Backtest

The following two tables show a comparison between a portfolio constructed of broad-index ETFs vs. a selection of stocks that Jim Cramer recommended between 23 August and 29 September 2005. The ETF portfolio is loosely based upon recommendations by Jeremy Siegel in his book “The Future for Investors.” Mr. Siegel recommends seeking a broad exposure to US markets… beyond simply the S&P 500 index. He also recommends a heaver than usual weighting in international equities. Categories for the ETF are LC:Large Cap, MC: Mid Cap, SC: Small Cap, mC: Micro Cap, REIT: Real Estate Investment Trust, Mat: Materials, EURO: European Index, PAC: Pacific Index, EM: Emerging Market.

The Jim Cramer portfolio was constructed using the following method. First, I decided to choose stocks to represent each of the 10 categories in Mr. Cramer’s August 2005 recommendation for a discretionary stock portfolio (see legend below). I reviewed my notes from the represented period and selected stocks that I had circled because of Mr. Cramer’s particular excitement about them at the time. Then I applied these companies to one of the 10 categories. Each category received an equal weighting in the portfolio. Both portfolios started with a hypothetical $100,000 so each of Cramer’s Picks categories had $10,000. If there was more than one company in a category, the amount was divided equally. Note that odd share amounts were purchased in order to make setting up the portfolio the easiest. Stock purchase prices were taken from the closing price on 30 September 2005. Final prices were taken from the closing price on 30 December 2005. If a stock received a dividend during the holding period, then the dividend was reinvested into the stock. No stocks were sold during the holding period. I did not take into consideration the commission and fees associated with selling securities.

The ETF portfolio ended with $103,626, taking into account the commission of $72 needed to buy the ETFs at $8 per trade. This represented a 3.6% gain for the period. The Cramer portfolio ended with $101,899 taking into account the commission of $280 need to buy the stocks at $8 per trade. This represented a 1.9% gain for the period. The Cramer portfolio therefore beat the ETF portfolio in this hypothetical example by $27.

Is this a fair comparison? Probably not! What should we take away from these results? Before we can answer that we must realize that this portfolio was constructed AFTER 16 December so the possibility for psychological bias is present. I did attempt to pick stocks that my notes had as most enthusiastic picks without consideration of current performance. But the only real way to do this would to have been to pick the stocks on 30 September. So, that’s what I’m going to do next. See below for a discussion of the 2006 portfolio we will track for the coming year. Nevertheless, we can observe some features about the two portfolios. Note that in the ETF portfolio, none of the selections achieved less than 0.4% return for the period. While the Cramer portfolio had much larger swings between individual stock performance. This is obvious and is to be expected but noteworthy nonetheless.

As I mentioned on the podcast MMM-001, it seems at first look that if we had simply placed stop loss orders on the Cramer portfolio of something like 7% or 10% then we would have cut our losers and been well ahead of the ETFs. What is missing from that logic, however, is the fact that a significant number of the winners would also have been stopped out because they too dropped significantly in the period before rebounding. While the results of that test are not shown here, the final number for that methodology returned -0.7% for the period.

Here’s the LATEST 2006 Cramer Portfolio. Watch this space for any changes. And be on the lookout for what price we got at the close of trading on the 30th of December!