Cramer's New Report Card: He Passed

The New York Times’ (NYT) blog Dealbook has an interesting note about the latest study attempting to quantify the advice CNBC’s Jim Cramer dispenses nightly on his show. Cramer is inarguably the biggest star on business television and he has become even more recognizable after the well-documented debate he had with Comedy Central’s John Stewart.

The heart of the debate was that Cramer recommended buying Bear Stearns just weeks prior to the investment bank’s demise. As we stated at the time, Cramer is not a personal financial advisor, he is an entertainer, and anyone who dishes out as many stock picks as he does on a nightly basis could look like a fool or a genius if you only select certain picks to suit a predetermined conclusion.

The study out of Northeastern University tries to give a clearer view of how a portfolio of his recommendations would have done. Their basic methodology is as follows:

“Mr. Bolster and Mr. Trahan created a hypothetical Cramer portfolio this way: Each time he recommended a stock on his show, $1 worth of that stock was acquired at the closing price the day after the show was broadcast. (The closing price better reflected what retail investors would pay if they tried to buy the stocks he mentioned.) If Mr. Cramer later made a sell recommendation on that stock, it was sold from the imaginary portfolio.”

The results of the study of Cramer’s picks from mid-2005 through the end of 2007 showed that Cramer’s picks performed at annualized rate of 12.1% compared to the S&P 500’s return of 7.35%. This is especially impressive because the stocks are bought at the next day’s closing price, which would not take into account the “Cramer effect” that is often seen when small or mid-cap stocks mentioned on Mad Money get a nice bounce the next day, presumably from a rush of retail investors.

Even big stocks sometimes feel the “Cramer effect” as Freeport McMoran (FCX) had its largest one-day gain ever the day after Cramer spent ten minutes discussing why he is bullish on the stock. It was a $25 stock at that point and rose 11% the next day; there was no other news on the stock.

The study also used a more complex model for evaluation, and in that case; the results were much closer to the benchmark return. There is a clear short coming to the study though, in that it does not reach into the meltdown of 2008.

Cramer is incentivized to grab ratings and to discuss the most popular stocks and stories, and because of this, it would seem reasonable that he talks about stocks with higher than normal volatility and beta. The basic case of the study though is certainly a nice out-performance, but this study is only part of the picture. The study does not take any of his picks since the market turmoil began in 2008, and it is quite possible that Cramer under-performed the market in the past year. It is entirely possible that he simply has been aggressive on riskier stocks, which is a winning strategy in bull markets and obviously would not be in bear markets. This is all assumption though, because the study does not go far enough into the current market to give a full picture of his recent performance. Either way, this is at least a better perspective than the much ballyhooed 2006 study from Northwestern Kellogg Business School which showed Cramer’s picks did not fair well over an 11 week period.

It is well known that Cramer was an accomplished hedge fund manager and an all-together pretty bright guy. That is in the past though, and Cramer is an entertainer now and he is one of the few people that has the ability to literally move the market. The booyah-heads that follow Cramer have made him into something larger than himself, and that means we will always be fascinated with the evidence behind his guru stock-picking prowess.

Original post: Cramer’s New Report Card: He Passed

Comments

[User 405635:]

The only thing the Jon Stewart show proved is that Jim Cramer did NOT clearly specify he is an entertainer. That was an afterthought added to fool viewers. Guess how many people it fooled?

No, if Cramer is smarter than whoever posted his report card, he would wait a few more years before claiming success.

May 20 07:40 PM

[ccerenz2:]

I saw the show where Cramer supposedly recommended Bear Stearns prior to it's failure...but he didn't do that. A caller called in to ask if her money was safe at Bear Stearns...as in her account. Jim said her money was safe at Bear Stearns. And as it turns out, it was. Had she asked about an investment in Bear Stearns, I'm sure his answer would have been different.
In addition, he was very correct in September/October when he predicted a significant drop, and has been correct again during this rally since March. Were you?
People seem to want to dump on him for their own gain, but the reality is, what this guy does is come out night after night with valuable advice that is usually more accurate than anyone else.

May 20 07:42 PM

[cayoblues:]

Let's face it, Cramer knows more about the market than 99% of us do. Hey, that's a gift as far as I'm concerned. Thanks Jimmy C!!!!


On May 20 07:40 PM User 405635 wrote:

> The only thing the Jon Stewart show proved is that Jim Cramer did
> NOT clearly specify he is an entertainer. That was an afterthought
> added to fool viewers. Guess how many people it fooled?
>
> No, if Cramer is smarter than whoever posted his report card, he
> would wait a few more years before claiming success.
>

May 20 07:52 PM

[RiskReturnO...:]

Cramer's best call was to tell people to get out at SPY = $100. Those who took the advice are still "up 10%" (vs. buy and holding, riding it down to $67 and back up to $90).

