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Editor's note: This recap is from a show that aired in 2008
Jim Cramer devoted his "Mad Money Show" Friday to talk about several mistakes viewers should avoid when they invest.
First, he said, investors need to understand the difference between an investment and a trade. "A trade is when you buy a stock for some specific event, a catalyst," he said.
An investment, on the other hand, is based on a long-term thesis, "the idea that a stock has the potential to work over a long-time horizon."
Cramer said it would unwise to sell a stock you believe in for the long term just because it's "gone up a lot off some catalyst."
Doing so, he said, will lead you to get out before the best gains have arrived.
Cramer illustrated the point by talking about his youngest child's desire to buy a second
iPod. At first he couldn't understand why she should want another one, but then he realized the significance of the iPod as a "fashion accessory" and presto, that insight turned into an investment thesis for the stock.
He bought Apple at $26 and enjoyed a huge run-up in the stock.
Bottom line: Don't turn a good investment into a trade before your thesis has a chance to take the stock much higher, he said.
China Watch: Cramer's a Fan
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Cramer's second rule of thumb is to avoid speculating in cheap, low-dollar stocks. He said his single biggest loss ever in his Acton Alerts Plus charitable trust was in
, which he bought for $4 and ultimately cost him $130,000, when he had to eventually sell it at $2.
"When we look at a stock with a share price that's under $10, we get taken in by that mystique of the single-digit stock," he said.
Cramer said the best way to deal with the situation is to apply his "multiply-by-10" test. "If the stock price were $40, and not $4, and everything else about the stock and the company was the same, would you still like the stock?"
"If I had done that with Charter, which was drowning under the weight of its debt, I would've never bought the thing in the first place," he said.
Cramer advised viewers not to be seduced by single-digit stocks. They're that low for a reason. "It's those very same low prices that attract us to stocks we otherwise wouldn't be buying."
Love at First Sight
Cramer told viewers not to go overboard on a new product. He made that mistake in 2006 when he fell in love with a stock called
. Some experts had told him the company had come up with a brand new product called "Go To My PC."
Enthused by the product's potential, he jumped in and bought it for his charitable trust in the spring of 2006.
Little did he know that the product had been around for three years when he bought the stock. The end result: He had to sell the stock 10 points lower.
Cramer advised viewers to be careful of so-called new product offerings. "If it's been around for a long time, you're jumping on a bandwagon that's about to go over a cliff."
Cramer said he gets a lot of requests for people who want him to talk more about mutual funds.
Personally, he thinks home gamers would be better off spending the time doing the homework necessary to pick individual stocks.
However, for those who don't have the time for stock picking, he recommends getting into a "cheap" index fund that mirrors the S&P, with low fees.
When you invest in a fund, he says, check out the performance of the manager, especially his long-term performance. "Any schmoe can make money in a bull market," he said.
Cramer says most investors think of 401K plans and IRAs as boring investments.
But for people who want to live well in their golden years, these investments are important because of their tax savings, he said.
That's because you don't pay taxes on the money that goes in; you don't pay taxes on dividends and capital gains as long as you keep them in the 401K or IRA; and you get taxed only once on the money as ordinary income when it's distributed in your retirement years, he said.
He said investments in REIT stocks and royalty trusts are especially attractive because there aren't any taxes on their dividend yields.
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for
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