Thursday, October 1, 2009

Jim Cramer's Real Money - What I've Learned Part II

Dear Blog,

I'll try to finish up here. So Cramer talks about 4 categories, undiscovered/discovered companies, undervalued/overvalued stock. I'll abbreviate UC,DC,US,OS. The biggest money would be found on the UC/US but that is purely speculation. But first let's talk about DC/US. Remember E x M = P? Well, if you can predict when earning are going to go up, you'll know when price is going to go up. Simple. What about M? M changes because of macro concerns, such as up turning economy or feds cutting interest rate. Cramer also says the M anticipates E (most times), such that they balance out again. So alright, cyclical stocks such as Maytag should be bought when their Multiple is the highest and then PG or noncyclicals must be sold when their M is the highest. Now on the UD/US side, these prices shift not because of the math (E doesn't even exist sometimes), but because of behavioral finance, crowd psychology.

Cramer also gets into red-hots and 10xers. Sounds wonderful. Get in, and get out either when the stock starts to fizzle, or if you get a huge jump! Look for mass-psychology-driven movement upwards by 40% management (credible, able to sell story), 30% fundamentals (cash-flow growth, balance sheet, liquidity), 15% technical analysis (support levels, chart reading), 15% TheStreet alpha factor (Proprietary measure). http://www.thestreet.com/stocksunderten. Should be a good ride, and Cramer says it's far more predictable and gameable than Wall Street experts think.

Being a private investor is the best. You can outperform the short-term obsessed hedge fund manager and you can trump the mutual fund model. Here are the tools to "trade and invest your portfolio to riches."

Ten Commandments
1. Never turn a trade into an investment. State what your intentions are when buying (trade/invest). If trading, determine the reason for the trade (like new product), and sell once it's finished coming out.
2. Your first loss is your best loss. Be disciplined and cut your losses quickly.
3. It's okay to take a loss when you already have one. Silly, silly, silly. A loss is a loss, realized or not. Cut it out!
4. Never turn a trading gain into an investment loss. You don't have gain until you realize your gain. Sell before you start bragging to your friends about the money you made!
5. Tip are for waiters. Do the homework yourself, stock tips are nothing to get excited about!
6. You don't have a profit until you sell. Gains not taken can be losses, gains taken will never be losses.
7. Control losses: winners take care of themselves. Let your winners do the walking, and make sure you don't lose money!
8. Don't fear missing anything. It's ok to miss things, don't try to invest after you feel like you missed something. You can be setting yourself up to lose.
9. Don't trade headlines. Do some homework, learn the whole story, before you click that buy button.
10. Don't trade flow. Don't trade because of people tell you to. If you are an ignorant trader without any info, you are going to lose.

Twenty-Five Investment Rules to Live By
1. Bulls and bears make money; pigs get slaughtered.
2. It's okay to pay taxes.
3. Don't buy all at once; arrogance is a sin.
4. Look for broken stocks, not broken companies.
5. Diversification is the only free lunch.
6. Buy and homework, not buy and hold.
7. No one ever made a dime by panicking.
8. Own the best of breed, it is worth it.
9. He who defends everything defends nothing, or why discipline trumps conviction. When everything is going ballistic, protect your good stocks.
10. The fundamentals must be good in takeovers.
11. Don;t own too many stocks. (5 good)
12. Cash and sitting on the sidelines are fine alternatives.
13. No woulda shoulda coulda.
14. Expect corrections, don't be afraid of them.
15. Don't forget bonds.
16. Never subsidize losers with winners. Don't sell winners to buy losers.
17. Hope is not a part of the equation.
18. Be flexible.
19. When high-level people quit a company, something is wrong.
20. Patience is a virtue-giving up on value is a sin.
21. Just because someone says it on TV doesn't make it so.
22. Always wait thirty days after an earning preannouncement before you buy.
23. Never underestimate the Wall Street promotion machine.
24. Be able to explain your stock picks to someone else. (What's going to make this stock go up? Why is it going to go up when you think it is? Is this really the best time to buy it? Haven't we already missed a lot of the move? Shouldn't we wait until it comes down a little more? What do you know about this stock other's don't? What's your edge? Do you like this stock any more than any of the others you own and why?)
25. There is always a bull market somewhere.

All this is from Jim Cramer. Important things that are hard to always keep in your head unless you read it a lot (and why I'm putting this on my blog). Let's continue.

Some picks to use on your portfolio.
A local company, oil company, brand-name blue-chip company with 2.5% yield, financial, risky/speculative stocks, secular stock, cyclical stock, technology company, young retailer, "hope for the future" (but not tech, maybe biotech) company. Remember, you can rank your stocks 1-buy now, 2-pulled back,buy more, 3-went up, sell shortly, 4-sell now. Start buying 1 and 2's and start selling 3 and 4's. Ranking stocks is a good discipline.

Next chapters talk about spotting bottoms and tops. To spot a bottom, check market sentiment, seeing the pain on the front page of new york times and Inverstors Intelligence survey of money managers. Then Capitulation, or when the sells start to crescendo off, and the brokers start selling off those violating margins around 2:30pm. If no more selling is occurring, we are, or close to, a market bottom. Then a catalyst to buy. Spotting tops can be done by analyzing competition, vaguenesss of management, overexpansion, government blindside, top in retail, fad stock tops, in-the-hole secondary (company starts selling stocks), accounting mayhem, or very hot hot market.

And for this final portion of the book called Advanced Strategies for Speculators (me), I'll try to go in depth, and understand each of his points. Let's go!

Stocks easy, if stock goes up, you make money. If stock goes down you lose money. Arithmetic! Now let's talk about others things you can do (this is partly Cramer, partly my MBA experience). Shorting a stock (selling a stock). So let's say you short a stock at $10. You receive $10 for selling a stock (but now you owe a stock back to the broker). If it goes up to $15, you are losing $5, but if it goes down to $2 you gained $8. You are betting against the market, and you buy to cover when the stock goes down to make a profit. Be careful, because, you can actually lose more money than you "invested" when shorting stocks. Calls (or Options) and Puts have been semi explained in a previous post, but let me quickly explain it one more time. A call gives you the option to buy a stock at a strike price for a price. If I'm the broker, I'll say I can give you the option to buy this stock for $1 for the month of October if you give me $0.10. Cool! So investor gives broker $0.10 and if the stock goes up to $1.10 or higher, you get a profit, and you only spent $0.10. But if it stays at or below $1, you just lose your $0.10, no biggie. Same thing with puts, but it's for shorting, or selling stocks. So one thing I don't know is the short squeeze which I'll explain in a bit... let me read Cramer's story right quick. So when someone continues to short, the bid price goes up on the stock, and the bulls get the advantage here. If this someone is big and continues to short, the bulls will ravage the place! What should have been done? Buy puts til after the expected weak quarter was announced so that not to be forced to cover (another problem with shorts) and hopefully earn profits as price falls.

No one will ever care about your money as much as you do. Invest wisely! Thanks Jim Cramer for the wonderful book. I thoroughly enjoyed it, and anxiously awaiting your new one! Let's make the monies!

- E.T.

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