Cramer's 'Mad Money Recap': Disciples of Discipline
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Editor's note: This show originally aired on Dec. 26, 2006.
To make money in the market, people need more than good stock picks and good advice about the state of the market, Jim Cramer told viewers of his "Mad Money" show Wednesday. "They need discipline."
Cramer: You're So Money, Farnoosh
Know What You HoldMoving on to rule No. 2: when playing a rally, "make sure your stocks actually fit the bill," he said. "Don't be bamboozled by what sector your stock belongs to. Instead, know precisely what you own and why you own it." Although Cramer always advises his viewers to do their homework and know what they own, this rule is different because the point is to recognize that "sectors don't always matter when it comes to giving stocks momentum." People should never confuse a rally within a sector for a rally of that entire sector, he said. Also, he knows people don't always do their homework before buying stocks -- behavior Cramer said he does not approve of. He iterated that he believes people need to spend at least an hour a week per stock they own doing homework to make sure the stock is still a "sound" investment. Breaking down the rule, Cramer said there are times people will see a rally in an entire sector. For example, if the Fed cuts rates, investors will see a rally in almost everything cyclical, or if the economy gets "pummeled," people will see a rally in consumer staples and food and beverage companies, he said. "These are broad, sector-based rallies and you don't have to be all that discerning to pick out a good stock that will make you plenty of money when these things happen," Cramer said. "But most rallies don't work that way." Market players will hear about health care rallies or transports rallies or tech rallies, but that doesn't mean the whole sector's rallying, he explained, because within sectors there are industries. This is what really counts and what people should pay attention to, Cramer said. Cramer said he came up with this rule on June 22, 2005, when he got "caught up" in the idea of a tech rally and picked the two names that most represent tech: Microsoft (MSFT - Get Report) and Cisco (CSCO - Get Report). But later Cramer realized that the so-called tech rally was really a gadget rally. "I fooled myself because Microsoft and Cisco had always been the tech stocks," he said. "It didn't matter that they didn't have any real exposure to the rally, because I was thinking of it as a tech rally, and in a tech rally you buy Microsoft." It's easy to mistake a rally in an industry for a rally in the sector it belongs to, Cramer said, but if people remember this second rule, they should be able to make a lot more money.
Latin AmericaHe said his next rule is "provisionally true" and though at some time in the future he can see it being revoked, he doesn't believe it will be soon. The rule is that "Latin America is always a trade." Every so often there's a "huge wave of interest in Latin American stocks," where everyone in the business who owns these stocks believes that Latin America is an "amazing, long-term growth story," Cramer said.
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