Tuesday, July 05, 2005

The Internet Stock Blog: Jim Cramer the coin-flipper? (TSCM)

The Internet Stock Blog: Jim Cramer the coin-flipper? (TSCM)

In earlier blogs I have pointed out the Jim Cramer can turn on a dime three times in a week. The internetstockblog reports that a study shows this to be true. The study shows that Mr. Cramer is right about 50% of the time and that he swings from optimism to pessimism and back again over very short periods.

The appropriate general rule to remember is that short term trading is 50/50 over the long term; just like coin flips. The reason is that stocks trade not on value but on emotion times value. Investors run in crowds like a heard of cows. In 1999, stocks were over-valued the entire year but the stampede was into stocks. By October of 2002 the stampede was out of stocks.

Right now, the stampede is still out of stocks. One might say the stampede is into real estate but investors are for the most part trying to avoid risk. Therefore the stampede is out of stocks and scattered into money markets, bond funds, real estate and insurance products.

Stocks are undervalued. Cramer can hop on or off the short term trend quickly. However, the smart move is to over weight stocks until the big move comes. As long as bonds and real estate are dear relative to stocks, it makes sense to invest new money in stocks.