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In his book Real Money: Sane Investing in an Insane World 1. Bulls and bears make money; pigs get slaughtered In other words, you can make money both in a bull market and in a bear market. You can buy stocks by going long when the market is moving up, and you can short stocks when the market is on a downward movement. 2. It’s okay to pay the taxes You should never use taxes as a reason to hold on to a stock that may have reached is peak and may head back in a downward slide. It is best to pay the taxes and make a little profit than to find yourself in a situation where you have held on to a stock for so long that you have to sell it at a loss. 3. Don’t buy all at once; arrogance is a sin Never buy stocks all at once. Buy in increments. Space out the total amount of money you have available to invest. Buy your stocks in increments on the way down in spaced-out intervals. Do not succumb to the pressure of others. There will always be another opportunity; perhaps, a better one. However, if you have spent all your capital on one position, then if a good opportunity arises, you will not be in a position to take advantage of it. 4. Look for broken stocks, not broken companies Know the difference between ‘bad companies with bad stocks’, and ‘good companies with bad stocks.’ It is important to understand that it is good companies with bad stocks that are a bargain. In order to know which are the good companies with bad stocks, you must examine the fundamentals of the company. There are a lot of good companies around whose stock prices are depressed for unfair reasons. Eventually, the stock prices of such good companies always recover. 5. Diversification is the only free lunch Don’t invest all your money in one stock or one sector regardless of how good or healthy the stocks or sector looks. Diversification spreads risk. 6. Buy and homework, not buy and hold Before you buy a stock you should study and investigate that stock. After you buy the stock, you should also regularly study the stock. It is important to spend 1 hour a week per stock position studying. If you cannot do this, it is best if you invest in index funds or hand over your stocks to professional portfolio managers. 7. No one ever made a dime by panicking Jim Cramer says that in all his experience in the stock market, whenever he panicked and sold off his stock holdings, the very next day he would see the price rise again. If you feel a panic attack emerging from within you, what you can do to prevent yourself making a big mistake is to sacrifice and sell just one stock. 8. Own the best of the breed The best of breed tend to be the most profitable stocks in the long run. If you have a choice between 2 or 3 companies in an industry sector, always go for the best of breed. 9. He who defends everything defends nothing, or why discipline trumps conviction If you are going to develop the discipline to manage your own portfolio, you will need to take time out to study the fundamentals of the stock: read about it, review the Web sites, listen to the conference calls e.t.c. There are times when the price of the stock will drop and its movement start to run counter to all the research that you have done. Those instances may just be temporary. However, it could be that on a few occasions misleading numbers or statements were put out by the company. In times like that, you need to have discipline and trust in the research that you have done about the stock. In such situations, you will have to have a disciplined plan. This plan would entail you ranking all your stocks in order of priority. In other words, you have to rank them in the order of those that you would like to buy immediately and those that you would be willing to sell if you needed the capital. In this regard, you should rank every stock you own according to a four-step system. This system would be as follows: i: A stock you would like to purchase more of right now. Ranking stocks in this way forces you to be disciplined and to choose the stocks that you most believe in based on your research and analysis. In down times, this system also forces you to minimize the emotional attachment you may have to certain stocks and sell off all those but the strongest. 10. The fundamentals must be good in takeovers Do not speculate on companies involved in takeovers. Rather you must focus on investing in undervalued companies with good fundamentals. If you invest in companies with poor fundamentals with the view that those companies will be involved in takeovers, you will be wrong far more times than you would be right. 11. Don’t own too many stocks In order to make the best investment decisions, you will have to put aside time to study the fundamentals of the stocks you invest in. It is not possible to follow and study more than twenty stocks unless that is your full time occupation. For most people, owning five stocks is about the right number that is sufficient to provide a sufficiently diversified portfolio. Owning less than five will mean your portfolio will not be diversified. And owning more will most likely mean that you will not be able to follow and study them consistently to make the most effective decisions. 12. Cash and sitting on the sidelines are fine alternatives On many occasions, it is best to have large cash positions when you are not investing in anything. Many times, the state and health of the market can be very poor, and there are just not sufficiently good opportunities to invest your cash. If you are sitting on a cash position, at times when the market crashes or undergoes a sharp dip, you will be in good position to take advantage of opportunities that arise. 