Jim Cramer is one of the most popular names on Wall Street. The former hedge fund manager turned “Mad Money” superstar grabs the attention of his audience, literally using bells and whistles to highlight his buy and sell recommendations.
Cramer’s known for high-energy analysis as he breaks down financial news on his hit CNBC TV show and until recently on TheStreet.com, which he co-founded. He’s also launched the Action Alerts Plus portfolio and the Charitable Trust portfolio, both of which investors pay subscription fees to access.
There’s no questioning his status as a celebrity, but Jim isn’t just a celebrity. His TV show and web content give stock recommendations that hundreds of thousands of investors follow. But are his recommendations worth following? Or should you listen to his critics who suggest you should do the exact opposite when he makes a call?
Jim Cramer’s Stock Pick Performance: Is It Better to Short His Recommendations?
The art of stock picking has grabbed the attention of investors, traders, and the general public. After all, if you pick the right stocks and time your trades correctly, you trade your way to millions.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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At the same time, some experts have stood out against stock picking, stating that it’s impossible to time the market. Instead, these experts say a highly diversified portfolio of exchange-traded funds (ETFs) and mutual funds is the best way for the average person to invest.
But is Cramer the exception to the rule? Are his picks beating the market? Or would you be better off shorting his recommendations, as his biggest critics have suggested?
Cramer vs. The Stock Market: Analyses
The real question here is whether Jim Cramer’s stock picks underperform, perform in line with, or outperform widely accepted benchmarks like the S&P 500 index, Nasdaq composite index, and the Dow Jones Industrial Average.
There are several ways to slice the data, including a couple that have already been explored thanks to scholarly articles and data-driven websites like TipRanks. Here are the results of those articles and data points as well as our own analysis of Cramer’s trading history.
Wharton School Study
The Wharton School study is the most comprehensive analysis of Jim Cramer’s performance to date. Research assistant Jonathan Hartley and graduate student in statistics Matthew Olson at the Wharton School at the University of Pennsylvania co-authored the study.
The study, published in the Journal of Retirement, assessed the performance and risk metrics of recommendations made by Jim Cramer as well as his Action Alerts Plus and Charitable Trust portfolios since inception.
Olson and Hartley combed through 17 years of data, building on multiple earlier studies. The Wharton School study found that Jim Cramer’s performance was in line with the S&P 500 from inception until 2010. However, the spread between the returns on his recommendations and the S&P 500 began to widen as the calendar transitioned from 2010 to 2011.
At the end of the 17-year period, the annualized performance of Cramer’s recommendations clocked in at just 4.08%. During the same period, the S&P 500 produced annualized gains of 7.07%.
However, there was one major area in Cramer’s investing style that hurt him in this comparison.
Keep in mind that it wasn’t until mid-2010 that a spread between Cramer’s picks and the benchmark index started to emerge.
During this time, the global economy had just begun to recover from the 2008 financial crisis. The Federal Reserve was moving forward with a dovish monetary policy by reducing interest rates and increasing funding for its bond-buying program, and the stock market was making a dramatic recovery from recent declines.
So, why did the S&P 500 pull ahead of Cramer during this time?
It has to do with his asset allocation targets. Cramer has long been a proponent of holding large amounts of cash. In fact, about 50% of his portfolio is in cash and cash equivalents. This means that as the market was recovering from one of the worst economic recessions in history, Cramer wasn’t fully exposed to the bounce back — a decision that significantly hurt his long-term performance.
At the same time, Cramer’s philanthropic strategy in the Charitable Trust portfolio also hurt him. That’s because all distributions and dividends from the portfolio are donated to charity rather than reinvested. If the dividends had been reinvested, I doubt they would have been enough to make Cramer’s portfolio stay in line with the S&P given his strong cash position, but the reinvestments would have narrowed the gap a bit.
Regardless of his cash position or what he does with dividends, the study found that Cramer takes significant risks based on standard deviation and Sharpe ratio data. The study found that the Action Alerts Plus portfolio had a 0.16 Sharpe Ratio and a 17.65 standard deviation. During the same period, those numbers were 0.41 and 14.6 for the S&P 500.
This is bad for Cramer’s picks for two reasons:
- Standard Deviation. The standard deviation is a measure of volatility, which is another way to say market risk. Cramer’s higher standard deviation tells you that his portfolio was more exposed to volatility than the S&P 500 during the assessment period, meaning greater risks were being taken.
- Sharpe Ratio. The Sharpe ratio was developed to measure the risk and reward characteristics of a portfolio. According to the Sharpe ratio data, Cramer took more risks for less potential reward than investors would have taken by investing in an S&P 500 index fund.
Considering this data, the average investor shouldn’t follow Cramer’s performance. Cramer hasn’t only been hurt by his desire to maintain a large cash position and decision not to reinvest dividends, he’s also hurt by his willingness to accept larger risks, even when the potential rewards don’t stack up.
