Cramer recounted what he used to call his "Bristol-Myers Theorem," derived from
, a drug company with the most consistent earnings imaginable. He explained that back at his hedge fund, anytime an associate would run in panicking about a negative story, he would always ask, "How does that affect the earnings of Bristol-Myers?" In just about every case, it didn't.
That's why Cramer often recommends reliable, consistent earning stocks with great dividends, stocks like
Kinder Morgan Energy Partners
, or utilities such as
. Cramer said no matter what the negativity of the day, companies like these will allow investors to put those stories into perspective.
The Dangers of IPOs
Next up on Cramer's tips for investors, the dangers of initial public offerings. Cramer said that he's often asked about the next hot IPO coming down the pike but his answer is always the same, "what price are they offering and how many shares are there?"
When it comes to IPOs, Cramer said it's all about valuation, how many shares are being offered and at what price. He said what starts out as a great offer at $20 a share, can easily get hyped up to $25 a share right before it comes public. The IPO business also has a habit of limiting the number of shares offered to ensure a big first-day pop in the share price, a pop that will only hurt investors later on. Cramer said his usual advise: If you can get in on one of these "sliver" offerings (described above), do so, but never buy them in the aftermarket.
Case in point, the recent IPO of
. Cramer said he never liked Groupon the company, but Groupon the IPO was a buy, buy, buy. Why? He explained that while Groupon had 640 million shares of stock outstanding, the IPO only offered a scant 40 million of them to the public.
The result was huge demand, which sent shares of the $20 IPO to $28 and then $30 a share on its first day. This was a great return for those in on the IPO at $20, but those who bought at $28 and $30 were crushed as shares slid to under $15 a share in the days that followed.
Few Are Forever
Cramer's final tip for investors is that only a few stocks should be held forever. He said it's not OK to own a stock unless investors know exactly what would make them sell it in the future.