I’ve got to admit, I get a kick out of watching Jim Cramer on TV. His high-octane, nerves of steel approach to investing is exciting to watch and easy to get addicted to.
I like watching the show to find new stock ideas to put on my radar. I don’t count his word as gold because I’ve seen him make huge mistakes and change his mind from one day to the next, but over the long-haul, he’s more right than wrong.
Buy and Sell Incrementally
One of the best things I’ve learned from him is the principle of buying and selling in increments. Instead of buying or selling a whole position at once, Cramer suggests to buy in quarters. He says that trading in whole positions is arrogant, and no one can call the top or bottom consistently.
I like trading in quarter positions because it takes a lot of the risk out. If a stock is moving down, and getting more affordable, I buy a quarter position. If it continues to move down, I’m happy and I buy another quarter. If it moves up, I’m happy and I look elsewhere for another stock that’s moving down.
I do the same thing when I sell. Selling can be agonizing because you don’t want to let go of something that has been so good to you. Buy selling in quarters, you can book some gains and still catch future gains.
Pay up to Twice Growth
Another good rule of thumb that I’ve learned from Cramer is the principle of paying up to twice the growth rate of a stock. That means looking at the P/E ratio and comparing it to the growth rate. Cramer suggests that you don’t ever pay more than twice the growth rate for a stock. If the growth rate is 15%, he will pay up to a P/E of 30.
He proved this principle to me with Google about a year ago. Google was growing at about 35% per year, which was phenomenal for a huge company. Most people thought that it was overpriced at $400 a share, even though the P/E ratio was only about 35. Cramer said that he would be willing to pay up to 70 times the earnings for a company that grew at 35% a year. He was vindicated when Google kept moving through 500.
Finally, About the Book
When I picked up the book, I was really hoping to learn a few more tricks like the ones I described above. Unfortunately, the book is mainly about the mistakes he has made over the last few years and the changes he has made to his rules.
If you’re new to Cramer I’d definitely recommend the book so you can get a foundation of Cramology; but for those of us who know him, well, to be honest… I was a little bored.
I must say that I did like the part about how he breaks down the “lightning round.” It’s amazing to see his vast knowledge of virtually every stock on the planet, and he shows us how he does it.
I don’t like to hear about how his rules are changing, because it leads me to believe that they aren’t set in solid principles. One of my biggest problems with Cramer is that it’s hard to pin down his underlying philosophy. Sometimes he’s a contrarian, sometimes he’s a momentum investor, sometimes he’s growth, and sometimes he’s value.
I’d like to think that he takes the best from all of these principles, but I’m just not sure.
Cramer warns everyone that his show is for investing “Mad Money” which is supposed to be less than 10% of your portfolio. He’s taking big risks with this money and no one should bet their house on his calls. Maybe thats why he takes some more liberties with his rules.
The bottom line is: buy the book if you’re new to Cramer; think twice if you’re not. Then again, some people can’t get enough of him and will buy anything that he puts out.