Mad Money: Whatever money you are left to invest with, after paying off your bills and funding your retirement. That’s according to the comically caustic and controversial stock picking celebrity Jim Cramer.
I’ve heard of Jim Cramer from way back when during the days I used to subscribe to personal finance magazines where he’d maintain a column or two. After his founding of theStreet.com, I’d stopped following him and have only seen his name surface while being raked through the coals in financial message boards and other sites. But while I was cruising the television channels today, I came across his Mad Money show for the first time ever.
I wouldn’t follow his stock picks but I watched his outrageous show with some degree of amusement, while he (in his own words) shamelessly promoted his book “Jim Cramer’s Mad Money”, a sequel to his first book “Jim Cramer’s Real Money”.
Despite his hit or miss reputation as a stock picker, he drew me in with his presentation of these general tips (with the customary bunch of crazy sound effects in the background):
Mad Money’s New Rules
These are the first five rules from the new book, which supplements those already described in the previous book. I find these to be part of a stock picking strategy more along the lines of trading. Cramer claims it’s for traders and investors alike, but somehow I’m not quite sure this caters to long-term investors who tend to buy and hold for longer, and goodness knows how Cramer isn’t too keen on buy and hold. What else is short-term investing but a euphemism for trading.
There’s a market for everything, pay attention to how they work.
There’s a market for everything, including newly public stocks, penny stocks and so forth. There’s that encompassing market over and above the smaller markets for various industries, and the performance of a stock is influenced by all these moving targets. It’s not just about the fundamentals. The supply and demand of the stock itself can affect its movements.
Never mistake a rally in a stock’s industry for a rally in its sector.
A sector is comprised of various industries and stocks of a given industry may rally independently from those within the same sector. Know what you buy, do your homework and spend at least one hour a week on keeping track of your stocks. If you’re going to be lazy about this, then just buy mutual funds. So when you play a rally, make sure the stock fits the bill.
Latin America is always a trade.
And don’t you forget about it! I played with Latin American equities in the mid to late 90′s and luckily it didn’t kill me. In fact, like many others out there, I made some awesome returns for a while only for the rug to be pulled out from under me during the tail end of the run. I was able to bail out in time but only by the skin of my teeth, thanks to a newsletter I follow that dishes out big picture market advice. If you’re going to put money in Latin America, don’t stay long for too long.
Follow the Street’s lead. Be a lemming.
Cramer says not to be a contrarian every minute. The Street is usually right about its direction so why not capitalize on its momentum? That’s quite true. Though by doing so, I find it pretty hard not to feel like I’m chasing a stock that’s about to run its course, with its advance potentially fizzling out at any moment. That’s why to do this right, you’ll have to study technical analysis and figure out through a bunch of indicators if there’s still life to the bull. Since I’m not a very good technical analyst, but rather an intuitive, “lazy” investor, I’m not going to guess. I’ll only put in my .02 (or more) if it’s an industry I’m truly comfortable with.
Don’t be afraid to admit that some stocks are just too hard to understand.
Invest in what’s familiar; there are a lot of easier ways to make money so don’t waste your time on the hard stuff. If you aren’t comfortable with a stock, its business or industry, look for something easier to grasp.
Caller Questions
Some callers precipitated a bit of worthwhile discussion around these pointers:
- 50% of a stock’s upside or downside comes from its sector.
Hence, pick a strong sector, then pick the stock within it. - Instead of investing in emerging markets, invest in domestic companies that do business in these markets.
That will mitigate your risk but still give you the exposure you want in these developing markets. - Stay away from overhyped stocks.
Sure we already know that, but doesn’t this contradict the “Be a Lemming” rule? This is precisely the reason why I avoid stock picking myself: I’m often confused by the opposing views. What else is the market but a conglomeration of mixed signals that eventually point to some direction. Thus, I let the market do the job for me via indexes, or have experts do it for me via mutual funds. - Don’t buy all at once. Keep your powder dry.
Don’t purchase your entire position in one fell swoop. Pace yourself and buy in increments to take the emotion out of investing. - How much homework should you do to track a stock?
Before buying a stock, get comfortable with it, watch it for a while and get to like it. Thereafter, devote one hour a week on tracking it and keeping up to date with the company behind the shares. It’s best if you like the stocks you buy or keeping up with the stock on a weekly basis will be a chore.
I appreciated the refresher as I learned some new things about an area of investing that I’m familiar with but I’m still not a master of.
Why I Don’t Pick Stocks
Frankly, because I’m lousy at it.
And sure, there are those with the golden touch — I knew this guy ages ago who went on to become one of these top wall street analysts several years running. Unfortunately, we’re no longer in contact, so I can’t ask for tips! Looking at him, I’m not sure how he does it. I won’t pretend to know how to make it work consistently.
There’s been much discussion around Cramer in the net given his financial celebrity status, but I don’t really follow him since I’m not ready to subscribe to a serious stock picking strategy at this time, for obvious reasons. Honestly, my stock picking record is at best mixed, even with the requisite “homework” I’ve put in before making purchases. I’ve done very well with some high tech fliers during the 1990′s but then again, I wouldn’t credit any prowess for that success. As far as I’m concerned, that was all about momentum and luck. These days with more of a mixed market, my individual stock choices haven’t yielded me much more than the overall market return anyway (if not less), so I’ve given up on stock picks for now. I’m sticking to my tried and true indexing approach which so far has proven a long term winner for me.
Cramer is great for entertainment though, as well as for some informative nuggets as above, which he spouts out every so often. I’ll probably catch an occasional show and even talk about it here if I hear something new, just like a few others who have covered him in the blogosphere. After all, he’s fun, in a Jerry Springer sort of way.
Copyright © 2007 The Digerati Life. All Rights Reserved.
{ 5 comments… read them below or add one }
For folks who want to try the stock market but want a little bit less risk, there’s a documented set of stocks termed The Dogs of the Dow.
A quick Google turns up a lot about this technique but the general idea is that you take the set of ten well-known global brands (DOW industrials) like GE, AT&T, etc. which pay the highest yields and buy equal amounts of each.
Then you rotate stocks based on if they still pay the highest yields or not.
The idea is that you lower your risk with the “high-yield” dividend (there is always a risk that the dividend will be cut, thus lowering the yield) and sell at a profit when the yield is no longer one of the highest (i.e. the stock price has gone up).
The advantage is that it acts like a no-load mutual fund that gives you a large footprint of highly diversified and relatively stable stocks.
Thanks for the great advice Steve!
I try very hard on my blog, Stock Picks Bob’s Advice, to make heads or tails with stocks, to pick stocks in a coherent fashion simply of companies that are doing well.
I think the individual investor stands a chance when he or she uses their thinking processes to develop a strategy for identifying potential stock investments. That, at least is my strategy.
Time will tell whether this investor can succeed at this task. I am optimistic that a simple approach to picking stocks makes more sense than even Cramer’s Booyahs.
Bob
Do you really value each one of Jim Cramer’s stock picks equally? Some ideas are better than others, and that’s the way to make money from Mad Money. The hedgies at stocktagger.com may have figured it out.
Stocks can be risky at times. I prefer to stick with high yield investment opportunities.