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Editor's note: The following is a recap of a "Mad Money" episode that originally aired on July 5, 2005. It was rebroadcast on Aug. 4, 2006
Wall Street is an "embarrassingly unsophisticated" place where the real money is made by daring investors who predict the tastes of crowds, Jim Cramer said on his "Mad Money" TV show.
"You need the stupid, unthinking greed of everyone out there to drive stocks up -- stocks that you were in early," Cramer advised viewers.
While buy-and-hold strategies will yield a market return, beating the market involves finding obscure stocks that will later find favor with the mob.
"If you're only willing to buy and hold, then you're too lazy to be in this game," Cramer said. "To beat the market you have to know where it's going before it gets there."
Cramer said he's earned the contempt of some investors for riding the dot-com craze to its zenith "before getting my butt out of there." But "no stock is overvalued if it's going up."
Don't look for momentum names is analyst reports, the
or most of the financial press, Cramer said. Look in message boards,
Investor's Business Daily
Cramer offered the example of an investor trying to game nanotech. "You're not going to look for a good nanotech company. You're going to look for the least bad one. Science that sounds just legitimate enough to get the crowd behind it."
"Once you're in, if you're right, the soon-to-be-hot sector will start getting coverage," he said. "Brokers will promote this garbage, then it will soar."
Saying when to sell is more important than when to buy, and Cramer offered a list of signals he looks for in stocks that are topping out. He mentioned creeping competition, accounting problems, overexpansion and government interference, among other things.
Again, Wall Street analysts are no help. "Downgrades happen most often after the train has left the track," he said. "Once it's burned, it's finished, gone, destroyed."
The encroachment of competition is responsible for 70% of stock "tops," Cramer said, a notable example being U.S. Surgical in the mid-1990s. You had to own the stock, went the Street's mantra, because of its dominance in the surgical staples sector.
"That is until
Johnson & Johnson
announced it was getting into the business. USS went from $120 to $30 and I shorted every share I could get."
"Always assume someone can come in and make your company's product for less."
Investors should bail at the first sight of accounting shenanigans, Cramer said. "You must shoot first, and don't even bother asking questions." Cramer copped to ignoring the advice and getting burned on
Overexpansion stresses management's time and money, while any reference to "integration problems" like those experienced at Enron and the old
are reasons to "run for the exits."
"Look out when a retailer has too many stores near each other," Cramer said. "When a retailer has stores in every state in the union and has no new places to expand, that's the ultimate top."
Cramer offered several rules of thumb for profitable investing including proper diversification and the use of 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.
No. 10: Buy a stock that is a stock for the future. Call it your nontech hope stock, he said.
No. 9: Pick a retailer, preferably a regional retailer that still has plenty of growth ahead.
No. 8: You need some technology to have a diversified portfolio.
would be a good start.
No. 7: You need a cyclical name.
No. 6: Own a secular stock -- a soft-goods stock such as
Procter & Gamble
Johnson & Johnson
No. 5: Own one speculative stock. Something you think is a winner, though. You have to do your homework on this one.
No. 4: Hold one financial. Own your local bank. Cramer owns
, a regional bank near his home.
No. 3: Own a brand-name blue chip.
No. 2: Oils. A must-have. They're consistent performers. And they have high yields.
And the No. 1 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 offered an understanding of how different businesses perform during different economic cycles. "Fifty-percent of how a stock moves depends on the performance of the sector it's in," Cramer noted. "If you call the sector, you can call half the gains or losses in a stock."
Cramer differentiated between the two main categories of stocks -- cyclicals, which do well when the economy is doing well, and secular growth, which aren't sensitive to the underlying strength of the economy.
The first category includes airlines, autos, raw materials and heavy equipment, while the second includes consumer staples because "we don't stop buying Band-Aids just because we're short of cash."
Cramer mapped out one counterintuitive investment strategy that consists of buying cyclicals when their price-to-earnings ratios are highest. The wide P/Es reflect the frantic effort of analysts to lower earnings estimates, he said, but that generally happens once the stocks have stopped going down.
"When these companies are at their most expensive at the bottom of the cycle, that's when you have to buy."
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At the time of publication, Cramer had no positions in stocks mentioned.
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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