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NEW YORK (
) -- "Being a long-term investor is no excuse for not following the rules," Jim Cramer told the viewers of his "Mad Money" TV show, as a he took a break from the daily market action to dispel the myths of the so-called "buy and hold" investment strategy.
Cramer said, of course, making money long term is the ultimate goal, but sadly it's also become the ultimate excuse for short-term losses. He said that far too often investors ignore short-term pain under the delusion that they're "in it for the long term."
"Losses are losses, realized or otherwise," Cramer told viewers. Being a "long term" investor doesn't justify owning damaged goods, he said, just ask those who owned shares in the former General Motors. Being a long-term investor does not mean buy and forget.
long-term investing all about? Cramer said in a word, homework. He said investors need to read the quarterly reports, read the
filings and listen to a company's conference calls. Investing for the long term, he said, is not a license to not pay attention. Investors also need to stick with high-paying dividend stocks, he said, because those companies, compounded over time, yield the highest results.
If the financial panic has taught us anything, said Cramer, it's that the buy and hold philosophy is dead. The banks will take your money, he said, even if it was made from a short-term trade.
"Never plan on owning a stock forever," Cramer told viewers. He said as sectors come in and out of fashion, investors need to be looking for overarching themes, multi-year secular growth trends that rise above the daily market action. One of those themes, he said, is the mobile Internet tsunami, or smart phone revolution.
Cramer said the mobile Internet revolution will be bigger than the PC revolution in the '80s and bigger than the Internet revolution in the '90s. He said investors must own mobile Internet stocks, because trends like these only come about two or three times a generation.
So what is the Internet tsunami all about? Cramer said it's all about mobile devices like
Kindle. He said it's about how these mobile devices are changing the way the world uses technology. This is especially important in the developing world, where entire countries are skipping landlines altogether, and are moving right into wireless communications.
Cramer said the obvious way to play the revolution is with Apple, a stock which he owns for his charitable trust,
Action Alerts PLUS. But he noted that the revolution will extend to many other companies, including the parts makers and vendors, the wireless carriers and even the retailers who sell these devices.
Cramer said stocks like
are all great choices.
Know the Right Price
Learning how to buy a stock at the right price was Cramer's next lesson for investors. He said it's critical to buy in at the right price, and fortunately, long-term investors can afford to be patient, and wait for their stocks to come to them.
"Price is often underrated," Cramer said, but loading up on a stock gently over time, buying more if it drifts lower, is a winning strategy. Calling a perfect bottom is impossible, he said, which makes buying incrementally all that much more useful.
Cramer explained that investors can use a strict scale, i.e., buying 100 shares every time their stock slips a point, but this strategy is not the most effective. Cramer said he likes using sliding scales, buying larger and larger amounts the further a stock slides. This way, he said, investors are pouring money in at the bottom, guaranteeing the maximum return.
While no investor likes seeing their stocks head lower, Cramer said for longer-term investors, those who have done their homework and have a solid long-term thesis in place, seeing their stock go lower just means they get to buy it for less.
Trim Back Winners
When you're investing for the long term, you need to remember to trim back your winners, Cramer told viewers. He said that knowing how to sell your winners is often more critical than knowing when to buy them in the first place.
Cramer reminded viewers that bulls make money, bears make money, but pigs get slaughtered. He said investors can't let their winners ride forever; he or she should instead, sell into strength and take profits.
"You haven't won until you ring the register," Cramer said.
Why sell the winners? Cramer said letting a stock that's up big run wild in your portfolio ignores the need for diversification. He explained that as a stock heads higher, it accounts for a larger and larger percentage of your portfolio, and that spells danger.
Cramer also advocated the concept of "playing with the house's money," or selling your initial investment so you can take more risks and enter a "can't lose" situation as you continue investing with pure profits.
Just like with buying, Cramer advised to never sell all at once. He told viewers that they should sell in increments: sell into strength and slowly reap the rewards of their best investment decisions.
The 411 on 401(K)s, IRAs
Everyone knows they should contribute to their IRAs and 401(k)s, but Cramer asked the question, what should you buy with your retirement money? He said that investing in IRAs, which uses pretax income and is allowed to compound tax-free for decades and decades, is vital for retirement. But, he said, it can be made even better with the right stocks.
Unfortunately, most employer 401(k)s just stink, said Cramer. They entail high management fees, poor investment choices and limited control. But still, given their tax-free nature, Cramer said it would be insane to refuse the free money 401(k)s offer.
However, after meeting the employer's match on a 401k, Cramer advised putting the rest of your retirement money into an individual IRA, one you're in control of. Then, he said, investors need to find high-yielding dividend stocks, companies that offer protection and growth.
Some good choice, he said, include master limited partnerships, or MLPs, like pipeline operators such as
Kinder Morgan Energy Partners
Enterprise Product Partners
Also on the list, oil tanker stocks, which return maximum value to shareholders. Cramer said he likes
Nordic American Tanker
in this group.
Finally, Cramer said real estate investment trusts, or REITs, are the place to be. Stocks like
Federal Realty Trust
, which operates high-end shopping malls, get top honors, but Cramer notes that there are dozens of REITs to choose from including medical, timber, residential, commercial and others.
-- Written by Scott Rutt in Washington D.C.
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At the time of publication, Cramer was long Apple and Cisco.
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.