Sneak Preview: Know the Downside

Editor's note: This is a special sneak preview of Jim Cramer's just-released book, Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer). Look for more sneak previews every day, and get your free copy with your annual subscription to Action Alerts PLUS; click here for details. Catch Cramer in person to get it signed Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco.

Missed the first sneak previews? Read the book intro and the rules of getting and staying rich: Rule 1, Rule 2, Rule 3, Rule 4 and Rule 5. Know what pros do right and amateurs do wrong: Part 1, Part 2, Part 3, Part 4 and Part 5. Learn the five mini-bull markets that will stampede for years, starting with aerospace and defense, agriculture, oil and oil service, minerals and mining and infrastructure.

5. Pros want to know the downside, not the upside. That's why dividends and buybacks are so important.

Whenever I meet or am in contact with a nonprofessional and I am pressed for an opinion, I always turn the tables and ask, "How much do you think this stock can go down?" People don't want to know that. They just want to know how much it can go up, or they want to tell me how much it can go up. They never want to hear about the downside. They don't even think it will go down.

I think that everything will go down, everything. I always want to know what can cushion me. How big is the buyback? Is it a genuine buyback that shrinks the float? (A buyback is when a company purchases its own shares, reducing the number of shares on the market and thus making each share more valuable as it represents a slightly larger piece of the company. The float is the number of shares that actively trade on the market.) Or is it one of those bogus buybacks that retires some of the stock the company is issuing to employees?

Is the dividend good? Can they pay out more? Is it possible that, even though the dividend seems small as expressed by the yield (dividing the stock price by the amount of the dividend), it may be bountiful if we think of it is as a moving target?