Finally, we have an answer.
After years to Jim Cramer bragging about what a great stockpicker he is and of choruses of Mad Money viewers grousing about the opposite, the issue has been settled.
Paul Bolster and Emery Trahan of Northeastern University have done an exaustive analysis of Cramer’s Mad Money stock picks from 2005 to 2007 (pre-crash).
Cramer’s not an awful stockpicker!
Unfortunately, he’s not a particularly good one, either.
In fact, once you adjust for the various style factors that explain most stock returns (market, small/large, value/growth, momentum), Cramer’s stockpicking is pretty much in line with the index. In other words, he’s average.
Also, in contrast to one of Cramer’s refrains about the mediocrity of passive investment strategies like Jack Bogle’s, once you subtract the costs of trading and taxes (not to mention the incalculable cost of having to watch Cramer’s show every night), you’d have been better off in an index fund.
Individual investors have an incredible variety of sources for investment guidance. These
include internet blogs, financial publications, books, newsletters and, of course, television
shows. We examine a relatively new but widely popular source of investment advice,
buy and sell recommendations made by Jim Cramer on his popular nightly Mad Money
show on CNBC… Overall, the results suggest that, while Cramer may be
entertaining and mesmerizing to many of his viewers, his aggregate or average stock
recommendations are neither extraordinarily good nor unusually bad.
Bolster and Emery’s study is embedded below. Here are some of the interesting points.
- On a gross basis, Cramer’s picks actually did quite well, especially relative to the S&P 500. Cramer’s “portfolio” (as constructed by Bolster and Emery) returned 12.1% per year, versus 7.4% for the S&P, providing lots of fodder for those who say he “beats the market.” This performance was before trading costs and taxes, however. And the comparison to the S&P also does not take into account the type of stocks Cramer likes to buy (generally, small cap, value, and momentum stocks, which, as a group, outperformed the S&P).
- After adjusting for transaction costs of $9.99 per trade, Cramer’s performance was still better than the S&P 500, but only modestly. Transaction costs, even low ones, take a huge bite out of returns. After taxes, moreover, the performance of Cramer’s picks would have suffered further. (One of the reason active investment strategies like Cramer’s are unwise for the vast majority of investors is that it’s so hard to overcome the costs of implementing them. To actually make you money relative to an index fund, Cramer would have to be an absolute stockpicking wizard.)
- After adjusting for the four “factors” that explain most stock performance (market, size, value/growth, and momentum), Cramer’s stockpicking was in line with the market. In this sample period, one could replicate Cramer’s performance by constructing an index composed of 18% Russell 1000 Growth, 29% Russell 1000 Value, and 53% Russell 2000 Growth.
Bolster and Emery conclude:
Our factor analysis of portfolio performance for the entire period of analysis suggests that factor-adjusted returns are generally not significantly different from zero. Multivariate analysis suggests that Cramer’s portfolio returns are driven by beta exposure, smaller stocks, value-oriented stocks, and momentum effects. However, when we look at performance year by year, it is clear that Cramer has reduced his reliance on high beta stocks and has shifted away from value and toward growth. This shift is further evidenced by style analysis which shows a significant shift from large cap value to large cap growth in 2007.
The full period results provide little compelling information that Cramer’s recommendations are extraordinarily good or unusually bad. However, the year by year results are more intriguing. In particular, Cramer’s robust performance in 2007 results from a clear shift from value to growth, particularly in large cap stocks. A 3-factor Fama-French model even provides a significantly positive alpha for 2007. Yet, this model produced a significantly negative alpha for 2006. Thus, we find inconsistent evidence of Cramer’s ability to add value through security selection. But he has an advantage over the typical mutual fund manager: he is not trapped in a style box. This worked to his advantage in 2007. The obvious question: can he exploit this flexibility effectively and consistently in the future?
We know what Jim’s answer would be to that one!
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