Jim Cramer on Short-Term Trading: Mad Money or Simply Mad?

Jim Cramer has a new investment strategy for you: short-term trading. According to Cramer's Mad Money show last week, summarized on the show's CNBC blog, short-term trading can be a good way to make money.

Here's his recipe: Identify stocks in your portfolio that have "flown too high" and "take a little bit off the table," investing that money elsewhere and letting the hot stocks cool off before buying them back at lower prices. Cramer pointed to Chipotle (CMG), Netflix (NFLX) and Salesforce.com (CRM) as examples of stocks that have soared too high,and assured his viewers that short-term trading is a "tested strategy."

In my view, this idea is errant nonsense. How would an investor implement this strategy? Stock prices move in a random pattern, and there's no way to determine with certainty when they have "flown too high" and when to buy them back.

Who Knows the Future?

Take Chipotle as one example: The stock closed at $97.90 on July 30, 2007, marking a big gain from its price of $42.22 on Jan. 26, 2006. Was that time to sell and "take a little off the table"?

If you thought so, you'd have been disappointed when the stock reached $151.88 on Dec. 24, 2007. The shares did fall then, to a low of $39.90 on Nov. 17, 2008, only to surpass their December level to close at $178.60 on Oct 11.

But that's exactly the problem. Future events affect stock prices, and no one knows what those events will be or how they'll affect the price of a stock.

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How difficult is it to guess? According to a summary of seven studies on day trading, 70% to 80% of day traders lose money. Another analysis, by investment consultant Ronald Johnson, concludes that 70% of the short-term public traders included in the study "will not only lose, but almost certainly lose everything they invest." As he puts it: "Numerous market studies have concluded that accurate market timing is not possible, even for professional money managers."

So Cramer's claim that short-term trading is "tested" is disingenuous. But consider the source: Cramer's employer, CNBC, derives substantial revenue from sponsors -- such as purveyors of trading systems and the securities industry -- that make money when you trade.

Don't be fooled. Cramer's trading advice really is "mad."

I'd encourage investors to heed the admonition of Vanguard founder John Bogle instead. As he told Bankrate.com during an interview about exchange-traded funds last year: "Trading is your enemy, because it's based on emotion."