Wharton students challenge Jim Cramer's stock predictions

Jim Cramer is a familiar figure in the financial world. The “Mad Money” host and bestselling author has made a name for himself picking stocks. However, a new study by two Wharton students suggests that Cramer’s recommendations may not be all that useful to investors hoping to beat the market.

The paper, published by Wharton graduate students Jonathan Hartley and Matthew Olson, investigates the performance of one of Cramer’s stock portfolios over a 15-year period. The findings indicated that Cramer’s “Action Alerts Plus” portfolio returned 64.5 percent cumulatively since its inception in 2001, versus the S&P 500’s 70 percent, after adjusting for the reinvestment of dividends.

“One factor that likely led to the portfolio’s underperformance in the years following the Great Recession was Cramer’s large cash position and the associated underexposure to market returns,” Hartley said. 

In good times such as the big stock market run-ups of 2012, 2013 and 2014, any idle cash causes the investor to miss out on some of the upside.

“The main purpose of the study was to provide more transparency,” he said.

The students wanted to hold Cramer accountable for his recommendations, which often appear on television. While traditional financial advisers tend to report their performance to their clients, Cramer and other TV personalities don’t necessarily encounter the same level of examination.

Investors can obtain access to Action Alerts Plus via a newsletter service. The $15-per-month subscription includes stock market commentary from Cramer and information about the portfolio’s holdings.

The publishing of the research paper, which was timed with the theatrical release of “Money Monster” starring George Clooney, quickly received attention among financial news outlets. Cramer responded to MarketWatch, explaining that his subscription service was mainly for educational purposes.

Cramer told MarketWatch that he has “never promised outperformance.”

The question remains whether investors can truly benefit from a subscription service such as Cramer’s. Many of his viewers are novice investors and a sizable fraction may not fully understand the importance of diversification, Hartley explained. However, the study showed over the last 15 years, ignoring expenses, investors would have been better off being in the average mutual fund than mimicking Cramer’s portfolio.

While other studies have attempted to investigate Cramer’s stock-picking abilities, this is the first to include data from post-financial crisis years. Throughout the research process, Hartley and Olson received feedback from Wharton faculty, including professors Robert Stambaugh, Michael Roberts and Krista Schwarz.

“The Wharton faculty are definitely very encouraging of research whether it is through research-assistant work or independent study in our case,” Hartley said. “In addition, the faculty really go out of their way to make themselves available.”

Olson agreed, adding even undergraduates can take advantage of the various research opportunities at Wharton.

“A lot of professors are willing to sit down and explain what they are working on,” Olson said.

Hartley and Olson both attended the University of Chicago during their undergraduate years and worked together at the Federal Reserve Bank of Chicago. Since coming to Wharton, the two have become close friends.

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