Cramer’s Picks Under Perform the Market – Study

When you’re buying stock, the best advice is to listen to respected stock market analysts. But be careful to look for objective investing information you can trust.

Jim Cramer’s “Mad Money” on CNBC is currently the most popular stock picking advice show on the airwaves. Cramer has gained considerable fame and a large following because of his entertaining presentation and super confident stock picks.

But does Cramer’s advice actually work? Are you better off when you follow his advice? According to an article recently published on Barron’s website (Cramer’s Star Outshines His Stock Picks) there is no good evidence that Cramer’s picks outperform the market.

In fact, this is not the only study that shows that on the average Cramer’s recommendations under perform the market by most measures. From May to December of last year, for example, the market lost about 30%. According to different studies heeding Cramer’s Buys and Sells would have added another five percentage points to that loss.

Which is to say, following Cramer’s advice to the letter would have resulted in a greater loss than if you had just ignored it and put your money in an index fund.

One significant trend noticed in Cramer’s picks may explain the under performance of his recommendations. Along with a previous study done in 2007, the Barron’s article points out that Cramer’s bullish picks had actually risen about 4% in the two weeks ahead of his recommendation, while the bearish ones had dropped about 7%. This suggests the research team behind Cramer’s show may tend to default to momentum plays.

This seems like a reasonable strategy – go with the stocks that are rising, sell or stay away from those that are falling. In fact the study showed that when viewers followed this advice the day after broadcast they did better than waiting five days as Cramer himself usually recommends.

Nevertheless over the longer term those picks turned out to be losers relative to the market – perhaps because the market tends to even things out, correcting for those moves that took place before the recommendation.

These observations has led some analysts to suggest an alternative strategy: betting against Cramer’s picks. For example, University of Dayton finance professor Carl Chen came to the conclusion that you could make over 25% in a month by betting against Cramer’s buy recommendations by using what are called short-term in-the-money puts.

So maybe savvy investors can profit from Cramer’s advice after all. Just don’t wait to hear him telling you about it on his show.