I don’t usually publish guest posts but today I’m going to make an exception. The following post was submitted to me by John Hinchey of H and K Services. This is NOT a paid post. Also, please feel free to leave a comment about your impressions of Cramer’s Mad Money.
Jim Cramer’s nightly “Mad Money” program has a huge, and expanding following and not just among traditional investors. According to a January 14th story in the Boston Globe:
“If ‘Mad Money’ is a business primer, it’s a crash course designed for the ADHD set. Cramer has a penchant for madcap props — he has eaten cereal drenched in soda pop and worn diapers to drill in a point — and he presides over a busybox of noise machines, pushing buttons like a crazed suburban father. His bulging-vein energy, along with his ability to move markets with yelped suggestions, has drawn the ire of Wall Street traditionalists.
But among college students, Cramer has developed a cult following since the show began broadcasting in March 2005. “Mad Money” is CNBC’s top-rated show among 18- to 54-year-olds — something that surprised the show’s producers when they first noticed that college students were calling in. About 60 colleges have asked to be part of an occasional tour that has broadcast from Harvard, the University of Michigan, Columbia, Georgetown, and Boston College.”
Cramer seemingly has inexhaustible knowledge of the corporate world, he provides self initiated recommendations and is always able to deliver a relevant comment and guidance on live caller’s queries regarding specific companies. But just how valuable is this entertaining advice? We went back and analyzed all of the ‘Buy/Sell’ recommendations Cramer made on ‘Mad Money’ during 2006 – the results are stupefyingly mediocre? For example, Cramer made just over 4600 ‘Buy’ recommendations in calendar year 2006 that could be evaluated (some stock symbols he put forth are not currently recognized by Fidelity, Yahoo, and MarketWatch, the quote services used in this study) which, if followed to the letter, yielded a paltry net return of 3.36% through March 1, 2007. Annualized, this ranks behind even good money market funds. More discouraging, this result was obtained using a pricing algorithm most favorable to Cramer. The basis for stock ‘Buys’ in this series of computations were market closing prices on the show date i.e., BEFORE Cramer’s picks aired. Moreover, this under performance occurred in a sustained up-market where stock and bond funds worldwide gained 12.94% on average according to Morningstar.
As described the ‘Basis’ for all stock ‘Buy’ recommendations were at the closing market price on the show date. In general, the ‘Market Value’ was the closing price of the designated date which, in the above instances, was March 1, 2007 before the big correction. If, however, Cramer made a ‘Sell’ recommendation for a previous ‘Buy’, the ‘Market Value’ was the closing price on the ‘Sell’ show date.
Perhaps the stocks he recommended received a short term up tick from a positive mention by Cramer? Not according to the data. If all stock ‘Buys’ are sold at a fixed short term interval the up-tick should be apparent. For the same period (Jan 1, 2006 through December 31, 2006) we calculate:
This indicates, for instance, if every stock endorsed by Cramer was purchased at the last price on the show date and then sold 5 days later a only a 0.72% return would accrue for the year, even without consideration of the Buy/Sell commissions!
‘Mon Back’ Picks
Cramer assigns a special tag to stocks that are especially attractive to acquire at times, the ‘Mon Back’ or ‘Back-Up-The-Truck’ designations. For 2006 we found 106 of these strongest ‘Buy’ recommendations and again, valuing this aggregate portfolio as of March 1, 2007, the computed return is 4.90%
‘Special Mention’ Picks
‘Special Mention’ is another attribute assigned to Cramer’s picks of escalated significance. For 2006 he ascribed this ranking to 1415 ‘Buy’s that could be rated. They did the best achieving a 5.85% return; again, however, this was over a fourteen month period (January 1, 2006 – March 1, 2007). Annualized it amounts to 5.01%.
Good Months and Bad
In our study we did find good months and bad months but it is pretty much a crap shoot. Here are the results for each month of 2006 using a ‘holding’ period of thirty days:
Because of the market correction in early March we are not reporting results for the first quarter of 2007 but will provide an update later in the year.
Jim Cramer’s enthusiastic predictions were initially viewed as a potentially valuable investment decision-making tool but cursory follow-up indicated caution was appropriate. Hence the in-depth analysis leading to the conclusion that, at least so far, there is little gold in that mine. We solicit and welcome any and all or your personal experiences, observations, and comments.
It seems in this case you get what you pay for!
John A. Hinchey
Pres. H&K Services, Inc