Stop Buying Stocks

What's up, Graham? It's guys here. So since the beginning of time, investors have been trying to beat the market using everything from technical analysis, hedge fund recommendations, professional stock pickers, and even animals, who are often found to do even better than the most experienced traders. But even though all of these are fun in the short term, almost none of them consistently beat the market every single time—or so we thought. Over the weekend, they came across a series of posts from the Reddit user knob Jaws, who spent the last year analyzing hundreds of thousands of data sets to find a blueprint that consistently outperforms the S&P 500.

And I'll be honest, I think you might be onto something, and it's a lot easier than you expect. So, we're going to analyze all the public trades made by members of Congress, every buy and sell recommendation made by Jim Cramer, every crash prediction made by Michael Burry, and over 66,000 buy and sell recommendations made by financial experts. Anyway, I'll link the knob jobs information down below in the description for anyone interested because he gets full credit for all the information in this video. And if you appreciate the insane level of detail that goes into something like this, it would mean a lot to me if you destroyed the like button for the YouTube algorithm and subscribe. That's all I ask, so thank you guys so much, and let's begin.

First, let's look through one of the most recognizable investors on the planet, who's bombed with a goatee, and that would be Jim Cramer. For those not familiar, he hosts a very popular TV series on CNBC called "Mad Money," through his incessant yelling, animated motions, and stock predictions in terms of what he thinks you should buy and sell. So keep in mind, he's not just some random dude on TV who says he knows more than the Federal Reserve; he's a former stockbroker and hedge fund manager who graduated Harvard with more than 50 years of investing experience.

So you would think that his recommendations would be way better than the random guy on a subway who told you to buy Luckin Coffee because it was about to moon, right? Well, thankfully we could find out because every single one of the 725 recommendations are publicly listed in 2021 on the day that they were mentioned. And from there, we could do the math to see just how well his recommendations performed against the S&P 500 and whether or not he is someone we should actually take advice from. Now again, not just did all the work here, so full credit to him, but he found that overall Jim Cramer made 651 buy recommendations and 74 sell recommendations year-to-date, with each of them analyzed over a day, week, month, and until present day.

Now it was found that if you had bought every single one of his stock recommendations and then pulled out the next day, the cumulative returns would have added up to a quite impressive 555 percent. However, the weekly performance is a little lackluster, adding up to a cumulative 42 percent, and after a month, his returns added up to be a negative 223 ROI. He was wrong more than he was right. In terms of his sell recommendations, 57.5 percent of the stocks he mentioned dropped in price the next day, with a cumulative return of negative 118.9 percent.

However, over a longer stretch of time, only 42 percent of his sell recommendations were correct. But with all of that said, it's important for me to mention a few things in terms of whether or not Jim Cramer could beat the market. First, this only looked at 2021 returns, so previous years could make this look a lot better or worse. Second, cumulative returns skew the information by adding returns together, making it seem a lot better than it actually is. It's kind of like saying if you bought 10 stocks and each of those stocks is up five percent, even though your overall return is still five percent, your cumulative return is now 50.

So another Reddit user, shadowy insights, adjusted this figure to account for the median return against the S&P 500, and sure enough, within a day, 54 percent of his recommendations beat the market. But within a month, that declined all the way down to 35, which means he was wrong more than he was right. And third, this data could be easily skewed because millions of people see and mimic his buy and sell recommendations, effectively causing the outcome he describes. In fact, this is such a common occurrence that it's actually called the "Cramer bounce" or the "Cramer effect," while stocks move an extra three to five percent following the 12 days after his recommendation.

Point being, even though his buy and sell recommendations do perform well in the short term, much of that is likely because the zone audience acts on that information and causes it to be self-fulfilling. But over a longer term, at least in 2021, it appears as though Jim Cramer does not beat the market. Next, let's look at another beloved part of our community, and that would be members of Congress. But thanks to the Stock Act of 2012, members of Congress must disclose any time they buy or sell a stock to help combat insider trading. Of course, they're still free to buy or sell whatever they want, but as those reports are made public, anyone is free to follow along their exact investment strategy.

So did they beat the stock market? Well, nearly 10,000 trades were made throughout Congress over a two-year period. And if we narrow those down to only the largest transactions, it was found that only 1,375 of those were above fifteen thousand dollars. Each of those trades were benchmarked across a month, a quarter, and day until present, and the results were pretty surprising. Over a month, their stock picks beat the S&P 500 by an average of 0.12 percent. Over a quarter, they beat that benchmark by 1.34 percent, and until date, their stock picks outperformed by almost six percent.

Of course, if you're thinking, "But Graham, you should really get information. I could just copy and your trades exactly and make a ton of money," even though they have to disclose every single stock they buy and sell, they have a full 30 days to do so and the median disclosure is made 28 days after making a trade. So that could mean you're buying in at a very different price than what they are. However, since Congress all seems to be investing for the long term, even accounting for the delay, it was found that they did beat the S&P 500 over the two years this was analyzed, although they really haven't beaten it by enough to make it worth your consideration.

Not only that, but in order to accumulate that slight advantage, you would have to buy everything that they do in equal proportion, meaning you would have to invest in all of those 1,375 stocks in order to achieve the average. So practically, it's really just not worth it. It's also worth considering that maybe they have some other inside knowledge or conflicts of interest that we don't know about, like Senator Perdue, who outperformed nearly all of his peers throughout almost 2,500 trades, including companies that stood to benefit from upcoming policy changes. Even though he was investigated by the SEC, no charges were filed.

