The "six weapons of influence" have been written about extensively by Robert Cialdini, Professor of Psychology and Behavioral Sociologist. When judged against Jim Cramer, former hedge manager and entertainer extraordinaire, we see exactly why we often make swift and short-sighted investment decisions.
The Buffalo Booyah!
One of Cialdini's weapons of influence has to do with "liking." He describes numerous circumstances when we do certain things simply because we like other people.
Jim Cramer has taken this to the extreme. If you've ever watched his show, you know that he will often throw a chair or wear a diaper to illustrate his point. He appears fun, good-natured -- just like one of us. When callers phone in, the first thing he finds out is where they're from -- he then quips, "Hey, it's Mike from Philadelphia! Booyah Mike, I'm from Philly too!" Instantly you find yourself liking and identifying with him, which makes you more apt to watch the show and trust his advice.
We all know the famous "booyah!" He recites it relentlessly. What's worse is he gets you to say it -- because it's all about familiarity when you want someone to like you. The repetitive, litany-like "booyah" makes everyone feels like they're part of the same group. So remember the next time you call to ask him about the prospects for Bank of America or IBM, he'll make sure to get his booyah's in there first.
Everyone else is doing it
Another one of Cialdini's weapons of influence is "social proof," where people do things because they see others doing them. Think about how many times you considered buying a stock because you thought other investors were doing the same thing. For example, Amazon.com (Nasdaq: AMZN ) is a great company with a stock that has drastically shot up in price over the last six months, so you just know investors are gobbling up shares. You want to buy them as well -- because no one wants to be late to the party -- but you've got to consider whether it's worth it. At almost 70 times earnings, there's a strong argument that Amazon may be just a bit too expensive right now.
But social proof is powerful. When you call his show, he'll often say something like this -- "I'll tell you what I just told Dan from Missouri, sell, sell, sell!" Of course you never heard what he told Dan from Missouri, but after asking Cramer if you should sell your shares, you feel a heck of a lot better knowing Dan is going to sell his shares too.
Let's go to the tape
So what about his overall analysis? Over the last few weeks, Cramer made bearish calls on the following stocks:
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Stock
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Why Cramer Hates These Stocks
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National Oilwell Varco (NYSE: NOV )
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Too much natural gas exposure
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Huntsman (NYSE: HUN )
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Too big of a run-up in price
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First Solar (Nasdaq: FSLR )
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Price is too high and government subsidies are ending
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Guangshen Railway (NYSE: GSH )
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Chinese market is "a terrible place"
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China Mobile (NYSE: CHL )
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Chinese market is "a terrible place"
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Source: CNBC.com.
While there's no doubt that National Oilwell Varco is exposed to natural gas, Cramer's logic seems a bit slack. 65% of last year's revenues were from the rig technology segment -- and typically big ticket rig orders are for oil, not gas. In fact, internal analysis from fellow Fool Joe Magyer illustrates that over the past six years, the stock price of National Oilwell is 95% correlated to the price of oil and not natural gas.
In the last three months, Huntsman has gained 4%, while competitor Dupont has gained 15% and the S&P has shot up by 5%. Sure, Hunstman has performed well, but maybe the "run-up" is warranted -- so where's the talk of fundamentals?
But despite falling subsidies, First Solar continues to boast a stellar balance sheet and the cheapest thin-film panel on the market. Until another company proves otherwise, First Solar still seems to be the top-dog in the game.
China is indeed a hot market, and stocks are expensive. But again, where is the fundamental analysis? Guangshen operates in the most populous area of China, with close to 100 million people. They are the dominant freight and passenger carrier in the region, and the stock is trading for less than tangible book value!
And look at China Mobile from a long-term perspective -- the company provides communication resources in places where it's needed the most: rural China. In some areas, penetration rates are less than 35%, which gives the company plenty of room for growth. China Mobil has a great balance sheet, barely any debt, and has proven it can sustain both revenue and earnings growth.
So what's his track record?
After combing through 246 of Cramer's picks over an 11 week period, researchers from Northwestern University found that "the aggregate losers in our event study are the Mad Money viewers who decide to buy the recommended securities when the markets open the following day, and the winners are the market makers and arbitrageurs who sell the overpriced recommended stocks." Even the producer of Cramer's TV show has said that "our job is to seduce."
I don't know about you, but that doesn't sound like a way to secure your financial future. In fact, it appears to me as though the show relies on a combination of liking and social proof to compensate for minimal fundamental analysis of his recommendations.
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Fool contributor Jordan DiPietro owns shares of First Solar and Guangshen Railway. First Solar is a Motley Fool Rule Breakers selection. Amazon.com, Activision Blizzard, and National Oilwell Varco are Motley Fool Stock Advisor picks. Guangshen Railway is a Motley Fool Global Gains recommendation. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard and China Mobile. The Fool has a disclosure policy.
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