Editor's Note: This program originally aired on April 1, 2010Search Jim Cramer's Mad Money trading recommendations using our exclusive Mad Money Stock Screener and watch Jim Cramer's Mad Money Post Game video exclusively on TheStreet.com.
NEW YORK ( TheStreet) -- "Sometimes you have to un-learn conventional wisdom to be a good investor," Jim Cramer told the viewers of his "Mad Money" TV show Thursday. He dedicated his entire show to teaching investors the secrets he revealed in his book Getting Back To Even. Cramer said the first myth investors need to learn to ignore the notion of buy and hold. He said investors should instead pay attention to short-term market fluctuations so that they can take advantage of them to buy stocks they like at cheaper prices, and sell those that have been driven unrealistically high.
Doing Your HomeworkCramer's second tip for investors was a simple one, hard work really matters. He said that doing your homework, reading a company's filings and listening to r conference calls, may seem fruitless, as stocks tend to bounce around seemingly unglued from their fundamentals, but he stressed the fundamentals matter a whole lot. Cramer said a company's fundamentals vital. They're knowable, he said, and anyone who tries to understand them, can understand them, and all of the information they need is free and readily available. So why focus so much on homework? Cramer said because lots of investors, and even money mangers, are lazy. He said that by just reading a company's reports and listening to their calls will give an investor a huge leg up on most of the other investors out there. "Homework is all about taking control of one's destiny," he said. Cramer explained that doing the work gives you conviction in your stocks, and a good, clean way to decide whether to buy more, or take profits.
Investing in IPOsCramer's next lesson for investors was how to invest in IPOs, those sexy deals that are talked about endlessly in the media. He said IPOs can either make you mad money quickly, but they can also blow up in you face if you don't do it correctly. Cramer said don't let brokers trick you into thinking that every IPO is a great deal, or that the challenge is getting your hands on the initial shares. "Wrong, wrong, wrong," said Cramer, adding some IPOs simply aren't worth investing in. The investment banks that underwrite IPOs have their own agendas, said Cramer. They're out to not only raise money for the company going public, but also to make money for their clients who invest in the new shares. For this reason, he said, IPOs are often, although not always, priced low so that investors are rewarded for investing. Cramer cited the 2008 IPO of Visa ( V) where the offering was intentionally priced low. He said at the time of Visa's offering, the stock market and the IPO market were horrible. Thus underwriters priced Visa at just $44 a share, causing it to pop as high as $69 a share, before settling out at $56.40 on its first day of trading. Cramer also said that he never advises buying IPOs in the aftermarket, meaning after they begin trading publicly on the exchange. "If you don't get in on the deal, forget about it," he said. So once investors understand how IPOs work, how do they choose which ones to invest in? Cramer uses a three-step vetting process that involves looking ironically not at what the company does, but rather at who the executives are, who the investors are and who's underwriting the deal. Cramer said the first group, the executives, is the least important part of the equation. He said that although most company's executives are largely unknown, he likes to see at least one seasoned player on the team. Cramer looks next at the investors, which is more of a negative check, or a means of disqualifying an IPO. Cramer explained that over the last few years, large private equity firms have taken countless companies private, and are now looking to cash out for big profits. This means the IPOs they're offering are very richly priced, sometimes for companies that are barely profitable. Cramer said if the investors are all big private equity houses, they shouldn't be trusted. Finally, Cramer said he looks to the underwriters of the deal. He said he wants to see major firms, like Goldman Sachs ( GS) or Morgan Stanley ( MS) on the deal, firms with reputations at stake. He said that these firms won't bring a company public just for the huge fees they bring to the company. Instead, he said, these firms stand behind the companies they work with. Cramer said only be looking at this three-step vetting process can investors truly know not only what, but who, they're buying and trusting with their investment dollars.
Final StepCramer said the final step in analyzing an IPO is to look at the company itself. He said investors need to ask a whole host of questions about what it makes, whether it's profitable and how big its end markets are. Cramer said if the company makes a consumer product, you need to ask whether you like the product. Cramer said the chances are if the company makes a good product and is already profitable, investors can expect to gain not only from the IPO, but also from the extended run afterwards. He said a trice-blessed IPO would be a profitable entity, with a big addressable market, and a great brokerage sponsoring it. Cramer said that in all cases, the trick is to recognize the size of the market and the power of its competitors, to determine just how far the new company will likely be able to go. In the case of athletic apparel maker Under Armour ( UA), the company was able to grow like bangbusters initially, but when the company decided to challenge incumbent Nike ( NKE) in footwear, Under Armour's sizzle soon fizzled. Bottom line, Cramer said investors need to do a complete analysis on IPOs by asking a of questions to sift the good from the bad. -- Written by Scott Rutt in Washington D.C. To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.