So overall, the verdict is they have beat the S&P 500 by a slight advantage, but it's really not by much. And it's not worth your time to try to mimic their trades in order to beat the market. So if Congress could slightly beat the market, what about financial analysts? Surely they do a better job because that's their full-time occupation, right? After all, it was noted that Goldman Sachs charges thirty thousand dollars for access to its basic research, JPMorgan charges ten thousand dollars, and Barclays is charging up to 455 thousand dollars for its equity research package, which, come on, that's basically like a fully loaded Lamborghini.

Anyway, the premise of this is simple: if you paid for these reports and then followed their recommendations over ten years, would that be enough to beat the market? Now it's important to mention that prior to this, no trackers followed the performance of this data, so our Reddit user decided to build one, and this information is incredible. He looked through a total of 66,516 recommendations made by analysts over the last ten years throughout S&P 500 companies, with more than 35,000 buy, 27,000 hold, and 4,000 sell recommendations, each analyzed over a week, month, and quarters, since all of these reports are available four times a year.

Now surprisingly, within a week, these recommendations outperformed the S&P 500 by 40 percent, and throughout the next month and quarter, that analysis outperformed the S&P 500 by over 20 percent. Now the sell recommendations, on the other hand, did not fare so well. It was found that within a week, the sell recommendations did perform slightly worse than the S&P 500, but over a month and a quarter, their average sell recommendations wound up beating the S&P 500, which meant it did the exact opposite of what they expected to happen. As far as which banks wound up doing the best, by far that award goes to Barclays, who's consistently beat up both their competition and the market quarter over quarter.

However, just like anything, there is some fine print that we have to be made aware of. First, because this calculation measures the percentage increase against the S&P 500, the actual increase is not as big as you would expect. In this case, as you can see, after a quarter, the recommendations went up an average of 4.858 percent during a time where the S&P 500 went up 3.956 percent, which is only a difference of 0.9 percent. Now second, some of these recommendations were made around a positive earnings report, which could skew those numbers to look a lot better. If a buy recommendation was issued before market open, that also means properly timing these trades is almost impossible.

The third, when accounting for the cost and time of this analysis, it was said that you would need a minimum of 20 million dollars invested to earn enough of a return to justify the amount of money needed to pay for the reports. And fourth, this analysis only covers the last 10 years, which has largely been a nonstop bull market as everything has gone up in price. So this could very well change during an economy if it doesn't just go straight up, especially considering that 40 percent of the recommendations were to simply hold. And fifth, there very well could be a Cramer effect in the sense that their recommendation causes the outcome that they say is going to happen.

Either way, I would say that there is merit to these reports, and some could have very well outperformed the market over a ten-year period, but accurately timing these trades for a marginal difference in the market would be nearly impossible. And I think for the average person, it would be a very difficult way to try to beat the market. And lastly, I thought this one would be fun, analyzing how many times Michael Burry predicted a crash and how many times he was right.

Now if you're not familiar with the man, the myth, the legend Michael Burry, he correctly predicted the 2008 housing crash and then was subsequently featured in the movie "The Big Short," starring Christian Bale. So our Reddit analyzer set out to find the truth: does Michael Burry predict a crash and get lucky, or is there actual truth to his predictions being correct? Now in order to fact-check these findings, each of his predictions were charted along with every single stock he said was going to fall, benchmarked against the S&P 500. As noted, his first verifiable prediction came in May of 2017, where he warned that we could expect a global financial meltdown and world war three.

In his exact words, "I didn't go out looking for this; I just did the math. Every bit of my logic is telling me the global financial system is going to collapse." Since then, the S&P 500 has returned 93 percent, and there is no threat of another world war. After that, in September of 2019, he said that index funds were the next market bubble and were distorting prices across the stock market, but so far that prediction has not panned out, and since then, the S&P 500 is up another 50 percent. He then went on to criticize Tesla stock's performance in December of 2020, and that it would collapse like the housing bubble. He subsequently shorted the stock, and even though we don't know his exact entry point in the short term, he was right as the price fell to a low of $563. Although to date, had you just held, you would now be up another six percent.

But then once again, in February, he said the market is dancing on a knife's edge and he is being ignored. Again, but again, the market is up another 11 percent since he said that. But it does appear that, according to this analysis, his only correct prediction was calling bitcoin's price peak around $64,000, and right now, we're down about 30 percent. So from all of his predictions, he is wrong significantly more than he's right. But let's be real: he only needs to be right once in a big way to get his own movie and achieve worldwide notoriety as the guy who correctly predicted the top.

Now before we wrap this up, obviously none of this is possible without the help of Knob Jaws, who, again, is super appreciative that I'm referencing his work, even though he wants to appear out of the spotlight. But by and large, very few people in companies can consistently beat the market. Risk-adjusted returns need to be accounted for, and for the vast majority of people out there who just want to invest as passively as possible, the S&P 500 is still the holy grail to follow. Now, if you're interested in a video covering his other analysis, including whether or not hedge funds could beat the market, if it's possible to make more money investing in IPOs, or several other really interesting topics that I spent the entire weekend researching, just let me know by either hitting the like button or commenting down below.

I'm also going to link all of his information down below in the description. He is not affiliated with any of this; he did not ask for any of this. I just thought it would be the nice thing to do to give him credit where credit is due. So anyway, with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram. I post there pretty much daily, so if you want to be a part of it, feel free to add me there.

On my second channel, "The Graham Stefan Show," I post there every single day. I don't post here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time.