Swedroe: Don’t Go ‘Mad Money’

August 10, 2018

Unlike many other personalities in financial entertainment, Jim Cramer, longtime host of the popular CNBC show “Mad Money,” manages a portfolio that invests in many of the stock recommendations he makes on TV.

Established in August 2001, with approximately $3 million, the Action Alerts PLUS (AAP) portfolio has been the centerpiece of Cramer’s media company, TheStreet, which sells his financial advice, giving a subscriber base that numbers in the millions access to each trade the portfolio makes ahead of time.

In March 2005, upon the launch of Cramer’s “Mad Money” show, the AAP portfolio was converted into a charitable trust, adopting the policy that any dividend or other cash distributions would be donated to charity. Cramer lists himself as a co-manager of the AAP portfolio.

Thanks to Jonathan Hartley and Matthew Olson, authors of the study “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution,” which appears in the Summer 2018 issue of The Journal of Retirement, today we can review an analysis of the AAP portfolio’s complete historical performance. We can also glean some idea of how Cramer’s TV stock picks may have worked for investors who listened to them.

Study In Madness

Hartley and Olson measured the performance of the AAP portfolio against various asset pricing models, including the single-factor CAPM (market beta), the Fama-French three-factor model (adding size, or SMB, and value, or HML), the Carhart four-factor model (adding momentum, or UMD), and five- and six-factor models that add the quality factor (QMJ) and betting against beta factor (BAB).

Their study covers the period Aug. 1, 2001, the AAP portfolio’s inception, to Dec. 31, 2017. Following is a summary of the authors’ findings:

  • The AAP portfolio underperformed the S&P 500 Index’s total return both since inception and since the debut of “Mad Money.” From inception, the AAP portfolio provided a total return of 97% (4.1% on annualized basis), underperforming the S&P 500 Index’s return of 204% (6.8% on annualized basis).
  • Over the full period, the AAP portfolio produced a Sharpe ratio of 0.16, half the size of the S&P 500 Index’s Sharpe ratio of 0.32.
  • Relative to the CAPM, over its full history, the AAP portfolio produced an alpha of -2.92%, which was statistically significant at the 5% level.
  • When analyzing the period January 2005 to December 2017, and adding the size, value and momentum factors to market beta, Cramer has a statistically significant negative alpha between 3-4%.
  • The statistical significance of the negative alpha disappears when using the models that include the QMJ and BAB factors—the portfolio’s exposure to common factors explains its performance, not Cramer’s stock selections. The six-factor regression shows an alpha of 1.5%, though it was not statistically significant.
  • The AAP portfolio has less exposure to the market beta factor than the market overall, contributing to its underperformance relative to the S&P 500 Index. This can be explained at least in part by the fund’s policy to not reinvest dividends—it holds cash to make annual charitable contributions (and thus should not be a reflection on Cramer’s stock-picking skills).
  • The AAP portfolio shows evidence of exposure to small-cap stocks, growth stocks and stocks with low earnings quality (junk stocks).

The preceding findings on Cramer’s performance are consistent with those from prior studies.

Other Evidence

In their study “How Mad Is Mad Money?”, which appeared in the Summer 2012 issue of The Journal of Investing, Paul Bolster, Emery Trahan and Anand Venkateswaran examined Cramer’s buy and sell recommendations for the period July 28, 2005 through December 31, 2008. They also constructed a portfolio of his recommendations and compared it to a market index.

Their study covered 1,592 clear buy and 700 clear sell recommendations. They then assembled an equal-weighted portfolio. To try to capture prices available to the typical retail investor, they based their trades on closing prices on the following day. Stocks remained in the portfolio until there was a sell recommendation. They then adjusted the absolute returns for the portfolio’s exposure to the market beta, size, value and momentum factors.

Following is a summary of the authors’ findings:

  • Investors are paying attention, as the stocks returned an abnormal and statistically significant 1.88% on the day following Cramer’s buy recommendation.
  • The returns for recommended stocks were positive and significant for both the day of the show (0.38%) and the 30 days prior to the show (3.9%).
  • However, the returns were negative and significant, at -0.33% and -2.1%, for days two through five and days two through 30 following the recommendation. After 30 days, the results are insignificant.

The bottom line is that, over this period, Cramer recommended stocks with momentum, both positive and negative. His recommendations affect price, with the impact reversing quickly, consistent with pricing pressure caused by viewers jumping on his buy recommendations.

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