This episode originally aired on Dec. 23, 2011Search 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) -- "Investing is a lot like comedy," Jim Cramer told his "Mad Money" TV show viewers on Friday, "timing is everything." That's why he dedicated his entire show to going 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 advisors that tells 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's 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's a difference between buying stocks before the European financial crisis began to rule the world's markets, and after. Cramer explained that one reason that timing the markets is so hard is that some of the best moments to buy are during the moments of greatest terror. He said that 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, and investors were able to side-step the additional 35% decline in the averages. But other than that one special case, Cramer said that 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 WorldContinuing with his tips for investors, Cramer said that not every big decline in the markets signals the end of the world. That's why no matter what the crisis of the day, it's never a good idea to sell everything, as not all stocks are equally good or equally bad.
When bad news hits, Cramer says investors should look at the stocks in their portfolios and rate them on a simple scale. Stocks you rate number one, for example, could be the ones you believe in and are worth buying more as they head lower. Stocks in the number two camp could be those that could be sold if you needed to raise cash. Meanwhile, the number threes 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 not 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 when 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 OwnCramer'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 WHY they own that stock. Why? Because the media has never met a negative story it didn't like. Whether it's the tsunami in Japan or the European financial crisis, Cramer said that investors should just assume that 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 Bristol-Myers Squibb ( BMY), 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 effect 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 ( KMP) or Verizon ( VZ) or utilities such as Southern Company ( SO). Cramer said no matter what the negativity of the day, companies like these will allow investors to put those stories into perspective.