Cramer's 'Mad Money' Recap: How to Gain From the Long-Term Game

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This program was last aired on Dec. 26, 2012.

NEW YORK ( TheStreet) -- Anyone can turn a profit in the stock market, Jim Cramer told "Mad Money" viewers, if they're willing to put in the time and effort. Anyone can do it, but only if done the right way, he added.

That's why Cramer dedicated his entire show to the notion of long-term investing, a term that's gotten somewhat confusing over the years -- so much so that it has become one of the biggest obstacles for new investors.

Cramer said that too often the term "long-term investing" is used as an alibi or excuse for poor performance resulting from simply not paying attention. The term "buy and hold" often means "buy and forget," which is a terrible investing strategy.

Being in the game for the long term does not mean investors can afford to take short-term losses. Nor does it justify owning damaged goods, hoping they'll recover "someday." Investors must always keep track of their investments, said Cramer, and fortunately it's never been easier to do.

Whether it's looking over Securities and Exchange Commission filings or searching the Web for the latest news and analysis, finding out what's happening at the companies you own is a necessity. There's no excuse for laziness, said Cramer, especially in an age where quarterly conference calls are only a click away.

"Stocks are still the best way to make money," Cramer concluded, but the notion of "buy and hold" needs to become a thing of the past.

Price Matters

Cramer's next lesson for investors? Few things are more important than price.

Whether you're a short-term investor or planning on owning a stock for years and years, the right price matters. Put simply, when you pay too much, it's that much harder to rack up big gains. Fortunately, if your time horizon is a long one, you can afford to wait and be patient for that perfect price to arrive.

In the real world, though, the notion of the "right" price is a farce, said Cramer. There will never be an "all clear" signal that now is the right time to buy. So how should investors approach this problem? Buy in increments.

Cramer said it's practically impossible to call a bottom in a stock, so if investors are looking to buy 400 shares of an $90 stock they should buy 100 shares right now at the $90 price. Then, if shares slip to $85 a share, buy another 100 shares. Buy 100 more if the price hits $81, then the rest if it falls below $80.

Cramer said he prefers to use wide scales because it affords investors more flexibility. The worst-case scenario in this example would be the stock going higher than $90 a share, in which can you've just made money, albeit less than you were expecting. But in the long run, buying more as a stock goes lower is the right way to buy.

Know When to Sell

"Every stock comes with an expiration date," Cramer told viewers, and the next lesson is all about knowing when to sell.

Cramer said knowing when to sell a stock is every bit as important and knowing when to buy it. That's especially true when it comes to your winners.

Despite the fictional character Gordon Gekko's proclamation that "greed is good," when it comes to gains in your portfolio greed is downright dangerous, said Cramer. Investors have to take some profits in their winners, he said. You haven't really won until you take a little off the table.

Why sell your winners? Simple diversification. What was once 15% of your portfolio when you bought it has now grown to over 20%, and according to Cramer's rule on diversification, no single sector should ever account for more than 20% of your portfolio.

As for the losers, Cramer said you don't need him to tell you they should be sold, but a frequent rookie mistake is to hold onto your losers and hope they'll someday get back to breakeven. This thinking is the worst kind of amateur mistake.

Take the small loss now, he said, and avoid the bigger ones that will likely be coming. Don't give your losers the benefit of the doubt.

Cramer said younger investors can afford to wait a little longer to sell than older ones because older investors can't afford to take the risk of losing their gains closer to retirement. Take all of your invested capital out, Cramer concluded, and keep playing with the house's money.

Retirement Investing

In the long run we all retire, which is why retirement planning is a big part of long-term investing, said Cramer. But what is retirement investing? Conventional wisdom has always told us that we have to invest in our 401(k)s and have to invest in an IRA. But beyond that, conventional wisdom has always been a little fuzzy.

Cramer said the promise of 401(k)s and IRAs is their tax-free status would allow higher returns over the decades. In reality, most 401(k) plans just stink, said Cramer, thanks to their high fees and severely limited choices.

Ideally, investors should have a portfolio of five to 10 diversified stocks, but most 401(k) plans only offer mutual funds and bond funds. That's why Cramer advocated contributing in 401(k)s only to achieve any company match, then stop.

Beyond a 401(k), Cramer said investors need to contribute to an IRA, up to the maximum of $5,000 for 2012, or $6,000 if you're over age 50. What should you keep in this IRA? Cramer said investors ideally want high-yielding, dividend-paying safety stocks. But here, too, there is a caveat.

Cramer said investors need to steer clear of master limited partnerships, MLPs, or real estate investment trusts, REITs, in their IRAs. Own too many, he said, and you could end up paying higher taxes than if you purchased the stocks in a regular brokerage account.

Look for Secular Growth Stocks

While there's no such thing as a stock you can own forever, some winners do last longer than others, Cramer told viewers. Those winners are called secular growth stocks.

Cramer explained that most companies need a healthy economy to do well -- those are called cyclical stocks. But secular growers do well year after year, regardless of the economy. The key to finding these names is to look for the "big picture" themes.

One such theme has been the recent move towards healthy eating, something that's helped propel stocks including Whole Foods Markets ( WFM) and Hain Celestial Group ( HAIN) for years.

But even secular stocks can have a shelf life, he cautioned. A few years ago, Cramer was talking up the "mobile Internet tsunami," the transition from feature-phones to smartphones that would rake in billions for all those involved. But as the smartphone revolution took hold, it quickly became an Apple ( AAPL) tsunami, disproving the theory that a rising tide lifts all boats.

Cramer said there's nothing wrong with owning secular growth names for as long as the story remains intact, but investors need to remember that even the biggest waves eventually come crashing on the shore.

What's in a Name?

In closing, Cramer said investors should try to not get hung up on the nomenclature of short-term versus long-term investing. In the end, we're all here to make money. He happens to think that longer-term investing is the better way to go for most home gamers, but if your portfolio does better being actively traded, stick with it.

Cramer cautioned investors must always remember they're no match for high-frequency trading machines or hedge funds with multimillion-dollar research budgets. Short-term trading does have its risks.

At the end of the day, however, the bank will accept your deposit no matter how fast you made the money.

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-- Written by Scott Rutt in Washington, D.C.

To email Scott about this article, click here: Scott Rutt

Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC

At the time of publication, Cramer's Action Alerts PLUS had a position in AAPL.

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."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

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.

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