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Editor's note: This recap was last published on Aug. 30, 2010.
NEW YORK (
) -- "When it comes to growing your wealth, the stock market isn't just your best option. It's the only game in town," Jim Cramer told the viewers of his
TV show Thursday, as he tried to get investors to once again fall in love with the market.
Cramer said he understands many investors' disenchantment with the markets, especially after the financial crisis of 2008, when even the good stocks got pummeled. But for those considering parking their life savings in U.S. Treasury Bonds, Cramer said to think twice.
Bonds and treasuries are often considered "safe" investments but they only offer a puny yield with a capped upside, said Cramer. "Treasuries are not a way to seriously grow your wealth."
Consider how much better a high-yielding dividend stock is. Cramer said unlike treasuries, stocks with dividends give you multiple ways to win. First, companies can raise their dividends and pay you more, something Treasuries can't do.
Plus, stocks can appreciate in value, something Treasuries can't do. And even if stock prices fall, their dividend yields rise, which means you can buy more on the way down and get even more money.
Cramer said investors may feel mistreated and abused by the markets as of late, but they can't sit on the sidelines. He said if investors stay disciplined, and keep a diversified portfolio with lots of high yielding dividend stocks, there's plenty of money to be made.
"Index funds are not the way to own stocks," was Cramer's second lesson to investors. He said while it may seem impossible to beat the averages, index funds are nothing more than a brainless way to invest, and there is a proven way to beat the averages.
Cramer reminded viewers that since 1926, nearly 40% of the total return from the
has come from reinvested dividends. And, ever since 1957, stocks with the highest dividend yields have also outperformed the S&P 500.
Cramer said there's simply no good reason to own the entire market through an index fund. He said investors can find individual, high-yielding stocks that will give you a much higher return than bonds, and a higher return than the averages.
Plus, he added, dividend stocks also offer some protection. Short sellers, he explained, are required to pay the dividends on the stocks they short, and thus, they avoid the big dividend stocks.
Cramer said he remains a fan of "accidental high yielders," a term he coined for stocks that offer a mid-range dividend yield, but because their share prices get pounded, temporarily offer high yields. These stocks have been some of the best investing opportunities out there, he said.
Need another reason to love the markets? How about takeovers. Cramer said takeovers are another great way rack up big profits, but only if done correctly. He warned that investors should never speculate on a takeover unless the company's fundamental business is sound. If the company's not in good shape, he said, it's stock will only drift lower and lower, wiping out any potential gains.
So how can investors see deals coming? Cramer said when
announced it was buying Starent Networks on Oct. 13, 2009, it came as no surprise.
Cramer had been recommending Starent since May 8, 2009, telling viewers about the power of the smartphone revolution, a huge new product cycle bigger than the PC and the Internet. Investors who took Cramer's advice saw an 80% gain over that time period.
Cramer said takeovers are easier to predict when you've got a huge secular growth theme, but that's not the only way to see them coming. Take 3Com, another computer networking play. Cramer said he recommended this company on Sept. 25, 2009 because it was getting its act together and turning itself around. Less than two months later,
snapped up 3Com for a 52% gain.
Finally, Cramer said that companies that are impossible, or extraordinarily expensive, to duplicate also make great takeover targets. Just look at
recent bid for
. Cramer said investors could have seen this deal coming, as Potash was about the only low cost way to get into the fertilizer business.
There's even more to love about the markets, said Cramer. When it comes to turbocharged profits, growth stocks are the only way to play. But what should investors look for? Cramer said there are three ingredients.
First, high-flying growth stocks need a strong secular growth story, meaning their earnings aren't tied the economy, he said. Even during a slowdown, he said, these secular trends transcend the larger economy.
Second, investors should be looking for accelerating revenue growth. Cramer said while growth is great, accelerating growth shows investors that business is snowballing, and money managers will pay through the nose for this type of growth.
Finally, growth stocks need to have rising earnings estimates. He explained that when Wall Street analysts keep raising their targets for a company, it's like rocket fuel for stocks.
Cramer said as long as these three components are in place, share price doesn't matter. He said the only way to tell if a stock gets too expensive is with its price earnings multiple. The ceiling, he said, is a P/E ratio that's twice the company's growth rate.
Cramer had a few final tips for investors before rekindling their love affair with the markets. First, always keep 5% to 10% of your portfolio in cash. Think of your portfolio like a tank of gasoline. "When you're running on empty, you don't have too many options," he said.
Next, if the market really stinks, buy in increments on the way down. Cramer said the market never provides an "all clear" signal when it hits bottom, so buying in increments is a great way to hedge your bets.
And speaking of bottoms, Cramer said in order to truly hit a bottom, you need wholesale capitulation. People have to give up, he said, and sentiment needs to be incredibly negative. The greatest clue to tell when a stock has hit bottom? When bad news no longer sends shares tumbling.
"All of these things are what make the markets worthwhile," said Cramer, which is why he never stops urging people to stay in the game.
--Written by Scott Rutt in Washington, D.C.
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