Penn State Thesis
In 2013, Jeffrey Sandler, a student at The Pennsylvania State University Schreyer Honors College, submitted a partial thesis as part of his work to earn his bachelors degree in finance. The thesis was aimed at analyzing data to see if Cramer’s stardom was so big that his predictions led to movement trending in the direction he predicted in one day or less.
In his thesis, Sandler assessed Cramer’s recommendations throughout the 2010 year. He found a few interesting points of data too:
- Action Before Cramer. Sandler found that the vast majority of stocks were trending upward for the five days prior to Cramer’s recommendations. The author suggested Cramer’s propensity to dive in on stocks that are already trending upward indicates that he is a positive-feedback and momentum trader.
- One-Day Returns. Just over 56% of Jim Cramer’s stock picks had a positive one-day return. The average one-day return on his picks was 0.42%.
- One-Month Returns. The study found that over a one-month period, Cramer’s picks produced an average return of 0.61% with a 51.09% win rate.
- One Year Returns. In 2010, Cramer’s picks resulted in a 14.93% annual return, beating the S&P 500’s 10.13% returns. 61.59% of his stock picks generated profits in 2010.
That all looks great. That is until you adjust for risk. The percentage of his picks that outperformed the market on a risk-adjusted basis was just 47.46%.
This is useful to compare to the Wharton School study. Both studies essentially say the same thing. Jim Cramer’s picks underperform the market on a risk-adjusted basis. However, the differences between the two studies show how the time horizon makes the difference.
Cramer’s willingness to accept risk served him well in 2010, with realized gains that outpaced the overall market. However, that propensity to take unwarranted risks — likely to offset his very high cash balance — has hurt his performance in the long run.
The results above are pretty convincing, but we wanted to be sure. So, we did our own analysis of more recent data.
We’re not talking about Cramer’s own portfolios or how he invests his own money here. We’re talking about his recommendations. We went to the “Mad Money” recaps on TheStreet.com and analyzed the first 30 buy recommendations he made this year in the Lightning Round. Here’s how those recommendations have performed after a few months:
|Stock & Date of buy recommendation||1-Day Return||5-Day Return||YTD Return|
|Total Good Calls||18/30 (60%)||18/30 (60%)||12/30 (40%)|
Although there are a lot of calls that ended in negative territory, it’s also important to consider the state of the market during the past year. Even though Cramer’s picks ended in the red as of early June 2022, they still may have beaten the market benchmarks during that time frame:
- S&P 500: Down 14.4% YTD
- Nasdaq: Down 24.2% YTD
- Dow Jones Industrial Average: Down 10% YTD
When you compare Cramer’s performance to the current market, he’s actually doing quite well. That may make you question the thesis and the peer-reviewed publication above, but it shouldn’t.
Our data set was composed of stock picks from the beginning of January 2022 to the beginning of June 2022. Over this short period of time, Cramer’s picks performed very well relative to the abysmal performance of the broader market. However, even our data shows a diminishing return and win rate the farther you get from the recommendation date. Over time, the financial media superstar’s success rate drops substantially.
We chose the first 30 picks of this year because it takes 30 points of data to create reliable statistics. We went with this year because we wanted an accurate reading of Cramer’s most recent stock picks, but started in January because we needed a few months for the data to age. Although the data shows Cramer winning right now, the diminishing returns and win rate in our chart serve to validate the long-term data compiled by various experts in the past.
The Verdict: Should You Follow Jim Cramer’s Stock Picks?
You should never take investment advice from anyone without doing your own research. Jim Cramer is no different. In fact, the data suggests that if you follow Cramer’s lead, the S&P 500 will outperform your portfolio in the long run.
Maybe that’s why Cramer doesn’t take all his own recommendations. Cramer has been clear about how he invests his personal money in an article on CNBC. He holds 50% of his money in cash, 40% in domestic index funds, 5% in international index funds, and 5% in gold and cryptocurrency. Cramer doesn’t buy individual stocks except for his charitable trust.
But there is a way you can make money off his stock recommendations. Our data and data from various studies suggest that Cramer’s calls often are profitable in the short term; 60% of his first 30 calls in 2022 were profitable after one day and 60% were profitable after five days. There were six incidents in which a trade that would have lost money on the first day would have been profitable on the fifth day.
This suggests using Cramer’s calls as short-term trading signals could be advantageous.
To do so, buy the stock when he makes the call. The next day if the trade is already profitable, exit your position and collect your profits. If not, hold tight for a few more days. On day five, exit your position.
Following this method, your returns on the first 30 picks from Cramer in 2022 would have averaged 1.5% in just five days each. That works out to 78% annualized gains.
Jim Cramer is a huge success, but just because he’s a huge success doesn’t mean you should blindly follow his investment advice. Multiple studies have proven that Cramer isn’t able to keep up with the S&P 500 in the long term, as is the case with most experts.
That’s why Warren Buffett says most Americans should invest in highly diversified low-cost index funds.
It’s also why we always tell our readers to do their own research before making an investment decision. Of course, you can make money from Cramer’s recommendations, but if you’re investing for the long run, Lightning Round callouts aren’t where you want to get your recommendations from.