Welcome to my new site/blog (it's evolving, but always about the content). Here's an audio ramble I recorded today. Click here for audio message from Strategy Update's founder, Zuma Dogg. And go to zumatimes.com and make sure you check out some videos. (Buckle in! I'll lose all credibility, then I'll try and win it back)
Meanwhile, coming soon, there will be original analysis on this site, but for now...
Here's something I came across on the cnbc website that I like a lot. Excerpts (including video) of Jim Cramer's special on "Rules of the Game" based on his new book. All of this stuff sounds pretty good to me. I have spent countless hours trying to persuade people I care about to try and think more along these lines. And of course, it kinda has slightly more credibility when Mr. Cramer says it. So to all those I love and care about...please read these excerpts, watch the fun little videos, and try and live by it. (No "picking and choosing" you undisciplined crybaby!)
CNBC's Jim Cramer's ("Mad Money" 6p & 11p) Investment Strategy "Rules of the Game" (Videos and Summaries from new book):
Original Posts By: Tom Brennan and Carlo Dellaverson
Excerpts from and links to Tom's original cnbc.com post -- including Jim Cramer video segment from "Mad Money":
Cramer's New Rules
In all of Cramer’s years on Wall Street, he’s learned a thing or two. When it comes to investing, he says, the most important thing to remember is that you have to play by the rules. So he’s gone and set up a few rules of his own – rules that cannot be bent or broken, he says, because nearly every time he’s broken one of these rules he’s lost money. The rules are there for a reason: they keep you disciplined and keep you away from making mistakes. Read on for Cramer's most important rules. Check out Cramer’s latest book for all 20 of them.
It’s Buy and Homework – Not Buy and Hold
If investors want to beat the market, Cramer says they need to know a handful of extremely important rules before they can be successful. They need to unlearn some of the worst, most harmful myths that all too many people seem to believe about stocks and investing. One of the biggest? Buy-and-hold.
Buy-and-hold isn’t a strategy, it’s an ideology. Its one central tenet is based on the idea that if you buy a stock and hang onto it for long enough, money will be made. It’s the security blanket investors use when a stock drops: “I know the stock is down now, but buy and hold says it’ll eventually bounce back and go higher than where I bought it.” But honestly, it’s just not true that a stock will necessarily recover its losses.
Worst of all, buy-and-hold lets investors be lazy. It means they don’t have to do their research. It’s the perfect excuse to not do homework. And the only way they can really know if their stocks are going up (or down) is by doing that homework. So that’s the rule: buy-and-homework, not buy-and-hold.
Homework should include checking a stock with CNBC.com’s investing tools, reading all the relevant news stories about it, comparing it to its peers and competitors, reading through its quarterly and annual reports, and especially listening to its quarterly conference calls. Very few nonprofessional investors listen to the conference calls, Cramer says, but they’re the single most important part of doing homework. And if investors don’t do this homework, they’re setting themselves up to lose a lot of money.
The professionals are always actively looking for new ways to make money, new stocks that can perform, and they will beat lazy individual investors if they just sit tight holding on to the same stocks indefinitely. Be like the professionals. Don’t have time to do the homework? That’s fine – just put money in a mutual fund. But Cramer doesn't recommend an investor manage their own money if they don't have the time (because that’s just buy-and-hold).
video:
The Surest Sign It's Time to Sell
There are plenty of indicators out there that mean you should sell a stock, but there are few that are as rock solid as this one: whenever you see a stock that’s being heavily shorted and also heavily hyped at the same time, you should be selling that thing nine ways from Sunday, Cramer says.
Hype can mean many things, but in this case Cramer is talking about analyst recommendations, celebrity endorsements and much-touted facts in the media that don’t actually mean anything for a company’s bottom line.
Combine that with a big short interest and you have a dangerous mix. Remember, shorting is basically people buying a stock high and selling it low, instead of the other way around. Shorts are betting a stock is going to go down and they’re typically right about as often as they are wrong. However, when they are up against a group of hyped-up, entirely positive analysts, the shorts tend to be right a whole lot more.
