Editor's note: Jim Cramer's new book,
Real Money: Sane Investing in an Insane World
, is available in selected bookstores now. As a special bonus to
readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it,
. Today, we present Cramer's tenth rule of investing. To read about his first rule,
; for his second,
; for his third,
; for his fourth,
; for his fifth,
; for his sixth,
; for his seventh,
; for his eighth,
; for his ninth,
Nothing's more exciting than a takeover. Nothing's as lucrative. You can put on a lifetime's worth of moves in a day from a takeover. So people go to great extents to try to get them, including buying a lot of bad companies in the hope of catching one takeover.
Funny thing about bad companies: They rarely get bids. In fact, the companies that get bids are great companies with cheap stocks, not crummy companies with expensive stocks. Yet that's what people buy, all the time.
Here's my rule:
Never speculate on companies with bad fundamentals.
The odds are that you will end up owning something that could go down much more than you thought, but that has very limited upside. You can make much more money buying a
, which is doing well and can still get a bid, than you can buying, say, a
(RAD - Get Report)
, which is doing poorly and is unlikely to get a bid.
Any time I deviate from this rule I get burned, particularly when I approach a stock as a nontakeover story and then the fundamentals go awry and I try to shoehorn it into a takeover story. Take
. After the accounting fiasco, I consoled myself that perhaps the company would be acquired because it was so cheap. That proved to be a sucker's game, because the company simply couldn't put out financials. Maybe one day Nortel will get a bid, but I have a feeling that it won't happen soon enough to make up for the time value of money.
Some people stay in stocks like
, always thinking that lightning could strike. Meanwhile, if they had moved on, they could have bought high-quality companies that moved up over time and could have done much better.
Where are the fundamentals cheap and the takeovers likely right now? I have to tell you that I would think that the oil and gas plays with the big reserves -- both Canadian and American -- are
place to be. No company is too big to be acquired in the patch with
walking around with $28 billion in the bank. I own
(ECA - Get Report)
Action Alerts PLUS
portfolio, and I bet that one won't be independent two years from now. Or
(XEC - Get Report)
either, for that matter. These companies are valued too cheaply vs. what they have in the ground.
Remember, though, unlike companies with bad fundamentals that you speculate on, if these go down you don't need to cut and run. If they don't get a bid, you still can win.
And you need multiple ways to win, at all times.