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Monday, January 05, 2009

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Jim Cramer's Mad Money Recap

Friday, January 02, 2009
Investing Mistakes To Avoid: Jim Cramer discussed several mistakes viewers should avoid when they invest. First, he said, investors need to understand the difference between an investment and a trade. A trade is when you buy a stock for some specific event, a catalyst. An investment, on the other hand, is based on a long-term thesis, "the idea that a stock has the potential to work over a long-time horizon." Cramer said it would unwise to sell a stock you believe in for the long term just because it's "gone up a lot off some catalyst." Doing so will lead you to get out before the best gains have arrived.

Cramer illustrated the point by talking about his youngest child's desire to buy a second Apple (AAPL) iPod. At first he couldn't understand why she should want another one, but then he realized the significance of the iPod as a "fashion accessory" and presto, that insight turned into an investment thesis for the stock. He bought Apple at $26 and enjoyed a huge run-up in the stock. Bottom line: Don't turn a good investment into a trade before your thesis has a chance to take the stock much higher.

Cheap Stocks: Cramer's second rule of thumb is to avoid speculating in cheap, low-dollar stocks. He said his single biggest loss ever in his Acton Alerts Plus charitable trust was in Charter Communications (CHTR), which he bought for $4 and ultimately cost him $130,000, when he had to eventually sell it at $2. "When we look at a stock with a share price that's under $10, we get taken in by that mystique of the single-digit stock," he said. The best way to deal with the situation is to apply his "multiply-by-10" test. "If the stock price were $40, and not $4, and everything else about the stock and the company was the same, would you still like the stock?" "If I had done that with Charter, which was drowning under the weight of its debt, I would've never bought the thing in the first place," he said. Cramer advised viewers not to be seduced by single-digit stocks. They're that low for a reason. "It's those very same low prices that attract us to stocks we otherwise wouldn't be buying."

Love at First Sight: Cramer told viewers not to go overboard on a new product. He made that mistake in 2006 when he fell in love with a stock called Citrix systems(CTXS). Some experts had told him the company had come up with a brand new product called "Go To My PC." Enthused by the product's potential, he jumped in and bought it for his charitable trust in the spring of 2006. Little did he know that the product had been around for three years when he bought the stock. The end result: he had to sell the stock 10 points lower. Cramer advised viewer to be careful of so-called new product offerings. "If it's been around for a long time, you're jumping on a bandwagon that's about to go over a cliff."

Mutual Funds: Cramer said he gets a lot of requests for people who want him to talk more about mutual funds. Personally, he thinks home gamers would be better off spending the time doing the homework necessary to pick individual stocks. However, for those who don't have the time for stock picking, he recommends getting into a "cheap" index fund that mirrors the S&P, with low fees. When you invest in a fund, he says, check out the performance of the manager, especially his long-term performance. "Any schmoe can make money in a bull market," he said.

Retirement Plans: Cramer says most investors think of 401K plans and IRAs as boring investments. But for people who want to live well in their golden years, these investments are important because of their tax savings, he said. That's because you don't pay taxes on the money that goes in; you don't pay taxes on dividends and capital gains as long as you keep them in the 401K or IRA; and you get taxed only once on the money as ordinary income when it's distributed in your retirement years, he said. He said investments in REIT stocks and royalty trusts are especially attractive because there aren't any taxes on their dividend yields.

Wednesday, December 31, 2008
Stay in the Game: You can't become a great investor by watching from the sidelines or giving up after a few losses; you have to be willing to get in the game and stay in it, Jim Cramer told viewers. He said it can be hard to keep one's head in the game, and as far as he's concerned there are three "forces" that keep people out of stocks: "boredom, bummers and brokers." Boredom, said Cramer, is a big problem. If market players are not interested in the stocks they own, they won't pay attention and that can lead to unexpected losses. "That's a recipe for disaster," Cramer said.

But as long as people invest well and stay interested, they could make a fortune, he continued. The one cure for boredom with investing is speculation, said Cramer, who believes people need to speculate if they want to be good investors. Speculation, he explained, means trading in a "high-risk, high-reward" stock and "trying to turn a little money into a whole lot of money in not a lot of time." Some might consider speculation to be foolhardy and "more immoral than gambling," but Cramer, who has made some of his biggest gains by speculating, believes speculation is good for investors.

"I'm telling you it's OK to speculate and make those risky investments that most of the talking heads frown on," he said. "And not only is it OK -it's entirely necessary. It's prudent and responsible." Usually when Cramer talks about diversification he's referring to it across sectors, but the principle is the same here. People who don't own some high-risk stocks are not really diversified, he said.

Because speculation can be really risky, Cramer cautioned that investors should only start once they understand the basic ground rules of speculating. First, never invest retirement money in speculation, he stressed. And second, don't ever have more than 20% of your non-retirement portfolio in speculative stocks. Cramer urged very conservative investors to put a tiny bit of their money into a speculative stock. "Make it 1% or 2% of your portfolio if you're that conservative, because trust me, that 1% or 2% will make the whole process of investing a lot more interesting," he said.

Tuesday, December 30, 2008
25 Rules For Defensive Investing: When it comes to investing, it's important to learn how to limit your losses, Jim Cramer said. He outlined 25 rules that he believes will help investors play the markets defensively to avoid big losses and keep their money safe.

