1025. Jim Cramer and Important Tips

 I have reviewed most of Jim Cramer's tips and guidelines over the years. Here are the notes I took from his many articles and books:

Trading and Investing are NOT the same – Trading is the buying/selling of stock based on some catalyst. Investing is longer term accumulation of more assets.

 

E x M = P

 

Ten Commandments of Trading:

1. Never turn a trade into an investment. Do your homework and sell a buy later.

2. Your first loss is your best loss – Dump before you lose your pants.

3. Its OK to take a loss when you already have a loss – CLEAN UP that portfolio. It took you too long to take a dump.

4. Never turn a trading gain into an investment loss – corrolary of 1.

5. Tips are for waiters.

6. You don’t have a profit until you sell.

7. Control losses; winners take care of themselves – spend you time identifying potential or actual l9osses and take them. This is first priority.

8. Don’t fear missing anything – there will always be another opportunity and don’t be greedy.

9. Don’t trade headlines.

10. Don’t trade flow.

 

25 Investment Rules:

1. Bulls and Bears make money – Pigs get slaughtered. Take the profits while you can.

2. Its ok to pay taxes.

3. Don’t buy all at once – arrogance is sin.

4. Look for broken stocks, not broken companies. That is, identify stocks that are out of balance with reality of GOOD companies only.

5. Diversification is the only free lunch.

6. BUY and HOMEWORK; not buy and hold. MUST spend an hour per investment per week after it is bought to keep up with news. Dump when you have to; don’t hold and lose.

7. No one ever made a dime panicking.

8. Own the Best of Breed.

9. He who defends everything defends nothing, or why discipline trumps correction – if the analysis sees it as a fleabag dog, be disciplined and treat the sucker now! You may have to get rif of it.

10. The fundamentals must be good on a takeover.

11. Don’t own too many stocks – must have time for homework.

12. Cash and sitting on sidelines are fine alternatives. – wait till right time to buy or sell.

13. No wudda shudda cudda; no 2^nd guessing. – move on, you need to manage future, not past.

14. Expect corrections and don’t be afraid of them.

15. Don’t forget bonds – they get serviced before your stocks.

16. Never subsidize losers with winners – Don’t sell your winners to cover losers.

17. HOPE is not part of the equation. If you use the word HOPE, dump it.

18. Be flexible.

19. When high-level people quit without proper notice, something is wrong – bail out unless they are retiring.

20. Patience is virtue.

21. Ignore TV comments.

22. Wait 30 days after earnings preannounce before a buy.

23. Never underestimate the Wall Street promotion machine – be ready to do opposite.

24. Be able to explain your picks.

25. There is always a Bull somewhere in the market.

 

Spotting Tops:

1. When competition heats up.

2. When management no longer speaks specifics.

3. When a company over-expands – usually reported as integration problems, or trying to mix a slow grower with a fast grower. Compare aplees-to-apples, same-store sales; don’t be fooled by higher revenues as a growth of core business when it was due to new stores that bring with it more management and quality efforts.

4. Watch for Government actions – don’t be blindsided.

5. No place to expand? All states have stores? This could indicate a top.

6. What happened to the Fad? Top time.

7. Accounting problems!

 

Economy Indicators to watch:

1. 4 consecutive CPU increase may signal Fed tightening ahead.

 

Other Cramer tips:

1. BUY CYCLICALS when Multiples are HIGH

2. SELL NON-CYCLICALS when multiples are HIGH

3. Fed has 2 ways to control: (a) change borrowing rates and (b) change quantity of money in market by changing reserves banks are allowed to carry.

4. Claims P/Es correlate to GDP cycle and past can be used as guideline for a stock.

5. Look at EPS growth per year … fastest growing deserves higher P/E. Determine the multiple based on earning growth and then determine the proper price.

6. Compare companies by P/E to determine the norm and whether an anomaly is due to acquisition, mgt. change, new business, etc. or to predict a P/E.

7. Act on cpmpanies that aren’t discovered (#1M-4M) or any company that is not closely followed.

8. Compare dividend percent and history of growth.

9. Know the company’s business driver metrics – use to compare to others and for growth measurement. For example, $/seat in airlines, $/sq foot in realty, shipments per day, profit margin/product, same-store growth.

10. Build cash for Octobers buys (when mutual fund managers drive the prices down)

11. Examine Debt-to-Equity ration … avoid debt unless normal for industry. Some companies incur debt in 4Q (retail) to stock up for Xmas. Others may to buld planes, build more cable systems, etc.

12. Determine whether a stock is “secular” or “cyclical”. Secular stocks NOT dependent on economy and demand higher multiples.

13. Listen to company meetings and announcements.

14. Favor companies growing sales and earnings faster than peers AND S&P and costs less than average.

15. The Value of a DISCOVERED stock will mimic the market. UNDISCOVERED stocks may not.

16. Why do Large Caps grow/decline? (a) due to rotational catalysts, e.g., portfolio mgr. shifts from group to group base on macro backdrop, such as weak economy as dictated by Fed. Involves switching between secular (health, drugs, beverages, food) and cyclical stocks. (b) dure to estimate revisions

17. KNOW HOW sector MOVES! More important than a business. DON’T BUY A STOCK WHEN SECTOR OUT-OF-FAVOR! Look at the CYCLE chart.

 

My Methodologies:

1. Do your homework on stocks owned

2. Check the cycle chart! Know the GDP and CPI numbers and direction.

3. Focus first on losses and loss-candidates for a sell.

4. Buy/Sell: Try WR%. FIRST, look at 2-yr, weekly chart of WR% to determine WHEN to move on a stock. BUY when moving above -20% (short-term moves) or    -80% (longer-term moves). SELL when it moves below -20% or -50 to 80%. THEN consult 3-6 month and daily charts to do actual buy/sell.

 

The CYCLE:

 

GDP	To Do	Fed Action
	Fed tightening on DOWNward Economy
5-4%	SELL papers & chemical (IP, DOW, DD)	Tighten (raise rates)
4-3%	BUY Medical/food (PG, KMB, K, BUD, PFE)	Tighten (raise rates)
3-2%	SELL cyclicals (CR, CAT, MMM)	Tighten/Neutral
2-1.52%	BUY high multiple techs (GOOG, YHOO)	Neutral
1.5-1.25%	SELL metals & minerals (PD, AA, MUE, NEM)	Neutral
1.25%-1%	SELL Gold; BUY Banks & Retailers	Neutral
1%	Fed getting ready to EASE or starts	Neutral/Ease
1-0%	BUY Housing, BUY Autos	Ease
0 to -2%	Look for bottom (possible recession) and BUY Low Multiple techs (IBM, INTC)	Ease
-2% to 1%	Economy starts UP	Ease/Neutral
1%-2%	BUY Paper & Chemicals	Ease
2%-3%	SELL Medical and food	Neutral
2.5%-3%	BUY cyclicals before Fed tightens (M prob high)	Neutral
3%	Fed starts tightening again to void off inflation	Tighten
3-4%	SELL Banks, Auto, Retailer, Housing	Tighten
3.75-5%	BUY Metals and minerals	Tighten
Stocks oblivious to cycles: Oil & Oil Services, defense, Aerospace, Telecommunications