Saturday, August 17, 2013

The day I met Jim Cramer: And his GOLDEN RULES for Individual Investors

A few months ago I had a Monday morning Jury Duty emergency. Long story short, I was able to postpone my “citizen duty” but not before having to show up to court that morning anyways.

So, what does jury duty have to do with this post? Well, this “out of the routine” event had me showing up for work a few hours later than normal. Before going up to my office I decided to pass by a store in the lobby of the building where I work to get some stuff. As I quickly searched for what I needed; my peripheral vision immediately spotted a familiar face:

Yes, ladies and gents! One of my investing “virtual mentors” Jim Cramer was by the cashier. Despite my sporadic shyness and introverted ways I pushed all that aside and decided to go up to him, introduce myself and ask for a picture. But not before informing him what a huge fan I am! I asked the cashier to take the photo (no shame in my game). And this quick moment, my friends, turned my entire day/ week/month around for the best! He is super humble and welcoming. 

Jim and I:

*Excuse the wild hair (mine, not Jim’s).

I have been a huge fan of Cramer for several years! I was introduced to him by the friend whom got me in to investing (see the ‘about me’ section). I have read several of Jim Cramer’s books but also watch his TV show on CNBC “Mad Money” on weekday nights.

Although I love all of his episodes; my favorites involve him talking about the fundamentals when it comes to investing. From time to time he likes to bring us back to the basics of being a successful individual investor. Last Friday’s show (aired 08/09), for example, fell in to that category. He spoke about “Golden Rules for the Individual Investor”. And here’s the outlined version:

1      Don’t own too many stocks: 10 is a good amount. Diversification is important but there is a huge difference between being diversified and holding 100 different kinds of stocks. As per Cramer: “More than 10 and you will likely start skimping on the homework, and that’s incredibly dangerous”. He recommends we hold 10 high quality diversified names. This is actually the kind of strategy I have been following in my investment career and I couldn’t agree more!

2.    Do your homework and your Investment Thesis: Speaking about homework; Cramer recommends we spend at least an hour per week on each stock we own reviewing earnings reports, reading news stories, looking over analyst commentaries, etc.  He uses the gathered information to determine profit margins, analyzing debt on the balance sheet, industry happenings and the caliber of the CEO of the company to carry it through successfully. It is extremely important that you “know what you own” and you should know your stocks well enough to be able to explain in 3 solid sentences WHY you own something. If you know your stocks well, you won’t be panicking or pulling your hair during a sell off or a down day. He explains: “You’ve got to know if your thesis remains intact on a big down day…and you have to know whether it remains viable after a big rally, too”. Hence, you should be able to confidently describe why you own something. Why do you own that particular company? Is the answer to that question a solid one?

3.    Don’t own too many “Dollar Stocks” at once: Dollar stocks refer to those that trade under $10. While it doesn’t hurt to put some money in speculative stocks once in a while (ie: potential for growth and price appreciation, being able to get a whole lot of shares for little money, potential for big profit, etc.) owning too many of those kind of stocks can also be scary because just like you can make lot of money in a short period of time the opposite is also true. You also run the risk of the stock going to Zero and loosing all your investment. Hence, as per Cramer “speculative stocks should only be a small part of the portfolio”. On a personal level, I traded MetroPCS (PCS) a few years back and made good profits but that was my only “single digit” stock at the time. Just like I enjoy risk from time to time I also like my sleep at night and I want to be able to sleep in peace!

4.    NEVER buy stocks on margin. Buying stock on margin means you borrow money from your online broker (or broker in general) to invest. DON’T DO THIS. NEVER. This can be a huge risk, especially if you don’t know what you are doing. When you invest on margin, you can’t afford to lose. If the worst happens you will owe the money you borrowed, interest on the money plus you make zero profit. This is not the way to go. I have explained over and over again that money in the stock market should be 1. Your money only 2. Part of your discretionary income (what’s left over after all your expenses have been paid).

5.    Stay away from Market Orders. I explained Market Orders on one of my initial posts. Basically, with a market order you are telling your online broker (or broker) to “buy” or “sell” at “whatever price”. You run the risk of paying too much when you buy and selling at a lower price than you could have. Hence, all buying and selling should be done with ‘Limit Orders’ which is where you specify the highest price you’re willing to pay when you buy and the lowest price at which you are willing to sell if you want to give up your position(s) on the stock. I explained type of orders in detail on this post.

6.    Don’t panic when stocks are down. There may be a lot of reasons for it none of which may be related to a specific company at all. As I mentioned before, the market has its mood swings and often times, down days may have nothing to do with specific companies but rather can be a result of news in the media and a thousand other reasons. Just look in to what exactly may be going on. Sometimes a “down day” can be a great opportunity to grab stocks from amazing companies at great prices.

7.    The SEC may not have your back right now so ‘watch your own’. For those who don’t know, the SEC (Security Exchange Commission) is one of the regulatory institutions that are supposed to protect the interest of individual investors. Cramer commented that “if we hear snoring on Wall Street is probably the SEC”. Basically, they have been supporting different kind of financial innovations which could present a risk for the “little guy”, one of them being High Frequency Trading. Hence, we have to watch out and protect our own interests because the SEC is currently taking a nap. (Gotta’ love his analogies ha!)

And there you have it! If you don’t know who Jim Cramer is just Google the name, check out some YouTube videos and tune in Monday-Friday at 11:00pm eastern time on CNBC. Check your local listings. (PS: The show actually comes on at 6:00pm on weekdays and then re-runs at 11:00 pm so I catch it then!).

PS: While doing some research for this post I realized you can catch any Mad Money episodes you miss on the CNBC website. Check out! Have a great weekend everyone!

I was not compensated for this post. All opinions are my own. I am genuinely a big fan of Jim Cramer and an addict of CNBC investing shows.