Barron’s Points Out Cramer’s CNBC Performance Fails to Impress

A very interesting cover story in Barron’s this week about CNBC market guru Jim Cramer and the track record of his investment recommendations on his nightly television show, Mad Money. Essentially, Cramer’s picks were found to have lagged the market over the last two years. While certainly not surprising to professionals, many retail do-it-yourself investors need to be aware of this story.

I wanted to write about it because I get a lot of emails asking about certain stocks, and very often the inquiries I get coincide exactly with new Cramer picks. Given Cramer’s successful stint as a hedge fund manager, many may be surprised to learn that his picks don’t perform well at all relative to the overall market. However, there are reasons this should not be very surprising.

The most glaring that I can think of is that Cramer needs to fill an entire hour of television time five days per week. That means he needs to come up with a handful of “great, new investment ideas” each and every day. Logic should tell you that there simply aren’t that many great investment opportunities. How much confidence do you think he truly has in every pick he highlights on his show? He might not concede anything himself, but watchers of his show should keep in mind that making so many picks almost ensures that you get a good mix of bad ones to go along with the good ones. You really can’t expect anyone, Cramer included, to post market-beating results while giving out so many recommendations.

You should also keep in mind that Cramer is no longer in the hedge fund business, he’s in the entertainment business. He wants to bring in viewers and in trying to do so, he needs to make it interesting so people keep coming back. In doing so, it would not be surprising to think he might try and get viewers a little more excited about his picks than is warranted. In trying to boost his ratings, it is understandable that he might cheer lead a little bit more than the typical market professional. Not surprisingly, this might set his picks up for disappointments on the performance front.

I’ll leave this topic with one more point about Cramer. To his credit his record at Cramer Berkowitz, his hedge fund, was very good. I believe his investors’ returns net of fees were around 24% annually, or something in the mid twenties (I read his autobiography, but it was awhile ago). This number, on the surface, appears to be excellent. However, keep in mind a couple things about that figure.

First, Cramer ran his fund from the early 1980’s through the 1990’s. Essentially, his time running money professionally overlapped exactly with the greatest bull market our country’s stock market has ever seen. I believe the S&P 500 compounded at around 15% per year during his hedge fund days. So, it’s not like he was making 20-something percent during a time when making money was difficult.

Second, if you read his autobiography, Confessions of a Street Addict, you’ll learn that he made a lot of that money in some pretty interesting ways. Since he was a big player, he made tons with IPO share allotments that he was allowed to flip on the first day of trading, which amounted to free money with little risk. In his book he also talks about how he would get word of analyst upgrades and downgrades before the information was made public to everyone, because his firm was a big client of the investment banks who issued sell-side reports.

If you factor in the market averaging 15% and throw in the other ways in which Cramer was able to make money for his clients with very little effort or insight, you might understand a bit more why his picks on Mad Money have left much to be desired. If you want to learn about the market and be entertained, Cramer can have a lot to offer. For stock picks though, I would not suggest you tune in for that reason alone.