Do Performance Claims Really Add Up?

Jason Zweig, well-known author of “The Intelligent Investor” column at The Wall Street Journal, recently checked out the claims of market-beating performance in marketing materials from a range of market commentators.

For example, Jim Cramer’s newsletter was reported by Zweig as stating that his stock picks generated returns more than twice the performance of the S&P 500 Index from Jan 1, 2002 to April 1, 2011. Over this period, the newsletter described Mr. Cramer’s performance as generating 39.2% vs.15.5% for the S&P 500.

Mr. Zweig noticed, however, that in Mr. Cramer’s performance comparison, the returns cited for his stock picks included dividends, while the returns cited for the S&P 500 Index (over the same period) did not. When he accounted for dividends accrued with the S&P 500, the S&P 500 actually returned of 38.3% in that same period.

Mr. Cramer’s stated performance still beat the S&P 500 Index — but only by 0.9%.

Zweig’s article states that an investor following Mr. Cramer’s portfolio would have to make between 700-800 trades per year. Needless to say, it takes a lot of time to trade 700-800 times a year and it costs a lot in brokerage fees to make 700-800 trades a year. And then there are the tax implications of making 700-800 trades a year. According to Zweig, investing in an S&P 500 Index Fund will be much more tax efficient than turning over a portfolio at this level.

It is undeniable that Mr. Cramer has a large following, but there are those who are concerned about how this kind of approach will impact the financial well-being of the individual investor. David Swensen, the famed head of Yale’s endowment has written about these concerns in “David Swensen’s Guide to Sleeping Soundly,” published this month in the Yale Alumni Magazine.

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One thought on “Do Performance Claims Really Add Up?

  1. Pingback: Hedge Funds: The Emperor’s New Clothes? « Portfolio Investing Blog: Portfolioist

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