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Jim Cramer’s Mad Money
August 11, 2007, 5:10 pm
Filed under: investments/finance/economics

Personal notes from Jim Cramer’s Mad Money

Cramer reiterates many of the ideas espoused in his previous book Mad Money in this new offering by the man from TheStreet.com. I am jotting down ideas I feel are useful and not repeated from Mad Money.

Homework steps

  1. Figure out exactly how the company earns its money
  2. Assess the sector the company is in
  3. Check out performance of the company
  4. Check out the competition

Assessing a stock, the “Lightning Round” way

  • Assess the sector that the company operates in
    • Is the sector growing? Out of favour?
    • Know which companies are best of the breed in each sector
    • Know if the sector is connected to Fed interest rates or to the BRIC
    • Some sectors are dependent on government spending
    • Understand the quirks of a sector
  • Understand the demand and supply of such a stock in the market
  • Know what analysts think of the stock
    • If they recommend a buy and the stock drops, the stock will probably drop more later as they change their recommendations to sell.
    • If they recommend a sell and the stock rises, the opposite happens.
  • Judge the management

Know your sectors

  • List all the sectors represented by the companies in the market, indicating also the various subsectors.
  • Form an informed opinion on every sector.
  • Rank the stocks in each subsector.

Ten lessons from bad calls

  1. Resisting the business cycle is futile – if institutions view a stock as cyclical, their perceptions shape the price movement of the stock
  2. There is a market for everything
    1. IPOs can be junk – private equity turned public is always done with an agenda.
    2. Think of stocks in a broader way, in terms of supply and demand.
  3. Do the right homework – find the right data for the right type of trade – if you are gaming the results for next quarter, you need only look at recent results.
  4. Latin America is always a trade – the countries that institutions find speculative are hence speculative markets
  5. Don’t be afraid to say some businesses are too hard to game/understand.
  6. Not all companies that produce commodities are as interchangeable as their products.
  7. Past performance is not an indication of future success.
  8. Never invest based on someone else’s convictions – form your own opinion
  9. When playing a big rally, make sure your stocks actually fit the bill – know precisely why you own a stock and what you own for a particular idea
  10. Don’t try to smash conventional reason, try to make money – conventional wisdom is there for a reason

Ten lessons from success

  1. Follow the Street’s lead: most of the time it works – look at the past behaviour of funds and institutions and anticipate their movements
  2. How to be a contrarian and still make money – understand how a stock can go from being out of favour with institutions to being in favour
  3. The street is never bullish enough on good stocks and never bearish enough on bad stocks – you should love stocks they love more and hate stocks they hate more
  4. Don’t be a snob – seek trends in everything
  5. Pay attention to politics because the street is too focused on money – government actions affect companies and trends
  6. There is a rhythm to investing in small-cap stocks with momentum and not much analyst coverage – track the number of analysts following a stock and the price movements of a stock over the period
  7. Use tips as contraindicators – tips indicate that many investors own a stock for the wrong reasons, a good indication to sell
  8. Hype plus massive short interest equals sell – a stock that’s heavily hyped and shorted is a sell
  9. Know how to spot downturns in cycles other than the business cycle
  10. Look out for multiple contraction – people pay lower P/Es for companies that deliver
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