Mad Money w/ Jim Cramer 6/16/25
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This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts.

Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I'll be with my friends. I'm just trying to make a little money for you. It's my job not just to entertain, but to put everything in context. So call me 1-800-743-CBC. Tweet me at Jim Kramer.

Investing isn't easy, but it can be a whole lot easier and much less daunting with a little instruction. The whole business of managing your money is made infinitely more confusing by all the arcane technology and authentic Wall Street gibberish. Woo!

You need to wade through to learn anything about a stock or its underlying business. If you're not clued into the jargon, it can sound like the professionals are speaking an entirely different language. You got to remember that there's an entire industry of people who need you to be happily convinced that investing is too hard for you, that ordinary people just can't do it. And it's the same thing to do is to give your money to a pro. Hey,

Hey, by the way, that's a huge reason why I started my charitable trust. When you join the CNBC Investing Club, our goal is to show you that you can do it yourself and to teach you how it's done. Of course, maybe giving your money to a professional is the right move for some of you, of course, but you don't have the time. But if you put in a little effort, if you do the homework, then I think you can do at least as well as the pros or a low-cost index fund, possibly the better comparison. Because in any given year, a lot of the pros really lose the index funds.

The fact of the matter is that the financial industry is full of people who are just after your fees. They're more interested in taking your money than in making you money. And if you're a hedge fund or a mutual fund manager trying to fundraise, you've got every incentive to keep regular people, sadly, ignorant.

why would they make any this investing stuff sound accessible when they could make it sound impenetrable if it sounds too straightforward it's harder for them to raise money and harder to convince people convince you to pay high management fees they're kinda like the Wizard of Oz they don't want you peeking at the man behind the curtain they don't want you to understand because if you did then you take control of your own finances you pick your own stocks and not pay someone else potentially exorbitant fees to do the things

you are perfectly capable of doing yourself. And after all these years doing the show, I know you can do it. And that's where I come in. See, I'm pulling back the curtain and explaining everything. Because while authentic Wall Street gibberish can sound complex...

Even impenetrable. It's not rocket science or brain surgery. You don't need to go to business school or work in an investment bank to understand it. You can comprehend all the mystical sounding vocabulary that we throw around here as long as you have a translator, a coach like me, who can explain what the darn words mean. I want you to think of me as a defector.

Someone who played for the other team, managing $500 million of already rich people's money, my old hedge fund, but who's now playing for you. Teaching you how to navigate your way through the minefield of the stock market every weeknight here on Mad Money and, of course, constantly for the CNBC Investing Club. Forget about the DaVinci Code. Forget Enigma. Forget the Navajo Code Talkers. To be a great investor, first you have to break the Wall Street Code, and I'm here to help you crack it.

That's why tonight I'm giving you my Wall Street gibberish to play in English dictionary. Consider it a glossary of the most important terms you absolutely must understand if you're going to actively manage your own portfolio of individual stocks the way I want you to. Words and concepts that many people in the financial industry don't want you to get your heads around because then you might actually feel empowered enough to pull your money out of their expensive mutual funds.

And hey, even if you're not a pro, you may not know enough. So why not take advantage of my 40 plus years of investing experience to give yourself an extra edge? Let's start with a couple of extremely important terms that go hand in hand.

cyclical and secular. Now, you hear these all the time. Yet no one but me ever bothers to explain what they mean, even though they're crucial when it comes to picking stocks. Cyclical has nothing to do with the spin cycle on your washing machine or Wagner's ring cycle, somewhat my classical music.

And secular isn't about the separation of church and state or public versus parochial schools. Oh, yes. And kudos to the late, great Lou Rukeyser, who first cracked that cyclical washing machine joke. And I've always remembered it's probably been about 50 years now. We say a company's cyclical if it needs a strong economy in order to grow.

It's cyclical because it depends on the business cycle. Cyclical cycle. So metals and mining companies and oil and gas, really any kind of raw materials, plus most of the industrials, are cyclical. The home builders are cyclical. The oil makers are cyclical. The commodity chemical makers like Dow are cyclical. You want a bunch of copper and iron mines like BHB? That's the definition of cyclical.

These companies are all hostage to the vicissitudes of the economy. When the economy heats up, they earn a lot more money and we're willing to pay more for those earnings. And when the economy slows down or shifts into a recession mode, they earn a lot less money and investors pay less for their shares. I always say that cyclicals are boom and bust names.

Ah, Secular Growth Company, on the other hand, is one where the earnings keep coming regardless of the economy's overall health. Take anything you eat, drink, brush your teeth with, or use as medication. So you've got consumer staples like Procter & Gamble, of course, the food companies like General Mills, the drug stocks like Pfizer or Merck or Eli Lilly. These are the classic recession-proof names that...

You want to buy when the economy slows down. Investors flock to the companies that can generate safe, consistent earnings unless the GLP-1 drugs actually really take over the world. Because you don't stop eating food or brushing your teeth just because of recession. Okay, so why is this secular versus cyclical distinction so important? Why is it the first piece of Wall Street jargon I'm translating for you?

