however, that regardless of trading endeavor that one needs both an investing and a trading allocation.
The next post will provide some ideas regarding that.
The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at firstname.lastname@example.org.
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