Tuesday, August 25, 2009

Cramer is Harmless

Professors Paul Bolster and Emery Trahan of Northeastern University in Boston recently concluded and published a 33 page report examining the popular CNBC Television program Mad Money with Jim Cramer. The program is the most watched program on CNBC and has an estimated 380,000 viewers tuning in per night.

The research looked at the effect that Cramer had on the stocks he mentioned on his show, and the research also examined the success rate that Cramer had in choosing stocks.

The results? Yes, Cramer beats the S&P500...but he does it through beta, not alpha. What does that mean? Well, it means he takes more risk...and therefore gets more reward...than the S&P500. The next question should be "Does Cramer beat an index with similar risk characteristics?" IE, by accepting the same risk tolerance, is a person better off following Cramer or buying an index? The answer is that the person is better off just buying an index...something like the Russell 1000 Growth, the Russell 1000 Value, and a bit of the Russell 2000 Growth. In other words, save the transaction costs, the frenzied buying and selling, the inanity of the television program, and just buy the index.

Cramer did not outperform a similarly styled index, nor did he underperform it by much. He evidently has no stock picking ability, nor is he especially dangerous. As Professor Bolster stated in his conclusion: "He's harmless."

No comments: