Rule No. 6: Do Your Stock Homework

Editor's note: Jim Cramer's new book, Real Money: Sane Investing in an Insane World , is available in selected bookstores now. As a special bonus to RealMoney readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here. Today, we present Cramer's sixth rule of investing. To read about his first rule, click here; for his second, click here; for his third, click here; for his fourth, click here; for his fifth, click here.


My kids hate homework. They think it is punishment. Sometimes when I look at what they are studying, I have to admit that I find it easy to sympathize with them. What's the relevance of most of the things they study? How will it help them in later life? Why bother?

Of course, that's a terrible attitude, and, as a parent, I encourage them to study because I want them to do well, and because you never know what they eventually will be interested in.

I think many of you believe that the homework you do on stocks might be just as irrelevant to your own portfolios as schoolwork seems to my kids.

When I tell people that they have to listen to the Starbucks ( SBUX) conference call or know what the analysts are looking for from Urban Outfitters ( URBN) if they are going to own those high-multiple stocks, they don't want to hear it. They can't understand what a scold I am.

When I remind people that doing the homework could take as much as an hour per week per position, they look at me as if I am some sort of old-fashioned teacher who is asking for way too much in this busy world in which we live.

That's just plain wrong.

Where does the desire to own stocks with no research into the companies come from? It comes from two different views:
  1. If I buy it and hold it long enough, it will come back.
  2. I don't have the time -- no one has the time -- to be that diligent.

The latter point's easy to counter: You don't have the time? Give it to someone else. You don't understand how to read a balance sheet? Give it to someone else. There are lots of good managers out there who will beat you simply because they are at it every day and you can't be.

It's the first concept, though, that I find really needs debunking. Buying and holding became the be-all and end-all for many people in the 1990s.

"You know what? I am just going to hold on to that CMGI ( CMGI) because it has to go back to $100, where I bought it." Or, "Why sell Sun Micro ( SUNW) now? When it gets back to $70, I am going to sell it because all of the texts say that if you hold things for the long term, everything works out."

Huh? What text says that? I don't know of it. That's just a fictional contortion of what the texts say.

That's why I say: Before you buy any stock -- before you purchase Caterpillar ( CAT), before you buy Lucent ( LU) -- please, please, do your homework.

Listen to the conference calls. Go to the company's Web site. Read the research. Read the news stories. Everything's available on the Web. Everything.

But if you fall back on a buy-and-hold strategy for an EMC ( EMC) or a Microsoft ( MSFT), I can assure you that you will be soundly beaten by professional managers with good track records who are actively searching for good stocks all of the time.

Remember:

Buy and homework, not buy and hold.

Random musings: Tonight is the night that "Mad Money" with Jim Cramer debuts at 6 p.m. EST! I hope you will watch and call me (1-800-743-CNBC) and have a terrific time!

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
Check back for more of Cramer's Rules

At the time of publication, Cramer was long Urban Outfitters and Lucent.

James J. 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 Action Alerts PLUS. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict."

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