Jim Cramer recently bought Citigroup (C) - Get Report and Goldman Sachs (GS) - Get Report at good prices because he followed Rule No. 1 of his "5 Rules for Today's Market" -- "Define Your Trading Ranges So You're Unemotional with Stock Purchases and Sales."
"When people ask me when they should start a new position, I usually like to say: 'Why not wait for a 3% to 5% decline at a minimum?'" Cramer said during a video-conference call with members of his Action Alerts PLUS club for investors. "If you don't wait and you buy [and] then we get a sell-off, what I most fear is that you'll leave the stock business altogether."
To take such emotions out of the equation, Cramer recommends defining your buy and sell prices for a given stock well in advance, then sticking to those levels regardless of what the broad market is doing.
For instance, his charitable trust recently bought some additional Citi and Goldman shares when bank stocks were tanking, as Cramer decided in advance to buy both if the stocks' prices fell below tangible book value. Tangible book value - roughly $198 for GS and $66 for C -- calculates how much a bank would be worth if the firm broke up.
"I don't mean that Goldman or Citi is going to bust up at $198 or $66; they're not going to close down and distribute the cash," Cramer said. "But if you can buy these two stocks a little below those levels, you have comfort. It's like a port in the storm."
Cramer also noted that many banks will buy back their own shares if prices fall below tangible book value, as that's additive to earnings. So, the expert boosted his charitable trust's positions in both firms in August even as bank stocks were tanking amid fears of a U.S. yield-curve inversion a possible recession.
"Our prearranged levels kicked in and even though it felt like Citi was headed to the $50s and Goldman back to the bad old days of the low $180s, we had to buy," Cramer said. "It turns out we [caught] the bottom."
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