Search Jim Cramer's Mad Money trading recommendations using ourexclusive Mad Money Stock Screener and watch Jim Cramer's Mad Money Post Game videoexclusively on TheStreet.com.
NEW YORK (
) -- "Sometimes you have to un-learn conventional wisdom to be a good investor," Jim Cramer told the viewers of his "Mad Money" TV show Thursday.
He dedicated his entire show to teaching investors the secrets he revealed in his book
Getting Back To Even
Cramer said the first myth investors need to learn to ignore the notion of buy and hold. He said investors should instead pay attention to short-term market fluctuations so that they can take advantage of them to buy stocks they like at cheaper prices, and sell those that have been driven unrealistically high.
Cramer said that stocks are no different from any other kind of merchandise. He likened them to buying a sweater at a retail store, saying that if you see a nice sweater for $30, you might consider buying it, but if you returned the following day and saw it was selling for $55, you might think differently.
> > Bull or Bear? Vote in Our Poll
Cramer reminded viewers that unlike the retail store, the stock market gives you a different price every day. But, he noted, that the risk-reward equation of a stock changes with its price, so shares of
, for example, aren't the same at $600 a share as they are at $700 a share.
Cramer said investors need not become furious day traders, but in practical terms, they should keep an eye on their stocks, keeping a shopping list of what to buy when they "go on sale." He said price matters, and investors can only make mad money when they're paying attention to the short term.
Doing Your Homework
Cramer's second tip for investors was a simple one, hard work really matters. He said that doing your homework, reading a company's filings and listening to r conference calls, may seem fruitless, as stocks tend to bounce around seemingly unglued from their fundamentals, but he stressed the fundamentals matter a whole lot.
Cramer said a company's fundamentals vital. They're knowable, he said, and anyone who tries to understand them, can understand them, and all of the information they need is free and readily available.
So why focus so much on homework? Cramer said because lots of investors, and even money mangers, are lazy. He said that by just reading a company's reports and listening to their calls will give an investor a huge leg up on most of the other investors out there. "Homework is all about taking control of one's destiny," he said.
Cramer explained that doing the work gives you conviction in your stocks, and a good, clean way to decide whether to buy more, or take profits.
Investing in IPOs
Cramer's next lesson for investors was how to invest in IPOs, those sexy deals that are talked about endlessly in the media. He said IPOs can either make you mad money quickly, but they can also blow up in you face if you don't do it correctly.
Cramer said don't let brokers trick you into thinking that every IPO is a great deal, or that the challenge is getting your hands on the initial shares. "Wrong, wrong, wrong," said Cramer, adding some IPOs simply aren't worth investing in.
The investment banks that underwrite IPOs have their own agendas, said Cramer. They're out to not only raise money for the company going public, but also to make money for their clients who invest in the new shares. For this reason, he said, IPOs are often, although not always, priced low so that investors are rewarded for investing.
Cramer cited the 2008 IPO of
where the offering was intentionally priced low. He said at the time of Visa's offering, the stock market and the IPO market were horrible. Thus underwriters priced Visa at just $44 a share, causing it to pop as high as $69 a share, before settling out at $56.40 on its first day of trading.
Cramer also said that he never advises buying IPOs in the aftermarket, meaning after they begin trading publicly on the exchange. "If you don't get in on the deal, forget about it," he said.
So once investors understand how IPOs work, how do they choose which ones to invest in? Cramer uses a three-step vetting process that involves looking ironically not at what the company does, but rather at who the executives are, who the investors are and who's underwriting the deal.
Cramer said the first group, the executives, is the least important part of the equation. He said that although most company's executives are largely unknown, he likes to see at least one seasoned player on the team.
Cramer looks next at the investors, which is more of a negative check, or a means of disqualifying an IPO. Cramer explained that over the last few years, large private equity firms have taken countless companies private, and are now looking to cash out for big profits. This means the IPOs they're offering are very richly priced, sometimes for companies that are barely profitable. Cramer said if the investors are all big private equity houses, they shouldn't be trusted.
Finally, Cramer said he looks to the underwriters of the deal. He said he wants to see major firms, like
on the deal, firms with reputations at stake.
He said that these firms won't bring a company public just for the huge fees they bring to the company. Instead, he said, these firms stand behind the companies they work with.
Cramer said only be looking at this three-step vetting process can investors truly know not only what, but who, they're buying and trusting with their investment dollars.
Cramer said the final step in analyzing an IPO is to look at the company itself. He said investors need to ask a whole host of questions about what it makes, whether it's profitable and how big its end markets are. Cramer said if the company makes a consumer product, you need to ask whether you like the product.
Cramer said the chances are if the company makes a good product and is already profitable, investors can expect to gain not only from the IPO, but also from the extended run afterwards. He said a trice-blessed IPO would be a profitable entity, with a big addressable market, and a great brokerage sponsoring it.
Cramer said that in all cases, the trick is to recognize the size of the market and the power of its competitors, to determine just how far the new company will likely be able to go.
In the case of athletic apparel maker
, the company was able to grow like bangbusters initially, but when the company decided to challenge incumbent
in footwear, Under Armour's sizzle soon fizzled.
Bottom line, Cramer said investors need to do a complete analysis on IPOs by asking a of questions to sift the good from the bad.
-- Written by Scott Rutt in Washington D.C.
To watch replays of Cramer's video segments, visit the Mad Moneypage on CNBC
Want more Cramer? Check out Jim's rules and commandments forinvesting from his latest book by
For more of Cramer's insights during the Lightning Round, clickhere
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."
None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com 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 TheStreet.com, 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 TheStreet.com. 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 TheStreet.com, 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.