Jim Cramer’s Mad Money does about as well as the market

Awhile ago I announced I would be conducting a little experiment about Mad Money, an off-the-wall financial advice show on CNBC hosted by Jim Cramer. The first results are in, and it turns out that Jim Cramer’s advice isn’t bad at all. It’s not particularly good either, giving good evidence for the concept of an efficient stock market, but it’s not bad. The aggregate value of the stocks he suggested the viewer purchase has increased by 9.7% since middle-to-late February. In the same time period, the Dow Jones Industrial Average went from around 12,750 to 13,850, for an increase of 8.6%. Jim Cramer just barely outperformed the market. This is to be expected — if any talking head on television really could predict the stock market accurately, then a lot of people would listen to his recommendations and act on them, thus driving the prices of those stocks higher and negating any potential above-the-market returns.

My experimental protocol for finding these values was pretty simple, and I hope to be able to do a more rigorous examination soon. Jim Cramer’s show has two kinds of segments on it. The first kind of segment, which usually book-ends the show at beginning and end, involves Jim Cramer making recommendations of stock. Since he is picking these himself, I assigned greater weight to them and “invested” $100,000. The other kind of segment is the lightning round, where Jim Cramer takes a lot of phone calls in quick succession and gives the caller advice on whether or not they should buy a particular stock. Since Jim Cramer isn’t generating these stocks themselves I gave them a lower weight, but for the ones that he did recommend buying I “invested” $50,000.

I did this for three separate days and then waited until today, periodically checking the portfolio based on Jim’s recommendation to see how he did. His best performing stocks were Charter Communications (CHTR) (+49.7%), Transocean Inc. (RIG) (+44.2%), Ludin Mining Corporation (LMC) (+37%), and Joy Global Inc. (JOYG) (+36.7%). His worst performing stocks were MRV Communications Inc. (MRVC) (-28.7%) and Melco PBL Entertainment (Macau) LTD. (MPEL) (-28.8%). See below for the full results.

Overall he didn’t do too badly. If you wanted to invest based on Jim Cramer’s advice, you need to figure out your risk tolerance. If you just buy a few stocks your risk is going to be pretty high — you could earn a lot, like if you had bought CHTR when he recommended it, but you could also lose a bit too, like if you had bought MRVC. And just going by the strength of his recommendations at the time, there would’ve been no way to know. If you were to buy more stocks, kind of like how my experiment went, it’s basically like taking a random sub-section of the market, and you’d be about as well off if you simply just bought an index-tracking fund.

Next up, I plan to continue running this experiment, but more rigorously. I’ll “buy” more of his stocks from more days of the show, and I’ll also run a separate portfolio to track how well the stocks that he didn’t recommend buying are doing. After all, if he is accurate about those, you could stand to make a bit of money by shorting the stocks he doesn’t like.

Mad Money evaluation

2 Responses to “Jim Cramer’s Mad Money does about as well as the market”

  1. Jeff V Says:

    Any chance you could do an update to this post?

    I’ve thought about doing something like this but it would be tough because he talks about so many stocks over the course of a week or so. Plus down the road he will change buy orders to sell orders as the facts surrounding the stock changes.

  2. Cyde Weys Says:

    Thanks for reminding me about this. I’ve written an update.