Tuesday, September 9, 2008
"Stay Mad for Life" by Jim Cramer
We don't know about you, but we find ourselves mesmerized from time to time by the antics of Jim Cramer on his CNBC show "Mad Money." He's amazing. He really makes stocks exciting. Since we had some time this summer, we had a chance to read his book. After the nuclear meltdown by Fannie Mae and Freddie Mac, we figured this was as good a time as any to go back and review Big Jim. Here's the meat of the matter when it comes to Cramerica:
Capital preservation is always more important than the exciting capital appreciation.
If you want more money, the first step is always the same: you need to save. Saving is the basis on which every other aspect of building lasting wealth rests. You can't invest without savings.
You absolutely must create a budget for yearly, monthly and even daily expenses. You must have health insurance. You cannot carry a credit card balance.
In budgeting, learn from your past, and judge it. Create a short term and long term budget, and hold yourself accountable EVERY month. If you fail on your planning, take drastic measures to get back on course.
Divide your income into three separate streams - spending, retirement, and discretionary investing.
Some things you don't want to take big chances on, and your ability to retire with plenty of money to spare is definitely one of them.
Even though you need to pay this month's bills well before you retire, if you are smart you will prepare for the long run first.
If investing in mutual funds, invest in index funds or the lowest cost mutual funds offered. Actively managed funds fail to beat the market 80-90 percent of the time.
To create the best possible retirement fund and the best possible discretionary fund you need to know what you're investing in and what you should be investing in.
Retirement funds percentage stocks/bonds
40 to 50 years 70-80% stocks, 20-30%% bonds
50-60 60-70 stocks/30-40% bonds
60-retire 50-60/ 40-50
retire 30-40/ 60-70
You know that I am a stock junkie and you know that investing in individual stocks is the best way to go.
Many parents exclude their children from family discussions about money, and I think that's counterproductive. When I talk about getting kids involved in the market, I mean getting them involved in things they know and may get excited about.
TWENTY RULES FOR INVESTING
1. Don't invest like a hedge fund manager
2. Don't quit when you get back to even (meaning if you believe in the stock long term, stay with it, or buy a bit more on the way down).
3. Never Say Never on a Takeover (it can happen to any stock).
4 Don't let the market shake you out of a good long-term plan.
5. Piggybacking can be a winning strategy- just stay on the pig
6. Play with the house's money (meaning that as a stock goes up, sell part of it in increments until you are left with an amount that you got all from gains...then stick with that for the really long haul because it's free).
7. Never turn an investment into a trade....If it is long term, stay with it.
8. Trust your instincts, not your friends.
9. Don't let short term bad news scare you from a long term stock.
10.If you sell a position to fill a need in a portfolio, don't jettison it because it isn't working. (so if you need a gold stock to round out your portfolio, and it is underperforming, keep it..it's insurance for a market turn).
11. Uninformed low dollar amount speculation can wipe you out.
12. Love the product, don't love the stock. (make sure the stock works with a product that has some lasting power).
13. Never buy the best house in a bad neighborhood (example: buying a radio company after XM and Sirius hit the scene).
14. You are not an index fund, so you don't need any one kind of stock in your portfolio......
15. Pay attention to local papers - the Web is your secret weapon.
16. Be suspicious of high dividends..they often don't get paid.
17.Be suspicious of technical analysis. It tends to miss all of the big turning points.
18. Companies can change their stripes, especially when you least expect it.
19. It just can't be this bad, can it?
20. Don't let the media panic you out of a good holding.
WHAT THE PROS DO RIGHT AND AMATEURS DO WRONG
1. Pros always shave cash....No less than 5% at any time. Need to be able to jump in on bargains.
2. Pros learn t start living and stop worrying about the quarterly report.
3. Pros try to not invest in things they don't know.
4. Pros recognize that not everything is analyzable.
5. Pros want to know the downside, not the upside.
6. Pros always look; they never avert their eyes from a downturn...need to know what is happening..and when to strike on an opportunity.
7 Pros accept that not everything works or is going to work at once.
That's why you diversify.
8. Amateurs are worried that they aren't making enough, and pros are worried they are making too much.
9, Pros know that cuffing it without doing homework can reduce you to an amateur.
10. Pros understand the upside, but they know that things can go wrong.
STOCKS FOR THE LONG TERM
Caterpillar, Goldman Sachs, ConocoPhillips, XTO Energy, Transocean, Hologic (diagnostics for early detection for mammography and osteoporosis...women's health), Inverness Medical Innovations (diagnostics); CVS Caremark, McDonalds, Freeport-McMoRan, Hewlett Packard, Corning, Google, International Game Technology (gambling machines), Pepsi, P&G, New York Stock Exchange, Union Pacific, Boeing, Sears.
MUTUAL FUNDS FOR THE LONG TERM
Aggressive - CGM Focus (CGMFX), Dreyfus Premier Strategic Value (DAGVX), Bridgeway Agggressive Investor (BRAGX) Rice Hall James Microcap (RHJSX). Legg Mason Aggressive Growth (SHRAX)
Growth - Buffalo Small cap, FBR Small Cap,
Value - Putnam Small cap value, Heartland Value, Berwyn, Muhlenkamp