1. Stay Diversified. Cramer said diversification is the only free lunch in investing. He advocated not having more than 20% of your portfolio in any sector and avoiding having "two-of-a-kind" at all costs. He recalled investors losing fortunes in the past when they sank all their money in hot stocks of the day such as dot.coms, telcos and energy merchandisers like Enron.

2. Buy and sell slowly. Never buy or sell a position all at once. he said. Instead, buy into a position slowly, taking advantage of weakness, and take profits on the way up.

3. Your first loss is your best loss. "If your thesis on a stock changes, take the loss and sell," Cramer told viewers. Don't let a trade turn into an investment by being afraid to sell. If the reason you bought a stock is no longer valid, you have to sell it, he said.

4. Dividends limit losses. Look for stocks that consistently grow their dividends year after year. As a stock's yield increases, it attracts new investors and helps limit the downside risk. You need only ask yourself, "Is the dividend safe?"

5. It's always good to have some cash. Professional investors always have cash on hand. Cash is a tool that should be used to buy quality companies after big market sell-offs.

6. Don't own too many volatile stocks. More than one volatile stock in a portfolio is not being diversified. Be honest and ask yourself if you can handle the wild price swings before investing in a volatile stock.

7. Know what you own. Knowing what a company does will help distinguish between a broken stock and a broken company and prevents panic selling.

8. Don't own low-dollar stocks. Stocks don't go to $2 and $3 a share because they're doing well. Speculating on low-dollar stocks can wipe out a portfolio.

9. Accounting irregularities equals sell. Stocks with accounting problems should be sold immediately and are off-limits until the issues are fully resolved.

10. Stay away for two good quarters following an earnings shortfall. It takes at least six months for a company to turn itself around after a big earnings miss. Investors should not wait it out.

11. When your broker stops talking about a stock, it's time to sell. Silence isn't golden when it comes to stocks. If your broker stops pushing a stock, its time to move on.

12. After a big run, get defensive. Check the S&P Proprietary Oscillator, a paid product, to determine if a stock is overbought or oversold. Plus or minus 5 is the key number to look for. Also check the Investor's Intelligence Bull/Bear Ratio, another great indicator of market sentiment on a particular stock.

13. If a stock's dividend yield is twice that of Treasuries, sell it. Dividends that reach that level should be a warning sign that the yield may be in jeopardy. There are two exceptions: oil tanker stocks, whose yield is based on their day rates, and master limited partnerships.

14. If a company has a new CEO, stay away. New CEOs need time to settle in and develop a plan, and that's not the time to own the stock.

15. Never turn a trade into an investment. If you bought a stock because of a specific catalyst, sell it when that catalyst changes or disappears.

16. Never sell call or put options. Selling a call option just gives away your upside. Selling a put option limits your upside, while still exposing yourself to all of the downside.

17. Never use margin. Buying stocks on margin is just dangerous. Once you get in the hole, you will never get out. Don't use it.

18. Never buy a stock at its all-time high. Be prepared to miss a stock rather than reaching to buy it at the high. Instead, wait for a 5% to 8% pullback before pulling the trigger.

19. Play with the house's money. Take money off the table as stocks go up until you've recovered your initial investment, then it doesn't matter as much what happens later.

20. Keep your head clear. When times get tough, it's OK to consider selling. You can always buy them back later at lower prices.

21. Contribute to retirement accounts throughout the year. Don't invest in that 401k all at once. Instead spread the payments out during the year and contribute more during the months when the market goes down.

22. Mutual funds should be diversified, too. If you have money in multiple funds, make sure they don't all invest in the same kind of stocks.

23. Playing defense is crucial in volatile markets. Don't wait for down stocks to recover. Bad stocks are likely to go even lower. Move on.

24. Invest in stocks with buyback programs. Companies that buy back their own stock offer a cushion to investors, helping to limit the downside risk.

25. Don't stop looking at your monthly statement. If you don't look at your monthly statements, you won't know how bad things really are. Keep your eyes open and stay current.

Monday, December 29, 2008
Surviving in a Dangerous Market: "It's OK to sell stocks in a down market," Jim Cramer told viewers Tuesday. "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 use 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. Cramer said 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."

What to Keep: After telling viewers what they should sell in a down market, Cramer then explained what investors should keep. He identified three types of stocks that can be owned, even in the worst of market conditions. First are the recession-resistant stocks. He said that any company that makes something you can eat, drink, smoke, wash with or use to cure diseases can all be owned during a downturn. Next are stocks with good fundamentals that trade at or near their cash. Cramer called these companies the obvious choices, since the cash on the balance sheet provide a floor to prop up the stock price.

Last are stocks that he's dubbed the "accidental high-yielders," with traditionally low dividends that after enormous declines in their stock price are now yielding over 4%. Cramer said he trusts the high yielders because many of them are industrial companies, like Nucor (NUE) and Caterpillar (CAT), with long histories of paying dividends and little risk of that dividend being cut. "The accidental high yielders are reliable," said Cramer. Cramer also stressed the importance of reinvesting those dividends. He said while dividends may seem small, compounding over time can make investors plenty.

In an awful market, said Cramer, the way to buy the high yielders on a scale based on yield. He suggested buying a small position as a stock yields 4%, then buying more as it yields 5% and even more if its yield reaches 6%.

** 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.