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Jim Cramer’s Real Money
August 4, 2007, 3:15 pm
Filed under: investments/finance/economics

Personal notes from Jim Cramer’s Real Money

  • Know the difference between investing and trading
  • If you learn from mistakes, you won’t repeat them.
  • Only invest in stocks where information isn’t perfect and is relatively unresearched.
  • Only bet on situations you have total conviction in.
  • Don’t place market orders, use limit orders instead.
  • Find out the metric by which a company is evaluated in its industry, i.e. the most important gauge of its competitive position.
  • Separate the stock from the company.
  • Diversify.
  • Buy and homework – spend an hour per company held per week to do research
  • Buy weaknesses, sell strength.
  • Look at a company’s viability before estimating growth – no or little debt due to the creditors
  • Quantify the upside and downside of an investment at a particular price – consider prices value and growth investors are willing to pay for a stock to determine the risk/reward ratio.
  • In the short term, stocks are pieces of paper. In the long term, stocks represent the value of companies.
  • Buy stocks that go up a lot in a short time and avoid those that go down a lot.
  • The investing landscape is divided into four- undiscovered companies with undervalued stocks, discovered companies with undervalued stocks, discovered companies with fully-valued stocks and undiscovered companies with fully-valued stocks. The most money to be made is in the first.
  • Look out for Gamesbreaker moves.
  • Large cap stocks mimics the market and depends on the economy. If the economy is doing well, they command a higher P/E and vice versa. Some large-cap stocks are more immune to the economy due to their essential businesses, like pharmaceuticals and food.
  • The market anticipates economic changes. Prices drop before earnings do and hence what appears to be cheap might not be very safe at all. When economic earnings are down, prices seem too high with the high P/E, but that is precisely the time to buy.
  • Cyclical investing: following the GDP growth, buy different companies. As GDP goes down and the Fed eases rates, buy high-multiple tech stocks, banks and financials, retailers and housing stocks. As GDP increases and the Fed tightens, sell financials, autos and retailers, buy minerals and metals stocks. As the economy slows again, sell paper and chemical stocks, smokestack stocks and sell gold, minerals.
  • Look for undiscovered companies transiting from small to mid and large cap and potential trends that will draw the attention of analysts.
  • How to spot huge gainers in front of monster leaps
    • 40 percent management – speaking with company, evaluate management, ability to sell story.
    • 30 percent fundamentals – real financials, not shell companies. Real profits and growth.
    • 15 percent technical analysis -price at a base for a long time.
    • 15 percent TheStreet.com alpha factor – there must be enough supply of stock for the rise. Investigate the stock’s reaction to news in the past, the stock’s float and low volume related to float.
  • The ten commandments of trading
  • The twenty-five investment rules to live by
  • Spotting bottoms – investment bottoms and trading bottoms
    • Investment bottoms are market bottoms and last longer
    • Trading bottoms are short-lived and tempting.
    • Market sentiment.
      • It’s at the very bottom when it hits the front page of the largest newspapers.
      • Investors Intelligence survey of money managers. When they are bullish, they have already bought their stocks and its the worst time for you to buy. When they hate the markets it’s the best time to buy.
      • Mutual fund withdrawals peak at market bottoms.
      • A reading of above 40 in the VIX is an indication of a market bottom.
    • Capitulation – crescendo sell-off where players give it up
      • Forced selling to cover margins
      • A dramatic spike in volume in exchanges
    • Catalyst – e.g. the Fed’s surprise announcements
  • Spotting individual stock bottoms
    • Negative news has no further impact on stock price
    • Insider buying
    • Negative rumours has no impact on stock price
    • Analysts abandon the stock
  • Spotting tops
    • Competition – a competitive top destroys a company’s business
    • Vagueness – when management isn’t concerned with numbers and specifics.
    • Overexpansion – acquisitions fail to deliver and/or the company expands too much
    • Government blindside – measures affect businesses
    • Top in retail – the top comes when the retailer has no more places to expand into.
    • Fad stocks top – watch out for conference calls of places that sell the product
    • When a company sells stock at a deep discount to its last sale of its equity.
    • Accounting mayhem
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