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This program last aired on July 6, 2016.
What makes for a strong investment versus a weak one? When is a loss a good loss? These were some of the questions Jim Cramer answered for his Mad Money viewers Wednesday as he dedicated the entire show to learning from his wins and his biggest mistakes over the past 15 years of running his charitable trust, Action Alerts PLUS.
Cramer explained that Action Alerts PLUS is designed to be a diversified portfolio that seeks out the best ideas for value, income and growth. The fund donates all of its proceeds to charity every year.
Investing in individual stocks isn't for everyone, however, and Cramer said he's still a fan of owning index funds that mirror the market for those without the time or inclination to do their own research and pick their own stocks. For everyone else however, read on.
Knowing Companies From Stocks
Cramer's first lesson to investors is knowing the difference between a company and its stock. This is especially important in the pharmaceutical industry, where the promise of a blockbuster drug doesn't always translate into blockbuster profits.
Back in the 1980s, when the link was first made between cholesterol and heart attacks, the stock market paid little attention, Cramer explained. Ultimately, the class of drugs known as statins would become the best-selling drugs in history.
But that isn't always the case, and investors need to be leery of companies that live or die at the hands of Food and Drug Administration drug approvals. Always look for companies with robust drug pipelines and avoid those betting the farm on a single success.
Cramer recalled recently investing in Eli Lilly (LLY) on hopes the company's Alzheimer's research would be worth billions. As time has worn on, Lilly's obstacles to success seem to be mounting. Not knowing if or when Lilly might see success, Cramer said he sold the stock and moved on.
The lesson? If you're going to speculate, have a fallback position. If you're going to sell, wait for bounce to sell at higher levels. Finally, the time to buy a drug stock is when expectations are low, not when everyone is excited about a potentially amazing new drug.
Knowing Right From Wrong
Cramer's next lesson for investors: telling the difference between right and wrong. This is certainly easy to do in hindsight, Cramer said, but in the heat of the moment, when emotions are high, things get a lot more complicated.
One of the great benefits of being an individual investor with a well-researched idea is you can afford to be patient and wait for the right time to buy and the right time to sell.
Cramer recalled buying Tyson Foods (TSN) for the trust in 2015 after the company acquired Hillshire Brands in 2014. The thinking was to get in early before others realized how transformative the merger would be.
But the merger came together more slowly than expected and shares fell as the estimates were cut instead of raised. Cramer said he had a solid thesis and had done his homework, but failed to be patient enough to let that thesis come to fruition.
The lesson? Don't act on emotion and don't go against your homework. You can afford to be patient. Don't give up on your ideas before they have time to pan out.