13. No woulda shoulda coulda Do not spend your time second guessing what could have happened if you invested in one stock rather than another. If you make a mistake or an investment decision you make does not turn out well, you should steel yourself, clear your head, and move on to the next investment decision. Doing otherwise puts you in a negative mindset. If you need to reflect on your investment decisions, it is best to put aside some time at the end of each month or quarter to do this. 14. Expect corrections: don’t be afraid of them Do not panic when a correction in the market occurs if you own stocks with strong fundamentals. Corrections happen ever so often. It is the way the market works and can present some wonderful opportunities for making further investments. 15. Don’t forget bonds It is important that as an investor, you understand that the stock market does not operate in a vacuum. In this regard, it is important to pay attention to bonds and interest rates. When interest rates are high for investments with little risk such as U.S. treasury bonds, they become appreciably appealing when compared to stocks. In these circumstances, there will be some investors who will decide to sell off their stocks and purchase bonds instead. This in turn may impact the market as a whole or the prices of certain stocks. 16. Never subsidize losers with winners It is better to sell stocks you may own that have poor fundamentals that are with time getting worse. And then to apply the funds to stocks that have strong fundamentals. Many investors make the mistake of selling their stocks with stronger fundamentals which invariably have higher prices and buying stocks with poor fundamentals whose price keeps dropping. 17. Hope is not part of the equation Keep your emotions in check. Hoping, praying, and rooting for certain stocks should not be part of your stock picking strategy. Your stock picking strategy should be based on spending time researching various stocks. It should also be based on adopting a strong sense of realism about a particular stock’s prospects. In sum, you should buy stocks with strong fundamentals that are getting stronger and sell stocks with poor fundamentals that are getting worse. 18. Be flexible It is important to constantly be aware of sudden changes in business or other external conditions that may impact companies you have invested in and be flexible in your approach to holding on to such companies. 19. When high-level people quit a company something is wrong Sell a stock you own if the CEO or CFO suddenly leaves the company. It is best to err on the side of caution and do that immediately. You may lose some money and may have to buy the stock at a higher price. However, in most instances, when a company official of that caliber leaves a company they are making a statement. So must you. 20. Patience is a virtue—giving up on a value is a sin You may own stocks that seem to stand still and not rise in value for a long time. If you believe in the stock, and by that I mean you are confident that the stock has very good fundamentals, you should exercise a bit of patience and hold on to it. Some companies especially those going through a turnaround take time for their efforts to come to fruition. If you sell the stocks of those companies too soon, you will lose out in the long run. 21. Just because someone says it on TV doesn’t make it so Do not trust TV talking heads. They may be on TV for many different reasons other than their expertise or track record. Rely on yourself. Do your research and make decisions based on information and knowledge you acquire. 22. Always wait thirty days after an earnings preannouncement before you buy It is very tempting to buy a stock after it has dropped in price after a preannouncement that indicates a shortfall in earnings. When a company preanounces a “soft quarter”, it most often means things are getting worse not better. So, in this situation, it is best to wait for thirty days after the preannouncement if you still wish to buy the stock. 23. Never underestimate the Wall Street promotion machine If a company’s stock gets recommended as a “buy” by a major Wall street firm, that stock is going to rise higher in price than it would normally do on its own. It is best to buy when a stock is experiencing short-term weakness and sell when it is exhibiting strength. 24. Be able to explain your stock picks to someone else Before you buy a stock, it is good to try and explain why you want to buy that stock to another person. The process of explaining your reasoning and philosophy for buying that stock will help reveal flaws in your thinking. Some questions you can ask are as follows: a. What is going to make this stock rise in price? 25. There is always a bull market somewhere There are always markets, sectors, and exchanges where you can find good buying opportunities. This is the case even in times when there is a recession or when the outlook for the economy is poor. You can read about the best bull markets by reading a free twice-yearly report put out by Fidelity called The Fidelity Sector Fund Report. Table of Contents Comments are closed. |
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, James Cramer detailed his 25 investment rules. These are briefly described as follows:
