Review: Jim Cramer Doesn’t Beat the Market

Jim Cramer is very… loud. He seems to have an opinion about pretty much anything related to finance. But that doesn’t mean he’s right.

Last week, researchers from Wharton released a working paper that looked at Cramer’s Action Alerts Plus portfolio. The results weren’t particularly pretty. The big headline is that the portfolio failed to beat the S&P 500 Index. Depending on how he pitched the portfolio, that may or may not be fair. But people certainly expected it to beat the market, and, well, for most people, the S&P 500 is “the market.”

But the researchers also ran a three-factor regression on the portfolio’s returns to sort out how the portfolio was doing on a risk-adjusted basis, and it’s basically the same story. The portfolio had a statistically significant negative alpha, so with the amount and type of risk taken in that portfolio, the model expected a higher return. In other words, his management actively subtracted value.

To be fair to Jim Cramer, these results aren’t all that different from any number of actively managed funds out there that I’ve run across. But this is a good reminder that:

  1. Active management doesn’t work, and
  2. The financial media is not your friend.

The financial media is not there to help you invest effectively and fund your retirement. They are there to sell ads, and the way to do that is to make a lot of noise (Cramer is very good at this). They hype every single movement and make it seem like the market is always on the brink of taking off or crashing. Sometimes both.

Stay focused on building a portfolio that will last for the long term. This means focusing on your risk tolerance, and taking the right sorts of risk. For more on how to do this, take a look at our ebook “Pursuing a Better Investment Experience.”


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