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Rule 6: Do Your Stock Homework

My kids hated doing homework.  
They thought it was punishment.

Sometimes when I looked at what they are studying, I had 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 conference call

or know what the analysts are looking for from Netflix if they are going to own those high-multiple stocks 'Äì

they don't want to hear it.

When I remind people that doing your homework means
listening to the conference calls
and reading research reports,
they want no part of it.

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:

The first -- If I buy it and hold it long enough, it will come back.

And the second - 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.

Because 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 point, though, that I find really needs debunking.

Buying and holding became the end-all be-all for many people in the 1990s.

"You know what? I am just going to hold on to that CMGI because it has to go back to $100, where I bought it."

Or, "Why sell Infospace now even though it is down 40% because it will be the first trillion-dollar stock."

Yep, they say, "if you hold things for the long term, the texts say 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 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.

You have so much more available now, so much more knowledge, that there is no excuse.

You aren't up there begging at the Goldman Sachs library for some microfiche statement from three months ago.

You have it in the here and now. Use it!  

But if you fall back on that buy-and-hold strategy for any group of stocks -- and don't pay attention 'Äì

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.

Action Alerts Plus portfolio manager and TheStreet's founder Jim Cramer has learned a lot over his 30+ years of investing. So he created a list of 25 Rules for Investing that can help you avoid the novice pitfalls that even he fell into on occasion.

Here, he debunks 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.

Cramer vehemently disagrees with both of the above statements.  But if you believe either of those views to be true, you should not be investing your own money.

Unless you take control.

Rule 6: Do Your Stock Homework

Much like your kids, you have to do your stock homework as well.  So that means:

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

Get actively involved in your portfolio and listen to Cramer tell you how.

Sign up and watch Jim Cramer's 25 Rules For Investing here!

Watch More of Jim's Rules for Investing: