Do Jim Cramer’s Stock Picks Beat S&P 500 Index Funds?

Do Jim Cramer’s stock picks beat S&P 500 index funds? Jim Cramer is followed by millions of ordinary investors who don’t know much about investing. These people usually go for mutual funds where they pay an arm and a leg for mediocre stock picks. John Bogle was a pioneer in providing mediocre stock picks at rock bottom prices. An average investor will benefit by investing in Bogle’s index funds because they don’t have to pay an arm and a leg for this service.

Jim Cramer provides an alternative to mutual funds with his stock picks. Most mutual funds imitate S&P 500 index and make a few high conviction bets, so their overall performance isn’t much different than the S&P 500 index (it is lower because of the excessive fees they charge). Do Jim Cramer’s stock picks beat S&P 500 index funds? According to two Northeastern University professors the answer is YES. Jim Cramer’s stock picks beat the S&P 500 index by 13 percentage points between July 28, 2005 and December 31, 2007. Jim Cramer’s stock picks had an annualized return of 12.1% vs. 7.35% for the S&P 500 index in the same time frame.

Even though it is a short time period to evaluate a stock picker’s skills, the time period for this analysis is picked randomly. Jim Cramer made 1344 buy recommendations during this short time frame. If Cramer’s performance in other time periods is similar to his performance in 2005-2007 period ordinary investors might be better off by switching from Bogle’s S&P 500 index funds to Cramer’s stock picks.

This doesn’t mean that Jim Cramer has any alpha though. We will discuss Jim Cramer’s alpha later.