Jim Cramer’s stock picks do not weather market downturns well

A year ago, I was just getting into watching Jim Cramer’s show on CNBC Mad Money, and I decided I would run a little experiment to see how well his stock picks performed. I analyzed the data five months later in July and it turns out he did pretty well, out-performing the Dow Jones Industrial average by just a hair over 1%. In the investing world, if you can beat the indexes reliably, you’re doing a damn good job. So I was impressed. But if you’ve been paying any attention at all to financial news since July, you’ll know that lots of important things have happened since then, like the bust in the home prices bubble and the neutron-star-caliber implosion of the subprime lending industry. It’s easy to outperform in a bull market simply by being over-exuberant, but when a bear market hits, that same outlook can cause you to fall, hard. So I took another look at how Jim Cramer’s picks fared since then. Spoiler alert: It isn’t pretty.

The same group of stocks that I analyzed in my first experiment, that was originally up 9.7%, is now down a grand total of 17.2% since February 2007. In that same time period, the S&P 500 has only decreased from 1,450 to 1,350, or 6.9%. Jim Cramer’s pick underperformed the market by a whopping 10.3%. That is bad. It looks like his stock picking strategies, which worked advantageously in good market conditions, went to hell with the first market downturn. See below for the full portfolio with all of the picks included.

But that first experiment wasn’t quite rigorous enough. I had “bought” a lot of stocks that Jim Cramer merely recommended in his Lightning Round segment. These stocks are chosen by callers to the show, and Jim Cramer has to deliver a verdict right on the spot, without being able to research them. So I’ll give him a break on his Lightning Round segment picks. That’s why I started a second portfolio in August including just the stocks that Jim Cramer personally recommended in the other segments of his show, the stocks that he researched thoroughly. These picks were supposed to be better, right?

So why did a portfolio consisting of only his hand-picked stocks fare even more poorly than the portfolio that also contained his Lightning Round picks? His picks from August have declined a staggering 20.6%. In that same time period, the market has only declined from 1,430 to 1,350, or 5.4%. He underperformed the market by 15.2% in 7 months! That is one hell of a feat. One wonders if only the hedge fund managers performed more poorly. See below for the full portfolio with all of the picks included.

So what have I learned? Don’t trust Jim Cramer’s stock picks! You should watch his show for the educational content only (and he does know a lot about the business). He himself admits that the stock picks are more for the entertainment value and to keep people watching while he beats them over the head with financial markets education. Stock picking is pretty much impossible to do correctly anyway. The stock market has zero rationality to it. So watch his show if you find it entertaining, but take the individual stock recommendations with a large grain of salt. It’s hard as hell to outperform the market, and because of the very nature of the market, if there was a consistent way to beat it, it would cancel itself out of existence, because the market’s prices would correct to account for it.

And now for the caveats. My sample sizes, especially on the second experiment, were admittedly small. I would love to see a more rigorous experiment tracking many more stocks. I simply grew tired of doing it, especially after I no longer found watching the show all that enjoyable (his personality can become grating after weeks of frequent watching). I generally entered the picks on the day of rather than five days later as he claims is best to avoid the post-show bounce, but I contend that it doesn’t matter. There is no consistent pattern that occurs with stocks after they are mentioned on his show; if there was, others would step in and take advantage of it until it no longer had any effect (ahh, the beauty of self-equalizing markets). And, because I lost interest, I did not sell any of the stocks when (or if) he suggested selling them — that would have required watching every show since August. Even though he does not recommend the buy-and-hold approach, that’s effectively what my experiment implemented.

In addition to an experiment with a larger sample size, I would like to see one in which every one of Jim Cramer’s recommendations is acted on, not just the buys. That would offer a more comprehensive overview of his performance. But where things stand right now, with such a hideous underperformance percentage below the index in times of financial turmoil, I don’t see how a more rigorous experiment could determine that he actually outperforms the markets. The error bars on my experiment may be large, but they are still dwarfed by the magnitude of his picks’ failings. Not a single one of the August picks I examined is even in the green!

And now for the portfolios (sorry about the screenshots, but I’m not going to take all that time to convert them into appropriate HTML for WordPress):

Experiment 1, Feb. 2007 – Feb. 2008
Jim Cramer’s first experiment

Experiment 2, Aug. 2007 – Feb. 2008
Jim Cramer’s second experiment

4 Responses to “Jim Cramer’s stock picks do not weather market downturns well”

  1. Cyde Weys Says:

    Incidentally, at the beginning of 2007, Jim Cramer predicted that the Dow Jones Industrial average would be at 14,600 by the end of 2007. It currently stands at 12,300. I would definitely say he’s guilty of being overly optimistic. Of course, the housing market downturn is what really killed his prediction, but in the long run, downturns happen fairly frequently. You need a stock picking strategy that performs well in all market conditions because all market conditions eventually do occur. A stock picking strategy that only performs well during bull markets is not sane investing.

  2. Jeff V Says:

    If I remember correctly, Jim Cramer is a former hedge fund manager himself (that might not be correct). This just shows once again that the markets are pretty darn efficient all things considered.

    I think hedge funds have become a country club investment tool. It is such a status symbol to be able to invest in a hedge fund (which typically has a minimum investment of 1,000,000 which usually is not available for liquidation for quite some time).

    It is also interesting to think that even in the time where Cramer was “outperforming” the market, his portfolio probably had a much higher beta (basically a risk coefficient) than the market’s beta of one because of he types of stocks he favors. So although he had a higher return I would imagine his risk to return ratio is much worse than the markets risk to return ratio for the same period.

    Thanks for the update!

  3. Lam Says:

    I enjoyed reading your article and I couldn’t agree more with you. I feel EXACTLY the same about Jim Cramer which is why I stopped watching him last year. Thank you for your data!

    Good luck and may you have a strong investing future.

  4. mlgreen8753 Says:

    Jim Cramer isn’t the most popular stock picker these days. I will rather go with my own pick in Mentor Capital (MNTR), which I have done the research on, than to listen to someone who is wrong more often than not according to the every blogger who’s followed his advice.