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Editor's note: This show first aired on April 15, 2011.
NEW YORK (
) -- "Timing is everything," Jim Cramer told the viewers of his
TV show Friday, as he dedicated the entire show to helping home-gamers become better investors.
Cramer said that knowing the right time to buy and sell stocks is perhaps the most difficult, and frustrating, part of investing. That's why many money managers continually tell small investors that the markets are too difficult. They advise against individual stock picking in favor of index funds that simply mirror the market averages.
Cramer said he doesn't have anything against index funds, and even recommends them for those without the time or inclination to manage their money. But, he cautioned, anyone who tells you that index funds are the only safe way to invest are sadly mistaken.
One reason stock picking is so difficult is that the best times to buy stocks are often the scariest. "Who wants to buy stocks in the middle of a horrible market sell-off," asked Cramer? But just because investors may hate the markets, it doesn't mean that's the right time to sell it, he said.
Cramer said whether it was the crash of 1987, the event surrounding 9/11 or the recent earthquake and tsunami in Japan, panic selling has never been the right strategy. In fact, Cramer said in his 30-year career on Wall Street, there's only been a single time when selling into a panic was justified, and that was in October, 2008.
Back then, Cramer appeared on NBC's "Today Show" and told investors to pull money out of the markets if they might need it in the next five years. In this single case, the already falling stocks continued to head lower, much lower, and the call to exit was justified.
Cramer said investors should never panic and never sell in the midst of an awful decline.
Avoiding Drastic Moves
"Not every sell-off is the end of the world," Cramer told viewers, "don't trade like it is."
Cramer said too many times, when the pressure's on and the markets are headed in the opposite direction you hope, investors begin to make mistakes. That's why his next lesson was never to sell everything all at once.
Cramer has always advised buying and selling stocks in increments. When a stock you like falls, buy more. When a stock has gains, take a little off the table. He said the same discipline applies when the markets is selling off big and investors want to hit the panic button and sell everything.
Cramer recounted how during his hedge fund days he'd owned American Stores, purveyors of the old Acme grocery chain. He said for years American Stores languished in his fund on the hopes of a takeover that never came. Then one day, amidst a brutal market correction, Cramer lost his cool and told his broker to sell out of all his positions. Two weeks later, American Stores received the takeover bid Cramer had been waiting for.
While the pain of a market correction may be unbearable, Cramer said investors need to maintain their discipline and let go of some of their positions or even some of the stocks in their portfolios, but they should never sell out of everything all at once. He said you just never know what tomorrow, or next week, might have in store.
Know What You Own
Here's Cramer's next lesson for investors: Always know what you own. He said in today's world it should just be a given that everything investors read in the papers and see of TV will have some sort of negative spin associated with it. And if you don't really know about the stocks you own, you will be tempted to sell at precisely the wrong time.
Just in the last year alone we've seen market scares about Egypt, Libya, the Grecian debt crisis, troubles in Portugal, the death of the euro and of course, the tsunami in Japan. During all of these events the markets have sold off, but should investors have followed suit? Cramer said investors need to put the day's news into perspective and use his "Bristol Myers" theorem to weigh its effects.
Cramer explained that back in his hedge fund days his staff use to always come to him panicked about one crisis or another, and his response would always be "what the heck does that have to do with the earnings of Bristol Myers?" He said Bristol's earnings then were unshakable, and this slow and steady company was able to put up dependable earnings no matter what was going on in the world.
While in today's market, unshakeable stocks are non-existent, Cramer said the same principle still applies. Investors need to always ask "what effect does this news have on a company's earnings?" If it doesn't affect a company's market, its customers or suppliers, then it's probably a non-issue and the stock will bounce back in short order.
Cramer said in today's 24-hour news cycle, just about everything is blown way out of proportion today only to be totally forgotten tomorrow. Investors must always use this prism when evaluating their portfolios.
Not the End of the World
What do Egypt, Libya, Italy, Ireland, Greece, Spain, Portugal and Japan have in common? None of them caused the end of the world as we know it, even though each one rocked the stock market at the time.
Cramer said in the middle of the debt crises for Ireland, Greece and Spain money managers all felt that it was the end of the world once again for the banking stocks, all of which sold off hard. But in reality, banks were better capitalized than people thought, and the issues all resolved themselves.
In Egypt, investors asked how a regime change in that country could not be bad for stocks? The unfolding events once gain sent investors heading for the hills. But in reality, no U.S. companies were significantly impacted by the protests.
Cramer said events like these should prove to investors that not everything signals the end of the world. In the case of Japan, which was indeed a horrific event, the outcome will be a positive one, as the country gets to rebuild itself better and stronger than before.
Cramer said the market always manages to survive catastrophic events, which is why they're a time to buy and not sell and are definitely not a time to panic.
Exit Plan Required
Not every stock can be owned forever, Cramer reminded viewers, and not every one should be. He said that every investor needs to know what events would make them sell their stocks, and if they don't, they shouldn't own them.
Cramer said gone are the days of "buy and hold" when stocks could be tucked away in a portfolio for decades. He said in today's market, investors need to be willing to change their minds and have an exit plan for every stock. Whether its a high-flying tech stock or a cyclical industrial stock, every company has a point when it won't be doing as well and when its shares must be sold.
Cramer said that's why knowing what you own is so important. Do you own a tech stock that 's linked to a certain product cycle like PCs or smartphones? Do you own an industrial smokestack stock that will turn south with the economy? Investors need to have answers to these questions and be able to change their minds when the facts change.
Tech stocks are not the same as other stocks, Cramer reminded viewers. As the dot-com bust of 2000 taught us, tech stocks are especially finicky and what may be a shooting star today can crash and burn tomorrow.
Cramer said only stocks that make things like ketchup and Cheerios are immune to the rise and fall of product cycles and the economy. You never hear people talking about how they'll be using less ketchup now that the economy is slowing, he said.
Cramer told viewers that knowing when to buy and sell is just as important as knowing what to buy and sell. He said investors should never panic and sell everything during a vicious sell-off. They should never freak out when the markets are panicking over a huge international crisis. And they should never sell everything all at once.
Instead, what they should do is take a step back and ask "how would this affect Bristol Myers?" They should always have an exit plan. And they should always pay close attention to their tech stocks.
--Written by Scott Rutt in Washington, D.C.
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At the time of publication, Cramer was not long any stock mentioned.
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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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.