Shorting a stock is risky, and usually the only people who do it are well-educated investors who have done their homework. So when you have all the analysts on one side having a love fest with a particular stock, and an army of shorts sitting on the sideline betting the stock goes down, you should see a red flag – it almost always means there’s something wrong that no one is talking about. It’s not inside information; it’s just information the bulls would be more comfortable ignoring. But if you ignore it, you could get crushed.
Bottom Line: Big hype plus massive short interest equals sell.
video:
Don't Fight the Cycle
There are certain stocks that do well with a strong economy and certain ones that prosper in a weak economy. For instance, when the economy is chugging along, it makes sense to buy big industrial stocks: companies that make machinery, cars and minerals, for instance. But when the economy weakens, you have to dump those cyclical stocks and get into secular growth stocks like healthcare, food and drink and consumer staples – essentially, products people still need even when the economy is weak. Procter and Gamble is probably the best example of this kind of company, Cramer says. Nobody stops buying toothpaste just because the economy is slowing down.
Cramer's not just advising you to play the cycle. What he’s really saying is that you shouldn’t fight it. You shouldn’t own cyclical stocks when the economy stinks and you should stay away from the consumer staples when the economy is stronger. This is an absolute rule, Cramer says. It doesn’t matter how good the stock is, how clean its fundamentals are – if it doesn’t fit into the cycle, it could lose you money. In the end, sadly, it doesn’t matter what you think. What drives a stock is what the money managers think, and the money managers obey the cycle.
Bottom Line: Don’t own stocks when the business cycle puts them out of favor with Wall Street, because those stocks will almost always go down – even if they don’t deserve to.
video:
Woulda, Shoulda, Coulda
We all know that it’s unproductive to think, “If only I’d bought here or sold there.” Or “If only I picked up Network Appliance before it bounced back instead of selling it into its bottom” – if only, if only, if only. These two words have no place anywhere near an investor's portfolio, Cramer said.
People don’t spend enough time talking about the psychology of investing. The pressure of owning stocks and having to make decisions about whether to buy or sell them is intense. It’s scary. Being an investor is emotionally brutal, but very few people ever talk about that side of stocks. Oh, they’ll talk about earnings and expectations and comparisons – all the rational stuff – but none of that matters if they can’t get their head under control.
Investors can’t afford to be thrown off their game, but at some point they’ll come down with a case of the woulda, coulda, shouldas. The worst thing an investor can do is let a mistake undermine his confidence.
Now this doesn’t mean investors shouldn’t evaluate their performance. They have to review what has worked in their portfolio and what hasn’t. But letting screw-ups undermine self-confidence doesn’t make a person better investor.
video:
Are You Diversified?
Everybody wants to be diversified in theory, but it's not as sexy as going all in on a winner stock. Diversification is boring. It’s conservative. It limits your risk. It’s totally unsexy. Diversification is the biggest party-spoiler in the world of finance.
Cramer understands. When housing is rallying, of course people want to throw all of their money into that one really strong sector. But think about those people who were ruined because they owned too much tech when the bubble burst just a few years ago – or the Enron employees who lost everything because they only owned stock in their employer and then that went to zero.
The problem is that people just are not good at processing downside risk – that’s just how people are programmed. They don’t intuitively understand that if they throw all their money in one sector, they could lose it all. It’s hard to feel that some of the stocks they own, especially those they like best, could be headed straight to zero.
In this situation, feelings always lose. Investors absolutely must stay diversified, and this rule can’t be bent, broken or spindled.
video:
Never Buy All at Once
A good investor can't be arrogant, Cramer said. And the single most arrogant thing an investor can do is buy a whole position in a stock at once. Never do this.
Investors send a message when they buy a whole position at once: “This stock will not go down any further from here. In fact, it’s all up from this moment on.” If an investor buys all at once, and then the stock dips, he feels like a moron – and he should, Cramer said. A little more patience and little less arrogance would have landed him some shares at a better price.
