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Editor's note: As a special bonus to TheStreet.com readers, we will be running an updated version of Jim Cramer's "Twenty-Five Rules of Investing," from his latest book, Real Money: Sane Investing in an Insane World. Here's Rule 10.
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 company that is doing well and can still get a bid, than you can buying a company that 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 Nortel (NT - commentary - Cramer's 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, like Lucent, but I have a feeling that it won't happen soon enough to make up for the time value of money. Some people have stayed in painful stocks believing 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. When you're scouting for companies where the fundamentals are cheap and the takeovers are likely, remember that, 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.
At the time of publication, Cramer had no positions in the companies mentioned.Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. ET weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here. TheStreet.com has a revenue-sharing relationship with Traders' Library under which it receives a portion of the revenue from Traders' Library purchases by customers directed there from TheStreet.com.
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