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) -- "Investing isn't easy, but it doesn't have to be mystifying," Jim Cramer said on "Mad Money" as he dedicated the entire show to helping translate Wall Street gibberish into plain English for individual investors.

Cramer's first words in the Wall Street dictionary: "secular" and "cyclical," two important ideas that go hand in hand. He said cyclical companies need a strong economy in order to grow. Think steel, machinery and chemical stocks.

Secular growers, on the other hand, keep growing regardless of the economy. Cramer said these are companies that make anything you eat, drink, smoke, brush your teeth with, or use as medication.

Why are these distinctions important? Cramer said they help determine how much a company will earn in a given environment. He said the hedge fund playbook was written on buying and selling these powerful trends.

This is why the philosophy of buy and hold is silly, said Cramer. Why would anyone want to hold onto a stock that's out of favor? During times of recession, said Cramer, investors need to sell the cyclicals and buy into the secular names. And when the economy is recovering, it's time to sell the seculars and jump back into the high growth cyclicals.

An Important Metric

Cramer's next translation of the Wall Street dictionary was about the different metrics used to value a stock. He explained that when you buy a stock, you're actually buying a small sliver of that company's earnings. By owning a stock, he said, you're betting that either those earnings, or the multiple the market is willing to pay for those earnings, is going up.

Cramer said there's no magic to price-earnings, or P/E, multiples. The price of stock is equal to its earnings times the multiple. That's it. Of course, both the earnings and the market's multiple on those earnings are always changing, but the formula remains the same.

The market is always drawn to growth, said Cramer, which is why faster growing stocks often fetch higher multiples than slower-growing ones. To determine how fast a company can grow, Cramer said, investors need to dig for clues in its quarterly reports.

Cramer said he's always interested in a company's top-line growth, how much revenue it generates, as well as its bottom line profits. He said the markets always pay up for accelerating growth, or growth that is speeding up quarter after quarter. Gross margins, the amount of every dollar a company turns into profits, is also another key metric to consider.

Cramer said the only way to truly compare stocks is to look at the multiple, the earnings, the growth rates and how well the top line, bottom line and gross margins are doing.


Next on Cramer's agenda: "risk/reward," a term that permeates much of Wall Street. Cramer said this term is nothing more than comparing the possible upside gains of owning a stock against the possible downside risk.

To determine the risk/reward of a stock, Cramer said you need to understand two cohorts of investors -- the growth investors, who are willing to pay up for the stock, and the value investors, those who will swoop in as a stock falls and gets cheaper.

Cramer said the reward is determined by the growth investors, while the downside risk is determined by the value investors. He said one quick and dirty rule is that a stock is cheap if it falls below one time its growth rate, but is too expansive over two times its growth rate.

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For example, if a stock trades at 20 times its earnings, and it has a 10% growth rate, it probably won't go much higher. But if the same stock falls to a multiple of 10 times earnings, then it probably won't fall much lower.

Cramer said pegging a stock's multiple to its growth rate is a quick and effective tool in determining its risk/reward. You must know what you own, he said, and know what others will pay for it.

Trade vs. Investment

Cramer's next gibberish item is the difference between a trade and an investment. He said on the surface these terms might seem identical, but in fact they're very distinct.

Cramer explained that when you buy a stock as a trade, you're buying it for a specific short-term catalyst, some anticipated future event that will drive the stock higher.

This event may be a company's quarterly earnings, or it may news-driven, like a Food and Drug A drug approval. In either case, the plan is to buy a stock ahead of the catalyst and sell it afterwards. Once that window passes, however, investors must sell their trades, good or bad, Cramer said.

An investment, on the other hand, is a long-term trading thesis that is not event-driven. Cramer said investments are not an excuse to buy and forget because they can still go wrong. That's why he recommends one hour of homework a week for each stock in your portfolio. As long as your investment thesis is still intact, he said, investors can continue to own their investments.

"Never turn a trade into an investment," Cramer reminded viewers, even if that trade is a successful one.

The Dreaded 'Correction'

Cramer's next item in the Wall Street dictionary: the dreaded "correction." Cramer said a correction is nothing more than a roaring market turning around and retreating, sometimes as much as 10%. He said corrections may feel like the end of the world, but panicking is always the wrong reaction.

Cramer explained that corrections are simply what happens when stocks go up too far, too fast. Investors should expect corrections, he said, and not beat themselves up if they fail to see one coming. "We don't have to like them," said Cramer, "but we do need to acknowledge that they happen."

Cramer's final word for the day: execution. He said this is a tough one since it's largely subjective, but execution usually refers to management's ability to follow through on its plans. When you own a stock, he said, you always run the risk of management screwing up and not producing what they promised.

Cramer said this is why it's always worth paying up for what he calls "best of breed" companies. "You want companies with proven, seasoned management teams," he said, because they're less likely to drop the ball.

To watch replays of Cramer's video segments, visit the Mad Money page on CNBC


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-- Written by Scott Rutt in Washington, D.C.

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At the time of publication, Cramer's Action Alerts PLUS had no position in stocks mentioned.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for, Inc., and CNBC, and a director and co-founder of All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of 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, 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 is related to the specific opinions expressed by him on "Mad Money."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.