Do you think Jim Cramer knows what he’s talking about?
Jim Cramer is a controversial financial guru who has written columns for several financial publishers and who has found success with theStreet.com, where he is a founder. Despite his celebrity, he’s been raked through the coals in financial message boards and other sites. Still, he’s managed to draw me in as a follower, thanks to some of his insightful teachings and to the entertaining way he presents them.
Stock Tips From Jim Cramer
There are legions of people who swear by Jim Cramer and I am one of those who finds value in the advice he offers stock pickers. Take note that these tips will apply more to those investors who have decided to dedicate all or part of their portfolios to individual stocks. Here are a few of Cramer’s tips:
1. Do your homework! Cramer believes that you shouldn’t be in the business of picking stocks unless you’re willing to do at least one hour per week of research for each investment you own. For this reason, he recommends only owning as many stocks as you can keep up with, using that hour time frame. I think a lot of people blame the market when they should be blaming themselves for not being involved enough in their portfolio. For those who don’t have the time nor interest in managing their portfolio this way, then you’re better off with passive investing strategies.
2. Buy and sell in increments. Don’t try to call bottoms or tops. Buy in smaller amounts as the stock price goes down and sell in increments when the price goes up. Don’t buy and sell all at once.
3. Don’t care where a stock has been, only where it’s going. Never look backwards. Just because a stock has been at a certain level doesn’t mean it will go back there; it also doesn’t mean it could never go back there. Analyze a stock carefully and get a feel for where it’s going using stock charting tools and research; don’t buy based on emotion or based on recommendations from unreliable sources. Just because a stock is at cheaper prices now relative to what it’s been in the past, doesn’t mean it’s the right stock to buy.
4. No more than 20% should be speculative plays. Everybody wants to get rich quickly which explains the love so many people have for speculative stocks. Cramer says that 80% of your portfolio should be in the best of breed stocks in the best sectors. Only 20% should be those stocks that aren’t proven yet. Depending on your stomach for aggressive investments, I’d adjust that 20% limit accordingly. You may find it more comfortable to keep 5% or less of your portfolio in speculative areas.
5. Don’t fight the big guys. Hedge funds, mutual funds, and big money investors move the market. If you try to invest by going against them, you will often lose money.
6. 50% of a stock’s upside or downside comes from its sector. Hence, pick a strong sector, then pick the stock within it.
7. 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.
8. Stay away from overhyped stocks. If a stock’s been pumped and has seen notable price inflation, it’s time to take a step back.
9. 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.
10. 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; otherwise, keeping up with the stock on a weekly basis will be a chore.
I’m actually a member of Cramer’s Action Alerts Plus service and love Jim Cramer’s market analysis. I’m able to keep tabs on stocks that he recommends through this service and I’ve personally found it useful. I also feel that this investment “guru” caters to the average person (or tries to). Since most of us don’t have the resources to do the research work ourselves, I do appreciate that Cramer is out there supporting the average investor.
Jim Cramer’s Mad Money Insights
This guru has also written a few books on money around the “mad money” concept. According to this comically caustic and controversial stock picking celebrity, Mad Money is what you call whatever money you are left to invest with, after paying off your bills and funding your retirement.
He discusses stock picking strategies that may be more along the lines of trading. Cramer claims that his tips are for traders and investors alike, although Cramer doesn’t seem to be as keen on buy and hold. Check out these rules he shares with his followers:
1. 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.
2. 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.
3. Latin America is always a trade.
If you played with Latin American equities in the mid to late 90’s you may have seen just how quickly this market could turn. There were many who made awesome returns for a while only for the rug to be pulled out from under them during the tail end of the run. Count yourself lucky if you were able to sidestep any deep and sudden slumps that have been known to plague this sector in years past. If you’re going to put money in Latin America, don’t stay long for too long.
4. Follow the Street’s lead. Be a lemming.
Don’t be a contrarian every minute. The Street is usually right about its direction so why not capitalize on its momentum? Though by doing so, you may find it pretty hard not to feel like you’re 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.
5. 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.
Listen To Money Advice, Make Your Own Financial Decisions
Of course, when it comes to investing, we all have our comfort zones, so when it comes to Cramer, your mileage may vary. I actually find the guy entertaining, and often try to catch his Mad Money show on television. As far as financial gurus go, I am quite particular about what kind of advice I follow. Even if you haven’t yet been burned by an adviser, you should realize that nobody is infallible and completely prescient (this should be obvious, but many gurus pretend they are) and that it’s best to take all the information out there in stride (who knew that even Warren Buffet’s investments could falter so badly in a crisis?). Let’s make our own decisions based on the stuff we listen to and read. Even if I check out the advice of gurus, I do so to for the sake of expanding my knowledge; nevertheless, I still do my best to separate the wheat from the chaff when it comes to handling my money.
So do you have any thoughts on Cramer? Bring it on!
Created May 29, 2009. Updated June 25, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.