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Editor's note: This recap last ran on March 29, 2010.
NEW YORK (
) -- "You can do everything I do at home, if you're willing to put in the time and effort," Jim Cramer told the viewers of his "
" TV show Friday.
He said that with just a few hours a week, investors can actively invest in stocks and manage their portfolios with great success.
So how does Cramer find new stocks to potentially invest in? He said that one way is with the new 52-week high list. Stocks on the new high list obviously have something going for them, he said. It may be that the company is part of a genuine bull market, or it might be that the stock has serious momentum, but in either case, Cramer said stocks on the new high list are worth giving a second glance.
"Things pretty much keep going in the same direction under something major shifts," Cramer told viewers. That's why if the fundamentals of a company on the 52-week high list are still strong, it may be a winner.
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But Cramer advised against buying any stock that's at it 52-week high. He said that with rare exception, waiting for a pullback will almost always give investors a better entry point, and with the larger up trend still in place, will afford them even greater returns. Cramer said when the broader market sells off, that's the perfect time to snap up the high fliers.
Cramer's second tip for active investors was to never buy all of a position in a stock all at once. He said that stocks rarely move in a straight line, so there will always been opportunities to buy more, perhaps lower than where a stock trades today.
Cramer said that if investors want to purchase 100 shares of a stock, he would start by buying only 25 shares. If the stock pulls back, Cramer said he would buy more. If it trends higher, then he knows his thesis is correct and he can continue to buy more shares as the opportunities arise.
There is one exception to his rule, Cramer noted, and that's in the case of strong insider selling. Cramer said that company insiders can sell stocks for all sorts of reasons, but there's only one reason for them to be buying shares of their own company, and that's because they think it's going higher.
Cramer said if company executives are buying shares at or near its 52-week, that's a pretty "darned good reason" to ignore both his "buy-in-segments" rule and his "wait-for-a-pullback" rule, and go all in. "If you see an insider buyer," said Cramer, "you might want to be buying too."
Continuing his tips for active investors, Cramer said that another tell that a stock may be headed higher is, of all things, a large short interest in the stock.
Cramer explained that when a stock has a large number of short sellers betting that the price will go lower, and it doesn't, that creates a short squeeze, which causes the shorts to buy the shares they've borrowed to cover their positions.
Cramer said a short squeeze is particularly bullish when combined with large insider buying, which is essentially company executives drawing a line in the sand and saying, "our stock goes no lower." He said that large company stock buyback programs accomplish the same goal, giving the stock strength to pressure the shorts out of their positions and take the shares sharply higher in the process.
But even without insider buyer or stock buybacks, Cramer said large short positions in a stock can still be bullish for investors if the company receives good news, changed market conditions, or anything that will rattle the shorts and force them to re-evaluate.
In lieu of the recent market meltdown, Cramer issued a note of caution regarding stocks with an extremely high level of short interest. He said that the financial panic of 2008 and 2009 was largely spread by hordes of short sellers and hedge funds ganging up on the financial stocks, forcing them lower in their hour of need. Cramer said in these rare cases, investors need to steer clear at all costs.
Trading Around a Core Position
"Knowing how to trade makes you a better investor," Cramer told viewers, as he outlined another of his key trading principles, trading around a core position.
Cramer explained that the typical "buy and hold" investment strategy would tell you that if you wanted to own 300 shares of a company, buy 100 shares now, then another 100 next month, and so on, then hold them indefinitely. But this strategy is flawed, said Cramer, when you account for the increasing market volatility.
Cramer said a better way to invest is via what's called "trading around a core position." So in the previous scenario, if you wanted to own 300 shares, investors would buy their positions, on weakness of course, then actively manage that position as the market dictates.
Cramer said if the stock increases by 3%, sell 50 shares. If the stock pulls back by 3%, buy some shares back. He said it may seem like small potatoes, buy trading these small blocks add up quickly.
Trading around a position provides investors with small gains that add up over time, he said.
Cramer's final tip for investors dealt with knowing when to sell a hot stock. He said his rule of thumb for years has been that when a hot little upstart receives its fourth analyst covering the stock, the party is over.
Cramer used drink maker
to illustrate his rule. Hansen was the hottest stock out there in 2005, when it traded for just $18 a share. Buy mid-2006, Hansen was still a darling of Wall Street, and seemed unstoppable trading at $200 a share. But then something changed.
Cramer said that on May 10, Goldman Sachs started covering the stock. He said that Goldman's coverage was Hansen's fourth analyst, and at that point, just about everyone who wanted to invest in Hansen, already had. The company's skyrocketing momentum came to an abrupt end just two months later.
Cramer said his bottom line was that hot momentum stocks are often worth owning, buy investor must know when to sell, and when too many Wall Street analysts jump on a company's bandwagon, the party is likely coming to an end.
-- Written by Scott Rutt in Washington D.C.
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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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