One of my favorite characters in animated films is Iago, the parrot in Disney's Aladdin. His sarcastic response of "Why am I not surprised?" to various revelations always got a chuckle out of me.
This was brought to mind by Jason Zweig's "Here's One Way to Beat the Market." In it, he points out the practice of some money managers of comparing their performance, including dividends, with the S&P 500, excluding dividends.
Stephen Horan of the CFA Institute points out, "There are two main ways to earn returns: price appreciation and income. If you systematically exclude one of them from your benchmark, while knowing that your strategy includes them, you're making a fundamentally unfair comparison."
One of the culprits named is Jim Cramer. His trading tip service from TheStreet.com, Action Alerts PLUS, proclaimed it was "CRUSHING the S&P 500." Actually it was - without dividends included for the S&P 500. With an apples-to-apples comparison, the story was much different. The advantage was less than 1%/year and that was before trading costs, the annual subscription cost, and tax consequences.
One can only wonder how widespread the practice is.
So the plot is a bit different, but the ending is the same.
Why am I not surprised?
'Truth in advertising' - enforcement is lax.
ReplyDeleteI would bet the practice is quite pervasive. People are always twisting statistics to sell their ideas or services. Anyone signs up for Cramer's dizzying pace of trading has already bought the message (or the personality) and won't be persuaded by pesky little things like facts.
ReplyDeleteYou shouldn't be surprised at all! What do you expect from the marketing department of these pundits, they need to justify the subscriptions.
ReplyDeleteHey...nothing surprises me anymore but I have to say it is pretty nervy to compare apples and oranges.
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