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This program originally aired Dec. 23, 2011.
NEW YORK (
) -- "Investing is a lot like comedy. Timing is everything," Jim Cramer told
That's why he dedicated his entire show to go over the frequent errors that investors make when buying and selling stocks.
Cramer said that knowing when to buy and when to sell is one of the most important, and most frustrating, parts of managing your own money. That is likely the reason why there is an entire cottage industry of financial advisers who tell investors that it simply cannot be done, that they should just put their money into index funds and leave it there forever.
But Cramer said that while index funds have their place, telling investors that they're the only way to make money is totally bogus.
Timing makes all the difference, Cramer explained. He said there was a big difference between buying stocks at the market peak in October 2007 and buying them at the generational bottom in March of 2009. There was a difference between buying stocks before the European financial crisis began to rule the world's markets, and after.
Cramer explained that one reason timing the markets is so hard is some of the best moments to buy are during the moments of greatest terror. It's almost never the right time to sell when the markets are panicking. History has proven that whether it was the crash of 1987, the flash crash of 2010 or the attacks on 9/11, what worked best was to be prudent and not to panic.
Perhaps the only exception, noted Cramer, was the financial crisis of 2008. Cramer said he was widely criticized for telling investors to sell their stocks in October 2008, but with the entire financial world as we knew it on the brink of collapse the call to sell proved to be the right one. Investors were able to side-step the additional 35% decline in the averages.
But other than that one special case, Cramer said dumping stocks into a selloff is always the wrong move. "Keep your head, because you will get a better moment to sell," he concluded.
Not the End of the World
Cramer said not every big decline in the markets signals the end of the world. That's why no matter the crisis of the day, it's never a good idea to sell everything because not all stocks are equally good or equally bad.
When bad news hits, Cramer told investors to look at the stocks in their portfolios and rate them on a simple scale. Stocks you rate No. 1, for example, could be the ones you believe in and are worth buying more as they head lower. Stocks in the No. 2 camp could be those that could be sold if you needed to raise cash. Meanwhile, the No. 3s could be those that are expendable and should be sold now.
Cramer said that as a general rule, if investors have big gains, they should give them back. Ring the register, he said. If the fundamentals of a company have changed, sell. If you think a stock is headed lower, sell some and buy it back lower. But no matter what happens, never sell it all and hide in low-yielding bond or bank CDs.
Cramer recounted how he learned his lesson about not selling everything. He said in the 1990s, he held shares of American Stores, the old Acme supermarket chain, hoping the company would be taken over. After years of losses, he finally gave up and sold all his shares, all at once. Just two weeks later, American Stores was taken over. Cramer said his mistake was selling it all.
Know What You Own
Cramer's next tip for investors: Know what you own. He said in today's media-driven world, investors simply should not own a stock unless they know
they own that stock. Why? Because the media never met a negative story it didn't like.
Whether it was the tsunami in Japan or the European financial crisis, Cramer said investors should just assume every story they see on TV or read in the papers has been exaggerated in some way. So unless investors know why they own a stock in the first place, it will be far too easy for them to bail out on their stocks at the first sign of trouble.
Cramer recounted what he used to call his "Bristol-Myers Theorem," derived from
, a drug company with the most consistent earnings imaginable. He explained that back at his hedge fund, anytime an associate would run in panicking about a negative story, he would always ask, "How does that affect the earnings of Bristol-Myers?" In just about every case, it didn't.
That's why Cramer often recommends reliable, consistent earning stocks with great dividends, stocks like
Kinder Morgan Energy Partners
, or utilities such as
. Cramer said no matter what the negativity of the day, companies like these will allow investors to put those stories into perspective.
The Dangers of IPOs
Next up on Cramer's tips for investors, the dangers of initial public offerings. Cramer said that he's often asked about the next hot IPO coming down the pike but his answer is always the same, "what price are they offering and how many shares are there?"
When it comes to IPOs, Cramer said it's all about valuation, how many shares are being offered and at what price. He said what starts out as a great offer at $20 a share, can easily get hyped up to $25 a share right before it comes public. The IPO business also has a habit of limiting the number of shares offered to ensure a big first-day pop in the share price, a pop that will only hurt investors later on. Cramer said his usual advise: If you can get in on one of these "sliver" offerings (described above), do so, but never buy them in the aftermarket.
Case in point, the recent IPO of
. Cramer said he never liked Groupon the company, but Groupon the IPO was a buy, buy, buy. Why? He explained that while Groupon had 640 million shares of stock outstanding, the IPO only offered a scant 40 million of them to the public.
The result was huge demand, which sent shares of the $20 IPO to $28 and then $30 a share on its first day. This was a great return for those in on the IPO at $20, but those who bought at $28 and $30 were crushed as shares slid to under $15 a share in the days that followed.
Few Are Forever
Cramer's final tip for investors is that only a few stocks should be held forever. He said it's not OK to own a stock unless investors know exactly what would make them sell it in the future.
Too often investors end up selling a stock at the wrong time because they never anticipated selling it in the first place, Cramer explained. Similar to the "Bristol-Myers theorem," if investors don't know what they own and why they own it, it's easy to panic at the first sign of trouble.
In particular, Cramer said high-flying tech stocks in particular cannot be owned forever, as technology changes too rapidly and what's red hot this year likely won't be next year. Likewise with cyclical stocks, said Cramer, just because the economy is great today, it doesn't mean the same will be true tomorrow.
"Tech stocks are not the same as staple stocks," Cramer explained. There are tech cycles and there are economic cycles, he said, but there aren't cycles for Cheerios or Hershey bars. Learn from the dot.com bust of 2001, Cramer reminded viewers. Investors need to be ready to sell when the time comes.
When it comes to high-flying stocks, Cramer concluded, "take profits on the way up, get out on the way down and be ready to jump ship when the time comes."
--Written by Scott Rutt in Washington, D.C.
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At the time of publication, Cramer's Action Alerts PLUS had a position in BMY.
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."
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