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Friday, July 03, 2009

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Jim Cramer's Mad Money Recap

Thursday, July 02, 2009
Surviving A Tough Market: "It's OK to sell stocks in a down market," Jim Cramer told viewers. "Just don't sell everything," he said, as he outlined his rules for surviving a tough market. Cramer told viewers that they should never be afraid to sell stocks when the market turns sour, but they need to exercise discipline, and never panic into selling everything. Over the last few months, he's been advocating that investors secure what money they may need in the next five years.

If investors are buying a house, paying for tuition, or even buying a car over the next five years, it may be prudent to secure that money now. Take the money out of stocks, he said, and keep it in cash or equivalents so you can sleep comfortably at night. But there's another reason to sell stocks, said Cramer, and that's to have money to buy them back cheaper. "The worst markets make the best buying opportunities," he said.

The chance to buy stocks at Dow 8,000 is a great opportunity that investors may never see again. Only by selling stocks into strength will investors have the money they need when the bargains reveal themselves. For retirement savings, however, Cramer advised against selling. Retirement, he said, is for the long term, and that money should stay in stocks. "We go through bad spells," said Cramer, "it's happened before and it will happen again."

Wednesday, July 01, 2009
The Methods Of Cramer’s Madness:   Jim Cramer continued filling viewers in on the methods of his madness - all the little tricks and tools he uses to pick stocks, to know when to buy and sell, and generally to be a great investor. He started off by giving people a "rainy day" tip for when the market is having a really bad, down day. "What you need to be looking for after a down day is buying opportunities," Cramer said. There is no better opportunity to buy than when you find a stock that's been upgraded by some analyst on a down day.

Usually when a stock gets upgraded, it jumps higher immediately, he said. But not when that upgrade comes out on a bad day for the market. "On those days, a stock that gets upgraded isn't going higher. In fact, there's a good chance it will go lower depending on how awful the action is," Cramer said. "And there is your opportunity -- the day after the selloff, when things have calmed down and are less negative," he said.

Another method to his madness, Cramer said, has to do with how he determines if an individual stock is truly undervalued. "People like to throw around terms like over- or undervalued," but Cramer said he has his own rule of thumb for figuring it out. "If a stock has a price-to-earnings multiple -- remember E (the earnings) times M (the multiple) equals P (the price) -- that's lower than its growth rate, then that stock is cheap," Cramer said. "If a company has 10% growth but trades at eight times earnings, this rule says it's cheap. If it has 10% growth and trades at 10 times earnings, it's still dirt cheap."

However, a stock with 10% growth and a 20 multiple is a stock that market players should take profits in, he said. Any stock with a multiple that's more than twice its growth rate is too expensive. At the same time, Cramer warned viewers that like any of his methods, this one is a rough approximation. "It's useful, but it's not always right," he said. "A lot of times a stock will get cheap, based on its earnings estimates, because those estimates need to be cut." "Plenty of inexpensive-looking stocks are actually quite pricey if the fundamentals are declining, and the earnings are going to miss the estimates," Cramer explained.

"It's the same at the top of the price range, but less dangerous: A stock that's trading with a multiple that's twice its growth rate looks expensive, but if its earnings need to be revised higher, its multiple will come down, and it has more room to run," he said. While the market is "too dynamic" for there to be any hard and fast rules to define how the growth affects a stock's price, there are some important points that come out of the connection, he continued. The most important is that stocks with accelerating growth, be it sales growth or earnings growth, are worth more than stocks with decelerating growth.

Tuesday, June 30, 2009
Keys To Sound Investing:    Cramer said investing is all about discipline. It's not enough to know which parts of the market are working or which stocks are buys and which ones are sells. The key to successful investing, Cramer said, is to know thyself. Far too many people invest like gamblers, said Cramer, and not even good gamblers. "Investing isn't a game and it's not random," he said. Investors need a plan and they need to stick to it. Understanding what you're doing and why is the key. Understanding your own weaknesses and removing emotion from the equation are also crucial, but very hard, skills to master, said Cramer.

Cramer recommended investors be honest about why they're buying certain stocks. Only by having a good understanding of why you think a stock will go up, will you then know when it's time to sell, he said. "Never turn a trade into an investment," he reminded viewers. "Be honest about your expectations, clear about your plan, and willing to abandon ship the moment those expectations are not met," said Cramer, "then you'll make yourself a lot of money."

Comfort Zone:   "Know what kind of investor you are and stay away from stocks that make you uncomfortable," was Cramer's second lesson in knowing thyself. Not all stocks are for everyone, he said, and all stocks are not right for every purpose. For younger investors, Cramer said its OK to speculate and take more risks. For older investors, income and capital preservation should be on the menu. But that does not mean however, that every young investor should be a risk taker or that every retiree shouldn't speculate.

Speculation, said Cramer, should be a part of every balanced portfolio. He said investors who are able to dedicate one hour per week per stock should speculate with a portion of their portfolios. Sometimes, however, the market tells us not to speculate, he said. Bear markets are one of those times. So whether it's a slow moving value stock or a volatile growth stock, Cramer said investors should look for stocks that make them comfortable and evaluate them.

Monday, June 29, 2009
How To Avoid Stock Market Losses   One way to avoid huge losses is to pay attention to a stock's price/earnings multiple and look for multiple contraction, a period when the market decides it's just not going to pay a high premium for a certain stock. When a stock catches a case of multiple contraction, it only gets cheaper and cheaper, as the market decides it's willing to pay less and less for a company's future earnings. But investors needn't worry too much, as there is often time before the symptoms of multiple contraction set in.

Cramer used Whole Foods (WFMI Quote - Cramer on WFMI - Stock Picks) as an example of multiple contraction. On July 31, 2006, Whole Foods, a high-flying, high-multiple stock, reported earnings with just a hint of negativity in their same-store sales growth. For the next two years, the stock just drifted lower and lower as investors decided Whole Food just wasn't worth the multiple they were giving the company. Cramer said his bottom line is that investors need to sell high- multiple names at the first sign of a slowdown.

Protect Yourself: Cramer said his last rule for staying in the game is to know your broker. "Some brokers will rob you blind," he said, "and you're probably handing them your wallet." Cramer explained that many amateur investors make the mistake of placing market orders, which get placed at whatever the current price of a stock is, rather than limit orders, which specify a price that the investor wants to pay.

Cramer pleaded with viewers to always use limit orders. He said that by using limit orders, investors can get way ahead of the pack, adding there's absolutely no risk in using them. Limit orders, he said, are the only way to know a broker's not cheating you.

** This web site is not affiliated with Jim Cramer or CNBC. The information presented here is transcribed from the Mad Money program on CNBC. While every effort has been made to prevent errors, accuracy of information cannot be guaranteed. None of the information contained on this web site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.