Study Says Jim Cramer Beat The Market, Sort Of The host of CNBC's Mad Money outpaced the S&P 500, research shows. But the finance professors who tracked Cramer's advice say his returns look less stellar when you factor in his love for risky bets.
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Study Says Jim Cramer Beat The Market, Sort Of

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Study Says Jim Cramer Beat The Market, Sort Of

Study Says Jim Cramer Beat The Market, Sort Of

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STEVE INSKEEP, host:

Now, it is hard to predict which of these national security heavyweights will win in the end. And it's also hard to pick winning stocks, which does not stop people from trying.

(Soundbite of TV show, "Mad Money")

Mr. JIM CRAMER (Host, "Mad Money"): It is time. It's time for the lightning round. (unintelligible) Oh, boy. (unintelligible)

INSKEEP: Oh, that's Jim Cramer, host of CNBC's super popular show "Mad Money," dispensing a steady stream of buy and sell recommendations. Two finance professors have analyzed Mr. Cramer's stock picks, and they discovered that he's not totally mad. NPR's David Kestenbaum reports.

(Soundbite of TV show, "Mad Money")

Mr. CRAMER: Hey, I'm Cramer. Welcome to Mad Money. Welcome to (unintelligible).

DAVID KESTENBAUM: On a typical show, Jim Cramer runs around on the set in a tie, sleeves rolled way up, taking calls from investors wanting advice. When he needs a sound effect, he pounds oversized buttons.

(Soundbite of TV show, "Mad Money")

(Soundbite of horn)

(Soundbite of rooster)

Mr. CRAMER: It's a perfect time to examine what could go wrong with this market.

KESTENBAUM: Cramer has become a national figure, which got Paul Bolster and Emery Trahan interested. They're finance professors at Northeastern University, and, let's be honest, they watch "Mad Money" very often.

Professor PAUL BOLSTER (Finance, Northeastern University): I can't say that I'm a regular viewer.

Professor EMERY TRAHAN (Finance, Northeastern University): Mostly at the gym, on the StairMaster.

KESTENBAUM: Scores of people do watch Cramer, though, and follow his advice. So Bolster and Trahan decided to analyze Cramer's stock picks. Bolster, for his part, had his doubts Cramer would come out very well.

Prof. BOLSTER: I thought that this guy really is - he's a spectacular entertainer. He attracts a lot of people. He gets a lot of interest, and probably attracts a lot naive investors along the way who pretty much do whatever he says.

KESTENBAUM: In their study, Bolster and Trahan considered an imaginary investment account. When Cramer said buy…

(Soundbite of TV show, "Mad Money")

Mr. CRAMER: Pull the trigger. The fundamentals that enhance it are on fire.

KESTENBAUM: They put that stock in the portfolio. When Cramer said sell…

Mr. CRAMER: Now, sell, sell, sell, sell, sell. Run, don't walk, and sell that stock.

KESTENBAUM: They took the stock out. Bolster and Trahan haven't finished analyzing the recent market crash. But over two and a half years, from mid-2005 to 2007, Bolster says Jim Cramer beat the major stock market benchmarks, including the Dow and the S&P 500.

Prof. BOLSTER: His return, the annualized return over the period we looked at was a little over 12 percent, versus the S&P, which turned about 7.4 percent over the same time.

KESTENBAUM: Wow, that's pretty substantial.

Prof. BOLSTER: It is quite substantial.

KESTENBAUM: Twelve percent compared to 7 percent. But that comes with an asterisk that makes the results a lot more ordinary. Cramer beat the stock market, but he did it by taking on more risk. It's what you might bet by buying the stocks of smaller companies. On average, they grow faster, but there's a lot more up and down. Think about it this way: You can get somewhere faster by driving 100 miles an hour. But that comes with greater risk: every once in a while, you'll hit a tree.

And by this measure, Cramer's risk-adjusted return is exactly what you'd expect. He is, they conclude, neither extraordinarily good nor unusually bad. He is harmless.

Prof. BOLSTER: I don't know how he'd think about being interpreted as a harmless guy. But say, in the end, that's probably one way to interpret this study that we've got.

KESTENBAUM: What does the literature say to you, and what is your conclusion after all these years about whether or not people can pick stocks and beat the market consistently?

Prof. TRAHAN: You can't do it.

Prof. BOLSTER: It's just an awfully tough thing to do when you're competing against people with very similar information and very similar incentives.

KESTENBAUM: We called Jim Cramer, and he declined to be interviewed. But then just this week, he mentioned the study on his show.

Mr. CRAMER: Studies done by two professors at Northeastern, Paul Bolster and Emery Trahan, I don't know them. It shows, among other things, that my performance between July 25th of 2005 - right after this show started - through December 31st of 2007 was, well, excellent.

KESTENBAUM: Cramer talked about how the study said he'd beat the market, but he didn't mention the extra risk or that his performance wasn't really so surprising.

David Kestenbaum, NPR News.

(Soundbite of music)

INSKEEP: David Kestenbaum is part of NPR's Planet Money team. You can see a video of Jim Cramer responding to the study of the stock picks along with our Planet Money blog and podcast at npr.org/money.

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