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.
Image from the Chicago Sun Times
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.
{ 24 comments… read them below or add one }
Even though he’s “out there”, there are a lot of people who like listening to him. What do you think of these statements he’s made? Some Jim Cramer quotes:
“Whatever money you may need for the next five years, please take it out of the stock market right now, this week.” He made this “dramatic statement” last October of 2008. In hindsight and as a market timing order, he appears to have made the right call. But I agree with the more general point he makes, that the buy and hold strategy is fine if you’ve got a long term investment horizon, but if you need any money within the next five years (fairly short term), then that money needs to be some place relatively safer.
Something else he said: “The market was going up for a long time and our real sin, I think, was to think it could continue to go up a lot.” You can say that again.
I prefer to focus on his takeaways rather than his picks.
I as well find Cramer entertaining, and I agree with you that the average investor should steer away from stock picking.
p.s. I love your blog. You have inspired me to write one of my own!
I think I better be clear on why I’m investing before I make an investment. If my goal is to grow my money safely for my retirement, I’ll do better by sticking w/funds.
It’s not always about making the most money I think. It’s about making the most money for the least risk and individual stocks can really bite me. I’ll stick with funds….
While at times I find him entertaining and at other times, obnoxious, if you have read any of his books he will tell you his wife was the brains of his operation when he ran his hedge fund.
Unless you intend to spend hours and hours of research on the market, it’s probably best to stick to safe stock picks and index funds.
Terrified of stocks. I think it’s a crap shoot!
I can’t stand to watch him because of his style. There is one thing that I think equity analysts have got that other folks don’t and that’s access. They have access to CFOs and CEOs and the ability to talk to them and ask questions. There are some gurus who are willing to talk about their calls with the company personnel and often that is the most important thing out of their analysis probably because it doesn’t contain any analysis.
I think the biggest problem is that people have blended the line between Entertainment and Advisement over the last 5-6 years. Nothing Jim Cramer does could really be considered great financial advise. His entire show is about timing the market, timing random trends, and keeping people busy.
There is nothing wrong with having a show like his, however people have to realize that it is an entertainment show… nothing more.
This reminds me of one of my favorite quotes, “Even turkeys can fly during a tornado!” Noone could pick wrong for the first 3 of the last 5 years. Whether you were in Real Estate, Single Stocks, or stood on a t.v. hitting random buttons which make weird sounds, you were on fire.
Let’s get back to respecting both Cramer and Stewart for what they really do. Perform mindless entertainment when we want to be vegetate and be distracted for an hour or two every day.
Baker,
I share your views. But there are people who follow Cramer and consider him a financial advisor/guru in his own right. Many will tell you how much they’ve benefited from his appearances and advice. I’ll feature some thoughts from one of Cramer’s listeners one day, and we can discuss the value of his specific advice at that point.
But yeah, I hear you. I have followed several radio personalities in the past and have respect for many of them for the thoughts and theories they share. And for a while, I may have followed their teachings blindly — and believed in their predictions. My point here is that I think there’s nothing wrong about being a follower, listener or fan, but ultimately, we’re responsible about making our own decisions. You can listen to advice, but we need to remember that nobody is infallible.
Great article and you’re right to point out that all so-called gurus are human too and are not infallible. I like the comments from Baker and SVB. Shows like Cramer’s that do offer some useful advice are also an entertainment program. SVB, you put it so well when you said that ultimately we are all responsible for our own financial decisions.
I don’t have a problem with Cramer or any other alleged Wall Street guru when they get it wrong or get lit up by others in the media or the general public. They provide a service that could best be described as, “We’ll provide you with a service and that service is to give you our best ideas with a certain amount of flare that is designed to protect our interests (making money) while serving the interests of our audience.” This is the quintessential contract that all gurus have with their audiences.
