Jim Cramer's bad bets

By Barron's

Thanks to his daily CNBC show "Mad Money," Jim Cramer has become the chief cheerleader for the bull market, or what was the bull market until a few weeks ago. Last spring, he was giddily exhorting the Dow Jones Industrial Average ($INDU) toward 15,000, with no troubles in sight.

Earlier this month, as the Dow tumbled in the direction of 13,000, he had an on-air meltdown, complete with screaming, sobs and predictions of financial doom. The clip quickly made the rounds on YouTube.

• Video: Cramer's meltdown

On Friday, after the Fed cut the discount rate, he said that the Dow's run to 14,500 had begun.

With dramatic pronouncements like that, it's no wonder that more than 100,000 viewers tune in each weeknight for his antic mash-up of sound effects, Streetwise advice and stock picks.

It's those stock picks that caught our attention. Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market.

Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the Standard & Poor's 500 Index ($INX) gained 16%, according to a record of 1,300 of the CNBC star's "buy" recommendations compiled by YourMoneyWatch, a Web site run by a retired stock analyst and loyal Cramer-watcher.

• Talk back: Is Cramer a fraud or the real deal?

We also looked at a database of Cramer's "Mad Money" picks maintained by his Web site, TheStreet.com. It covers only the past six months but includes an astounding 3,458 stocks -– "buys" mainly, punctuated by some "sells." These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.

When we asked Cramer and CNBC for their own records of "Mad Money" stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test.

They complained that the list from YourMoneyWatch contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a "buy" or "sell" decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.

CNBC: Wait a week

CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational and not just about stock picking. In the end, they said we should focus only on the tiny universe of stock selections -- about 12 a week -- that Cramer researches the most.

And we should do it only for the issues picked this year. CNBC analyzed these stocks and said that if held for one month, they beat the S&P by 0.8 percentage point, or 1.7 points after two months. They offered no year-to-date results.

We analyzed those stocks ourselves and, as in all our calculations for this story, relied on Patrick Burns, a statistical-computing expert in London who consults for hedge funds and major investment firms.

It turns out that CNBC did its analysis incorrectly and that the stocks beat the S&P by 0.4 percentage point in one month and 1.2 points over two months. CNBC measured the stocks' performance against the average performance of the S&P year to date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren't held for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically significant 2.2 percentage points through last week.

Continued: Selling Cramer short

 1 | 2 | 3 | 4 | next >