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"It's my job to protect you from conventional wisdom," Jim Cramer told viewers of his "Mad Money" TV show Monday. He said that anyone who tells you ordinary people shouldn't own individual stocks is just wrong.
Cramer said it's "hogwash" for those on Wall Street to tell individual investors that the market is too hard, and that they should just go with mutual funds or index funds.
He said that no one will ever care more for your money than you do, and that in an era when personal responsibility is at its highest, it's ludicrous to think that ordinary people can't make smart decisions about their money.
During one of the longest bull markets in history, index funds became all the rage, only to crash in 2008. Cramer said while index funds are a valuable and welcome innovation for investors, they're not a way for average investors to play the market. Using only index funds, investors will have a hard time even matching the market, and will never beat it, he said.
Likewise with mutual funds, said Cramer. Many investors think that an actively managed fund will beat the market, and that fund managers will get out ahead of trouble. Not true. In order to gain competitive advantage over their peers, funds remain fully invested, making them vulnerable to mistakes and losses just like everyone else, he said.
Cramer said when it comes to investing, picking the right stocks and knowing when to sell, are the two skills that keep investors ahead of the markets, and not struggling to keep up.
When it comes to investing, it's discipline, not conviction, that leads to success, said Cramer. "We screw up when we just go with our convictions," he said, adding that's why we need discipline.
Discipline comes from rules, said Cramer. Rules are what help us make the tough calls, and one rule that Cramer said he lives by is "never turn an investment into a trade."
Cramer said many investors make the mistake of selling a stock they believe in just for a quick gain. But this is wrong: "Don't sell a stock you believe in for the long-term just because it's gone up a lot off of some catalyst," he said.
If you know something is going to work for the long-term, you have to be willing to sacrifice the quick gains and hang in there, said Cramer. Don't just take the five-point win when you know there are 50 points to be had.
Another rule investors need to live by comes from Cramer's book "Stay Mad For Life" which makes the point that "low-dollar speculative stocks can wipe you out!" In today's market, this rule could not be more true, he says.
Cramer said while he's not against speculating on single-digit stocks, doing so without doing your homework is a recipe for disaster. Anyone who invested in
at $10 a share, only to watch it sink to a penny stock, can attest to this rule, said Cramer.
Stocks do not get into the single digits because things are going well, he said. And while many investors may want to speculate on a miraculous comeback or even a takeover bid, the vast majority of stocks under $10 a share are just lethal to portfolios.
Cramer said he only recommends speculating on low-dollar stocks as long as investors know these names can wipe them out. "Don't be taken in by their share price," he said.
Cramer said his next rule for investors also comes from his book "Stay Mad For Life," and that's "love the product, not the stock." He said too many times investors think because a company makes a great product, their stock will do great too, and that's just not true.
Cramer explained how in 2006 he fell victim to this rule, falling in love with the stock of
, which made the popular GoToMyPC software. Back in 2006, Cramer thought the software was the best thing since sliced bread, and invested in Citrix as a result.
The very next quarter, Citrix disappointed Wall Street by announcing slower- than-expected sales. How could this be? Cramer explained that he was simply too late, everyone who loved the software as he had, already owned it. He was too late. Blinded by the product, Cramer lost sight of the market, of the business, and of Citrix.
Cramer said a great product does not make a great stock. He said "just because you just discovered something doesn't mean millions of other people haven't already discovered it."
Cramer said he final rule for investors has to do with retirement. "When it comes to managing your own money, nothing is more important than making sure you've got enough dough to retire," he said.
Cramer's "secret weapon" when is comes to retirement savings is dividends.
Cramer reminded viewers that earnings from dividends are only taxes at 15%. That makes certain stocks, which pay incredibly high dividends, likes real estate investment trusts and energy trusts, incredibly appealing for retirement savings.
REITs and energy trusts, like
BP Prudhoe Bay
Permian Basin Royalty Trust
, are organized as master limited partnerships, meaning they pay all of their earnings out in the form of enormous dividends. These stocks can see yields upwards of 10% to 15%.
Cramer said stocks like these are great investments, provided that the companies do not carry too much debt on their balance sheets. He said no matter what kind of stock investors may be looking for, there's likely a REIT or trust to accommodate them.
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At the time of publication, Cramer was not long any stock.
Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."
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