For investors who gradually got back into the market, the results are even better. If they scaled back in at SPY $70, $80, $90, they would be significantly up 20 % points relative to "buy and hold."

Personally, I monitor his views for sector allocation strategies, instead of specific stock picks. Once I nail the sector (and country), the big picture is taken care of, and I typicaly capture 80-90% of the gain without having to pick specific names (and endure specific stock volatility / uncertainties).

Coupled with aggressive sector rotation and covered call writing, my enhanced Cramer portfolio can beat SPY by 10% annually with much lower downside risk.

May 20 07:55 PM

[doc_hawkins:]

2005 to 2007
Lets see 2008 to present
I can usually pass a test on an easy subject

I am not bashing Cramer but make a conclusion on relevant data

He did predict the drop last fall and hinted on the downturn last Feb but this article simply does not cover a large enough period to believe the title.

May 20 08:06 PM

[3treesout:]

Was a fan - got burned twice!! How can anyone say you don't want a particular stock one day and 4 days later put it high on your recommend list. This guy should play back his own shows. He's mad allright and so am I.

May 20 09:19 PM

[Prudent Man...:]

WaMu anyone?

A lot of short memories here. If you followed Cramer in 2007/2008 you wouldn't have anything to invest now.

I admit he is smart and savvy on the market. So is Madoff. Results are what counts and as a retired mutual fund (derivatives) manager my results were recorded by professionals every day and I receive my share of Lipper #1s. I have yet to see Cramer's but he sure has his followers which show us something about market participants.

Remember when Maria Bartiromo was having trouble with fractions when we were quoting in eights, e.g., 2/8 ths instead of a 1/4. She is cute, people like her (as I do) and she has the biggest contract on CNBC.

May 20 09:31 PM

[jpeak:]

Wow. I am blown away by the support for this clown. The last quote I recall regarding Cramer is that he has "called more bottoms than a proctologist." That's pretty accurate. Clearly nobody (including the author of this post) was around when he was screaming that GM was a "45 dollar stock" before it plummeted. And that Wachovia was "was well run with Steele at its helm (and on his cheesy show to boot)" and never forget to "ring the bell on homebuilders..." before the all crashed.

Don't get me wrong. Cramer knows stocks and daytrading, but that is not the audience he caters to. First, if you listen to him and buy on his advice you're an idiot. If you're a retail investor that doesn't know better and listens to him you're screwed. That is where I have a problem.

Don't pitch this shitty investor that can't make a dime on his own advice to other people. As far as I know Cramer has only made money selling stock in his crap company that gives crap advice.

May 20 10:17 PM

[redbaron:]

I agree that Cramer is an entertainer, and also agree that he is a very bright fellow. I don't follow his advice, but make my own decisions on stocks; but I do watch his show, and he does move the market from time to time. He did turn positive within the last few months (some time shortly after March 10), and he has been right on the market since that time. That is more than I can say for many professionals, who are still watching from the sidelines as this market continues upward. No one is right all the time, and the investors who Cramer pitches his advice to, likely are better off with his advice than none at all.

May 20 11:11 PM

[MattZN:]

It's a bit ludicrous to assume that anyone can predict where the market will go, so pointing out faults is not really all that meaningful. Cramer will be the first to tell you that he isn't in the business of trying to predict short-term shifts in the market. He recommends and disrecommends so many stocks on his show, not to mention constantly cautioning his viewers to not buy immediately on any recommendation he makes, that I find it highly doubtful that he moves markets in any meaningful way. Frankly I don't find his predictions any more or less accurate then predictions by other 'experts'.

The entertainment is, well, entertainment, but it's like putting a happy face on hard analysis which is primarily what he does. If you don't like the format, don't watch the show. I disagree with Cramer most of the time but I also get a lot of insight into the market when I compare his commentary against my own research. If he picks up a fact that I've missed, that's useful information regardless of how it is packaged. I don't subscribe to his pay-service, or anyone's pay-service for that matter.

-Matt

May 20 11:15 PM

[Blue Star:]

I agree. It is OK to watch the show but you need to make your own choices so do as much of your own research as you can so you can stay on top of your investments.

It is always easy to go back in history to prove things but the future does not work that way. Peter Lynch may have had it right. Pick stocks that you know the company as an example if you like LOWES because you shop there and like how they run their stores this can be a great data point in your research.

May 21 08:28 AM

[Norman Lepo...:]

Cramer is horrible. I stopped watching him and CNBC a year ago and am glad I did.

May 26 11:37 AM