He is Jim Cramer, journalist-turned-broker-turned-hedge fund manager-turned TV star. Cramer hosts CNBC’s TV show Mad Money. A whopping half-million viewers tune in to watch him yell out his stock analysis at callers.

This wildly gesticulating madman has turned into somewhat of a television icon.  This Harvard-educated ex-stockbroker ran his own $450 million hedge fund in the 1990s. During his 14 years at the fund, it averaged a yearly 24% return. And Cramer is estimated to be worth over $50 million.

One caller in yesterday’s Mad Money show said, “Jim, Booyah! My wife says I’m in trouble for listening to ya.”  “Oh I don’t know about that,” replied Cramer with a frown.

But the caller’s wife could be very right. Would you be in trouble for acting upon Cramer’s Mad Money stock picks?

Let’s find out…

Cramer’s TV show is so popular that, like I said earlier, it has a huge fan following of about half a million people. As a result, a positive mention on Cramer’s show can send a stock soaring. Not surprisingly, hundreds of stocks experience the ‘Cramer effect.’ After all, Jim Cramer mentions over 10 stocks in each Mad Money episode.

When this maniac investor mentioned NMT Medical (Nasdaq: NMTI), shares shot up 30%. Cramer also sent other stocks soaring. ZymoGenetics (Nasdaq: ZGEN) went up 10% and Conexant Systems (Nasdaq: CNXT) 23% the very next day after Cramer mentioned it on his show.

Unfortunately, many of the stocks Cramer mentions on his show are illiquid small caps. That means they can come crashing down with the same ease that they skyrocket. Shares of Occulogix (Nasdaq:RHEO) for example, crashed down to 60% after a Mad Money mention.

If you are day trader and have the skill and knowledge to quickly buy and sell Cramer’s daily picks, you may do alright. But if you are an individual investor with little market experience, then stay away from buying Cramer’s picks.

According to an MSNBC article, “While these picks may be tempting, they can just as easily send someone into poverty as into a higher income bracket, market veterans say.

“‘People making investment decisions based on nothing more than his say-so probably shouldn’t be in the market,’ said Steven Thel, former general counsel for the U.S. Securities and Exchange Commission and a law professor at Fordham University.

“‘There are real doubts about whether the small (investor) ought to be making his money by making his investments in certain stocks,’ Thel added.

“Greg Goldstein, president of Long Island-based broker-dealer Marquee Investment Capital, agreed.

“‘All of sudden, if they don’t sell fast enough, once the buying stops, they’re dead,’ Goldstein said. ‘People have to be careful. If you can afford to lose money, there’s nothing wrong with it. But a lot of people don’t want to do their homework.’”

So if you’re trying to buy Mad Money picks, beware of the Cramer effect.

Regards,

Sala Kannan
March 10, 2006

Wall Street’s Maniac Investor was originally featured in the Penny Sleuth.