Now, a broker might not like getting these little incremental trades, but the investor is the shot-caller in that relationship. The timing of a buy is never perfect, so don't rush. Just acknowledge that there's a possibility the stock could drop, allowing a better chance to buy more.
Bottom Line: Don’t be arrogant. Don’t buy stocks all at once. Be patient and buy incrementally.
video:
The Rules of the Game
Rule No. 1: There’s a market for everything – oil stocks, newly public stocks, small-cap value stocks – so pay attention to how it works. You should even think of the stock market in general as a market, meaning it’s governed by supply and demand as much as anything else.
The importance of supply and demand in trading is especially true for hyped up, trendy stocks. Just look at ethanol in 2005 and 2006. At the end of 2005, when every major media outlet was running stories about how ethanol was the next great energy source (see original post: http://www.cnbc.com/id/21903112).
But by the summer of 2006, when VeraSun VeraSun Energy Corp, Hawkeye and Aventine Aventine Renewable Energy Holdings Inc were on the scene, the oversupply of ethanol stocks had killed the run in that sector. If you’d just been paying attention to the fundamentals, or to the hype about ethanol in the media, you would have been caught totally off guard by downturn in ethanol. A lot of people got caught up in the hype and ignored the simple but important rule of supply and demand.
The oversupply doesn’t just have to be in a sector, either. Cramer once got burned on the Sealy
Sealy Corp initial public offering, and not because there was a sudden glut in the supply in mattress stocks – it was the record rate of IPOs. The quarter the mattress professionals came public saw the most IPOs since the dot-com bubble. Anybody who was after a newly public stock, who wanted to play the IPO game, had already gotten a piece of the action somewhere else. He ignored the market for IPOs, and he paid the price.
Bottom Line: New rule from the new book – Pay attention to specific markets for specific kinds of stocks. The supply and demand of a certain kind of stock is just as important as a company’s earnings.
video:
Know What You Own
Rule (No. 2 tonight) is “Know what you own.” Just because you own a tech stock doesn’t mean the company is representative of the entire sector. There are industries within a sector, and those that ignore this important fact can end up losing money – or missing out on big opportunities.
[see original post for further explaination:]
EX: There will be talk of a healthcare rally or a transports rally or a tech rally, but that doesn’t mean the whole sector’s rallying. (Cramer caveat: Always be suspicious of anyone on TV – except for him – calling a sector rally. You want to know how broad that rally truly is.) It’s the industries within these sectors that really count.
Case in point: Cramer called a tech rally in June of 2005 by writing two ticker symbols on his hands – MSFT and CSCO. He figured these two names best represented tech on the whole, even though the rally was happening in gadget production and not the entire sector. By February of 2006, Microsoft was up 71%. These were the real participants in the so-called tech rally that was really a gadget rally.
Bottom Line: Don’t let yourself be fooled. Never mistake a rally in an industry for a rally in the sector to which it belongs. It’s an easy mistake to make, but if you remember my rule, you should be able to make a lot more money.
video:
Be a Lemming
Only two rules left. We’ve already been over paying attention to markets, knowing your stocks and playing Latin America for the short term only. Now it’s time to cover a rule that might betray your contrarian leanings: Be a lemming.
That’s right. You want to follow the Street’s lead because most of the time it works.
Cramer wants to be clear: This doesn’t mean you stop thinking. If you think the Street is wrong about a stock or group of stocks, then don’t buy in. But if you do your homework and you like the direction in which the big institutional investors are headed, then be a follower.
Wall Street is often right. Stocks on the 52-week high list often stay there for days or weeks by hitting new highs. You don’t have to follow the momentum, but if there is momentum and you’ve done your homework and you like the stock, then Cramer says go for it.
Sometimes stocks will get anointed by money managers. These are the best-of-breed stocks that are meant to stand in for the entirety of a great sector. They’re like the Energizer bunny – they just keep going and going and going.
