How to Watch Mad Money

Only pay attention when Jim Cramer is talking about small cap stocks.

Two grad students at UC Santa Barbara, Bryan Lim and Joao Rosario, evaluated a year-and-a-half's worth of the Mad man's picks on his nightly CNBC show. They took note of whether the buy or sell recommendations was brought up by a caller or by Cramer himself. They also broke the stocks down by capitalization (small, medium, large).

Overall, they found that his forecasting ability is "favorable":

Mid- and large-cap post-pick excess returns are generally of the correct sign, though the magnitude of these returns is relatively small. Where Cramer displays the most ability is with small-cap stocks, in both his caller and non-caller picks

When they adjusted the stocks by size and industry, Lim and Rosario found that his picks generated the best return when they were small-cap non-caller stocks. (These garnered a 1.9 percent overnight return.)

Long-term returns for stocks asked about by callers were negative, suggesting people were inquiring about over-valued and/or "hot" stocks.

The graphs below from the paper break out Lim and Rosario's results. Somethings to keep in mind: "decile" 1 to 5 represent small-cap stocks, 6 to 8 are mid-cap, and 9 and 10 are large-cap. And the numbers on the x-axis start at 20 days before when the pick was made.

As you can see, small-cap stocks outperform Cramer's others picks.

But, in the end, the best bet might be a contrarian one: "the highest returns are associated with long positions in small-cap non-caller sells."

Lim and Rosario also include this caveat:

Any conclusions to be derived from the preceding analysis of Cramer's stock picking ability must be considered incomplete, as Cramer's recommendations are generally too nuanced to be captured by the simple strategy implied by our examination. Like most professional
stock pickers, Cramer consistently advocates an active trading style, sometimes indicating price targets, and the simple buy-and-hold strategies in this paper are unable to capture the trading strategies presented on his program with any precision. Unlike most professional stock pickers, Cramer does not have the luxury of selectivity.


Whereas his financial sector counterpart may be content to recommend a portfolio with a relatively small number of stocks, Cramer must consistently generate new picks in order to remain relevant. Even if it were the case that Cramer's preferred portfolio consisted of, say, fifty stocks, the laws of television dictate that he must advocate hundreds more on his program. In this sense, one must handicap Cramer's forecasting ability with respect
to similar studies of mutual- and hedge-fund managers.

Related:

• Can You Make Money From Jim Cramer's Picks?