Do the stock recommendations of guru Jim Cramer on CNBC’s Mad Money move the market? Do they beat the market? In their May 2009 paper entitled “Investing in Mad Money: Price and Style Effects”, Paul Bolster and Emery Trahan examine the market impacts and performances of buy and sell recommendations made by Jim Cramer on Mad Money. Using daily closing prices for a sample of 1,387 clear buy recommendations and 534 clear sell recommendations from YourMoneyWatch.com [no longer active] spanning July 28, 2005 through December 31, 2007, they conclude that:
- Jim Cramer’s stock recommendations impact share prices as short-lived effects that reverse for buys but persist for sells, as follows (see the first chart below):
- The average abnormal return for buys is +3.6% for the 30 days leading up to the show and +1.9% on the day after the show, suggesting that Jim Cramer is reacting to prior information and momentum. These returns reverse by an average -2.0% over the next 30 days.
- The average abnormal return for sells is -2.0% for the 30 days leading up to the show and -0.7% on the day after the show, suggesting again that Jim Cramer is reacting to prior information and momentum. Over the next 30 days underperformance extends by an average -2.6%.
- The aggregate cumulative return for Jim Cramer’s recommendations over the the entire sample period before trading frictions is 31.8% (12.1% annualized), compared to 18.7% for the S&P 500 index (7.35% annualized). Applying a 1% one-way transaction fee ($9.99 on a $1,000 transaction) reduces the aggregate return on Jim Cramer’s picks to 22.4%, still moderately higher than buying and holding the market. Taxes would further reduce net return.
- Factor analysis suggests that beta exposure, the size effect, the value premium and momentum jointly drive the aggregate return for Jim Cramer’s recommendations. His tilts toward beta and small stock exposure are persistent, but he shifts from a value tilt to a growth tilt over the sample period.
The following chart, taken from the paper, shows average cumulative abnormal returns (CAR) for 1,339 buy recommendations and 528 sell recommendations made by Jim Cramer on Mad Money from July 28, 2005 through December 31, 2007. Day 0 is the day of the show during which the recommendation airs (after the market close). Results suggest that: (1) Jim Cramer reacts to momentum in making recommendations; (2) the market reacts to his picks; and, (3) buy recommendations subsequently reverse, but sell recommendations do not.
Prior research has indicated that these effects tend to be more pronounced for smaller firms.
Note that the study uses close-to-close calcuations of daily returns. A trader may therefore not be able to exploit the Day 1 effects due to gap responses to the recommendations after hours on Day 0 or at the open on Day 1.
The next chart, also from the paper, shows the dollar-weighted cumulative return (before transaction costs) over the entire sample period of a portfolio formed by investing $1 in each unique Jim Cramer buy recommendation and holding until he makes a matching sell recommendation. The number of stocks in the portfolio grows from six stocks on July 28, 2005 to 771 open positions on December 31, 2007 because buys generally far outnumber matching sells.
The chart also shows the performance of the value-weighted S&P 500 index for comparison. The dollar-weighted Cramer portfolio mostly generates higher returns with apparently higher volatility.
Note that this comparison does not take into account drags on the Cramer portfolio from (1) transaction fees; (2) the bid-ask spread; or, (3) the need to start with and maintain a reserve of cash for a growing portfolio. All three drags are likely to lower cumulative return on the Cramer portfolio materially.
In summary, evidence suggests that “while Cramer may be entertaining and mesmerizing to many of his viewers, his aggregate or average stock recommendations are neither extraordinarily good nor unusually bad.”