Bottom Line: It’s OK to follow the Street’s lead. In fact, it often pays to follow the Street’s lead and buy the stocks that are going up, but only if you agree that the stock is worthy.
video:
Don't Be a Snob
There’s one rule that’s near and dear to Cramer’s heart, and it should be pretty simple to follow: Don’t be a snob.
Pretty much everybody involved in the stock market is a rich person who lives in Manhattan or the suburbs of New York City. The analysts, the money managers, the commentators – they’re almost exclusively concentrated in this one area, and they’re almost all much wealthier than regular people.
Now that might sound like a pretty apparent statement, but think about it. With Wall Street being run almost entirely by rapacious capitalist fat cats – not that there’s anything wrong with that – they are bound to miss some of the best trends out there. If you’re too busy shopping at Neiman Marcus to take a look at Target, that oversight could cost you a great opportunity to make money. Wall Street is almost always late on picking up trends in low-end or mid-grade products because everybody on the Street lives in an upper-class bubble.
Most of the big institutional buyers missed this move (see original post for example) because they were snobs, Cramer says. They didn’t want to eat at Oliver Garden and they didn’t want to own a piece of its parent company. Because of that, they missed about a 50% gain in nine months. A 13 point upside swing – now that’s something to be snobbish about.
Bottom Line: No offense to the people that run Wall Street, but they have blinders on. Those blinders mean you can make money looking at stocks that run under the Street’s radar.
video:
Latin America Is Always A Trade (Not a Long-Term Investment)
The title kinda says it all. If this is an issue for you see original post:
Humility Is a Virtue
OK, here’s the final rule of the night: Don’t be afraid to say something is too hard. There are some things out there that are just too hard to game. No matter how much homework you do, no matter how hard you try, you will never be able to know enough to invest or trade in certain situations.
Cramer says one of the hardest is restaurant same-store sales growth. He admits to getting burned almost every time he’s tried. There are just too many factors at work, he says, too many different things going on that could crush you if you get it wrong.
Now, Cramer’s not telling you not to buy a restaurant stock. He’s just letting you know there a better ways to profit than banking on a better-than-expected same-store sales number.
Cramer shared some examples of why restaurant same-store sales are the worst.
Bottom Line: Never be afraid to admit that something is too hard to game. Restaurant same-store sales are the hardest, but they're not the only things that are too hard to game. You're not admitting defeat or stupidity if you admit something is too hard – you're being smart and looking for easier pickings.
video:
Past Performance Not Indicative of Future Success
This next rule sounds intuitive but it’s actually the exact opposite: past performance is not indicative of future success.
If you’ve made a lot of money playing a trend, or just investing in a hot industry, then your natural instinct is to keep finding new ways to play that trend. It’s an easy mistake to make, but it’s also an easy way to get burned. If you’ve been successful playing a sector trend, you can’t let that make you feel invinsible, Cramer says, because it’s a surefire way to lose money.
Bottom Line: Don’t let the fact that one stock has caught fire influence your decision to buy a similar looking stock. It’s an easy trap to get caught in, but it can be a hard one to get out of if you lose big.
video:
Tips Are for Waiters, Not Traders
Investors should never take or listen to stock tips, Cramer said. They shouldn’t try to get stock tips. Tip generously when out to dinner, but that’s the only kind of tip that’s allowed in the People’s Republic of Cramerica.
Here’s the worst part: When someone is passing out stock tips even though he doesn’t truly know anything, that person has an agenda. Rumors don’t get started for no reason. If you get a tip, it’s probably because somebody’s in a bad position. So if there's a rumor that Nokia’s taking over Research in Motion, most likely that person has a load of RIMM stock he’s hoping to sell into strength.
We all would love to get a real tip, but those don’t exist. As far as Cramer’s concerned, a tip is either illegal, incorrect or straight-up manipulative. None of those things is good for an investor.
Bottom Line: Stock tips are tempting, but they’re not worth listening to. Tips are for waiters, not traders.
video:
zumatimes.com
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