Reading the entrails

CNBC stock “analyst” Jim Cramer is getting lots of well-deserved mockery for giving some spectacularly bad investment advice, and then compounding his mistakes by denying them.

Yglesias points out that the whole business Cramer and his ilk are involved in is a contemporary version of entrail reading. Take this wholly typical “20 stocks to buy now” column. Consider what needs to be assumed to make taking this guy’s advice worthwhile.

(1) All the information and analysis performed by the stock picker isn’t already imputed in the stock’s current price; and

(2) The stock picker knowledge of the various industries and firms he’s analyzing is deep enough to allow his speculations to add value to the analysis already being done by hundreds and thousands of people who dedicate their lives to studying these industries and firms on an industry-specific and firm-specific basis; and

(3) This added value is greater than the transaction costs that must be incurred in order to take advantage of it.

Now how likely is this? How likely is it that there’s a single person on this earth who knows enough about the contemporary technological and economic challenges of superconductor production, and about the complexities of commercial railroad transportation in America today, and about the Brazilian banking industry in the context of the current state of Latin American finance, and (repeat for 17 more industries) to be giving advice about 20 stocks that, collectively, actually has investment value? And how likely is it that, if this paragon actually exists, you just happen to have stumbled onto his wisdom by googling “20 Stocks To Buy Now?”

Beyond that, the notion put forth in the linked column and in a thousand similar ones, that individual investors should “do their own research” in order to “identify good companies” is both practically and theoretically preposterous.