The problem comes when people–the public and/or media pundits–alter this basic contract to instead read, “These experts are the best in the business and their advice and opinions are beyond reproach. Therefore, I’ll follow their advice as gospel.” This alteration is the underlying issue when things go awry and gurus get sniped in the media.
Ultimately, everyone needs to remember that no matter the guru, they will get it wrong at some point. However, if the reason they made it to guru status is because they’ve been right more often than wrong, they become a valuable tool for investors. The value of that tool hinges upon the individual investor’s ability to translate gurus’ ideas in the context of their personal situation.
I NEVER listen to stock advice from anyone because I don’t trade stocks. I have these smart guys (mutual fund managers) that have extraordinarily transparent records of their trading intelligence and I know they’re a heckuvalot better than I am. My decisions become as simple as how much in stocks, bonds, and cash…just the way I like it.
A couple of stats for the Cramer et al reliant: 91% of millionaires surveyed held their investments for 1 year or more (source: The Millionaire Next Door). The average investor typically returns only 1/3 to 1/2 of the S&P 500 over 15 year periods (source: DALBAR).
As it stands, the best investment strategy for non-professional investors is buy and hold within a well constructed asset allocation strategy with a declining risk profile beginning as early as 25 years until retirement.
At the very least, the Cramer/Stewart exchange was highly entertaining :)!
A couple thoughts as the guy who was quoted in the article. First, I have read all of Jim Cramer’s books and he says that his wife has helped to keep his sometimes hot head in check but I didn’t get the impression that she was the brains of the two. Next, you can’t knock the guy for what he’s doing. He took all kinds of heat when he was on the Today show and told people to take a significant amount of money out of the market. He was right. Back in March, he told people to put money back in and if you listened, your portfolio is up an average of 30% or so. I’m not in any way saying he’s perfect but he Action Alerts Plus service has made me a lot of money. I don’t have time to do my own research so I follow him and it has been well worth it. I hold on to 20% of my portfolio to make my own speculative decisions.
Think what you want about him but I admire that he is putting together a show that does cater to the average soccer mom-type American. If the statistics are true and only 20% of all mutual funds beat the market, are you really doing yourself a favor by taking a passive investing approach?
Cramer picks stocks daily so he’s going to be wrong frequently. Being wrong on Bear Stearns is not a big deal that Stewart makes it out to be. Cramer’s show is not investigative journalism — it’s just stock picks with entertainment value. It’s too over the top to be taken too seriously.
There have been a ton of academic papers that have shown that you cannot time the market and that the typical investor is much better off buying an index fund and sitting on it for 30 or 40 years than listening to a Cramer or any other self styled financial guru.
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 wrote about the Dogs of the Dow here as well.
How do I sign up to get emails on stocks to buy?
I try very hard on my blog, Stock Picks Bob’s Advice (bobsadviceforstocks.tripod.com/bobsadviceforstocks), 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.
Cramer has a tendency to steer followers toward the stocks he (his charitable trust) owns even if there are better stocks out there. Cisco is an example. He stated that he had a bad experience with Cisco and will never recommend again? Is he losing his mind? What if the stock does great?? You have to be flexible in choosing stocks.
One bad experience should not cloud your thinking about the future of a company.
There’s been much discussion around Cramer on the internet given his financial celebrity status, but I don’t really follow him since I’m not ready to get into stock picking in any serious fashion. To be honest, my stock picking record is at best mixed, even with the requisite “homework” I’ve put in before taking any positions. I’ve done very well with some high tech fliers in the past 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. The market today is mixed, so 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 an 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, which he spouts out every so often. I’ll admit that he’s fun, in a Jerry Springer sort of way.
Some of these stock investing tips are reasonable, but would you follow Cramer’s advice if you know he’s crazy? I think people are put off by his financial media personality, probably because of his bombastic and loud style. I agree that he’s a controversial investment figure who’s known for public tirades against his critics.
He might be controversial, but he does have some pretty good ideas. It’s really up to people if they’ll follow everything he says or think carefully and decide on their own.