How do you catch a big stock move before it happens?
By finding out about a potential strong mover before everyone else does, Jim Cramer said on Tuesday's "Mad Money" show.
"You need to be able to see stock moves coming," said Cramer, who did a prerecorded special edition on spotting tops, among other things, on his
How does one do that?
"You do not make money by buying well-known companies," Cramer said. "You do it by buying small-cap stocks that shouldn't be small."
Investors should be looking to get in stocks that are not covered by analysts, before the brokers can eventually get in and start pumping them up. But when everyone knows about the stock, you get off the train. Make the analysts work for you, Cramer said.
Another way to make money is to understand market psychology.
"Finding undervalued stocks is all about psychology," Cramer said. You need to know what the mob is doing, Cramer continued. If you follow the mob, you will be investing in the hot names, which are fraught with problems. "The mob crowd is fickle," Cramer said.
Cramer also outlined methods that would help investors spot tops. It's more important, Cramer said, to know when to sell than to buy.
"Why stay too long and get cooked?" Cramer mused. "
Gains can vaporize in an instant," Cramer said.
Cramer said investors should always be on the lookout for competition. You have to follow not only your stock, but the whole industry. Competition is the chief reason Cramer has sold stocks during his career on Wall Street. What's more, always assume that competition is out there. Keep doing your homework. "Competition from left field kills you," Cramer warned.
Another way to spot a top in a stock is overexpansion. Wall Street loves acquisitions and rapid expansion. But overexpansion, Cramer said, puts a strain on management. When management talks about "integration issues," investors should run to the "sell, sell, sell!" button.
When retailers put up too many stores near each other, beware, Cramer said. The time to own retailers is when they are regional stores, not when they are national players with a store in every state.
Another reason to sell: "Accounting irregularities," Cramer says, "equals sell." When accounting is shaky, he said, shoot first and ask questions later.
Another way to spot a top is to scan the front pages of mainstream newspapers. When you see business stories on the front page, it's time to sell.
Cramer later outlined his game plan for building an active stock portfolio. Before he got started, he made this point: Use discretionary funds for an active stock portfolio. Do not play with money that you need. And do not play with retirement money. Here are his 10 rules for building a portfolio, as he delivered them.
: Buy a stock that is a stock for the future. Call it your nontech hope stock, he said.
: Pick a retailer, preferably a regional retailer that still has plenty of growth ahead.
: You need some technology to have a diversified portfolio.
would be a good start.
: You need a cyclical name.
: Own a secular stock -- a soft-goods stock such as
Procter & Gamble
Johnson & Johnson
: Own one speculative stock. Something you think is a winner, though. You have to do your homework on this one.
: Hold one financial. Own your local bank. Cramer owns
, a regional bank near his home.
: Own a brand-name blue chip.
: Oils. A must-have. They're consistent performers. And they have high yields.
tenet in Cramer's tool kit: Pick a company that you know. You want to have an edge. Perhaps one of your pals works there. Local knowledge gives an investor an edge.
Cramer gave one more tip at the end of the show. He said that at economic bottoms, it's time to buy beaten-up cyclicals. When cyclical stocks start to bottom, Cramer said, earnings estimates get slashed. That, he said, makes stocks look expensive -- and that is precisely when you have to buy. You'll be buying the stocks just as the earnings start to pick up.
Interested in more Cramer? Check out Jim's rules and commandments for investing from his latest book by
. It's a series of articles from Cramer on how to become a better investor. The following table lists some of the rules that Cramer dissects.
At the time of publication, Cramer was long Commerce Bancorp and Intel.
James J. 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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