Because it helps you figure out how much companies can earn in a given environment. And because it matters to the big institutional money managers, the guys who have so much cash to throw around that their buy and selling pretty much defines the whole market, at least in the short term. See, the whole hedge fund playbook is about when to buy and sell cyclical stocks or secular ones based on how economies around the world are doing.

This is what drives the decision-making process. Now, in the old days, 50% of the performance of any individual stock came from its sector, which is just a fancy word for the segment of the economy a stock falls into, like tech, energy, machinery, health care, finance. And when it comes to sectors, much of their moves are driven by whether they fall into the secular or cyclical camps. These days, it's much more than 50%, and that's really thanks to the rise of sector ETFs.

You don't want to own much in the way of cyclical when the economy is slowing. These stocks are simply going to get crushed because their earnings tend to fall apart as they have during every meaningful slowdown, including Chinese slowdowns. And there's nothing about that you can do it. What do you do?

But by the same token, when business heats up and the cyclicals are all doing well, nobody wants to own the boring, consistent secular growth names, the food and the drugs. And you won't make as much money in them during those periods either. You have to accept that. You're not a trader. You just accept it. Now, you always want some cyclical stocks and some secular stocks in your portfolio because you can never be completely sure where the economy is headed. But when business looks like it's booming, you want a lot more cyclical exposure. And when business looks like it's falling off a cliff,

You want a lot more secular exposure. The bottom line, investing ain't easy, but it doesn't have to be mystifying. You just need to learn the language, know the difference between cyclical and secular growers, and always stay diversified. Shane in Alabama. Shane!

Hey, Jim. Thanks for taking my call. Absolutely. When building a balanced portfolio, is the 60-40 rule still fundamental? And how much of that percentage should be in cash?

Okay, I'm blowing out all that. I think that we want to bet against, we don't want to bet against ourselves. We want to bet with ourselves. I am betting that people are going to have a long life, hopefully a happy life. So we're buying and keeping a lot of stock right almost to the end. When you're 60, 70, I still think that's young, and I think you should have 70% stock. I know that's higher than what I've usually said, but I just think that you're not going to get the return from bonds that people want, and I'd rather have you in stock and then take it down to 30, then 20, 30%.

30 or 20, and depending upon how you feel about yourself. I want you to be thinking about living long, and I think you'll live longer. It's my own psychology. Joseph in Florida. Joseph. Hey, Jim. How's it going? Not bad, Joseph. How about you? Thank you for calling.

I'm doing awesome, Matt. Good. So I wanted to get some insight on a 529 plan and an index fund for my one-year-old child, Jared. All right. So you look, 529 plan is perfect and put it in a low-fee S&P 500 index fund. I did that for my kids, and they are eternally grateful. And you're going to do it for yours, too. Edna in New York. Edna.

Booyah, Mr. Kramer. I'm a new member of your investing club and wanted to thank you for all I've learned so far. Thank you. You turned my husband and I into active investors. Well, I want you to be informed active investors. Absolutely. How can I help? I recently rolled over an old employee IRA into a brokerage account and have 20 to 30 years before I'll need the funds. Right now it's sitting in a money market account earning 5%.

So would you recommend I put it in an S&P 500 index fund? Here's what I want you to do. I want you to take, starting now, every month, take a twelfth of that money and put it to work. We're not going to put it all to work at one level. One twelfth. And then we get to, if we have a really bad month, I want you to double down and put one sixth in. And when we're finished in the third and fourth quarters, well, we'll figure out whether you need to have a little more cash. But that's how I want you to invest that money. That's long-term money, and that should be in stock forever.

Not bought, but over time, not all at once. Investing isn't easy, but it doesn't have demystifying. You just need to learn the language. Only money tonight. Forget Merriam-Webster. I'm helping you demystify all that Wall Street speaks. That's what you need, from P.E. multiples to GARP and much more. I'm cracking on my dictionary to help you navigate the market and take charge of your portfolio. That's what I want. So stay with Kramer.

Don't miss a second of Mad Money. Follow at Jim Cramer on X. Have a question? Tweet Cramer. Hashtag Mad Mentions. Send Jim an email to madmoneyatcnbc.com or give us a call at 1-800-743-CNBC. Miss something? Head to madmoney.cnbc.com.

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This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts.

Tonight, I'm helping you translate the cryptic and occasionally unfathomable terminology that makes owning stocks so darn difficult. Yep, I'm giving you the phrase.

to navigate your way through the world of investing. Hey, but why don't we call it the Michelin Guide to Fine Stock Tining? Consider it the televised encyclopedia of Kramerica for tearing back the cloak of mystery that can make managing your own money seem like an impossible task. The process of picking stocks shouldn't seem as difficult as, say, conducting triple bypass heart surgery on yourself. You don't have to be Stephen Hawking or Albert Einstein to understand this stuff. Although, with the way a lot of the pros talk about stocks,

I bet even Einstein would have a tough time figuring out what the heck they're saying. Now, I just explained the difference between cyclical companies, like, I think, industrial smokestack businesses that need a healthy economy in order to grow earnings versus secular growth teams. Think toothpaste, okay?

that consistently expanded about the same pace regardless of where we are in the business cycle. How you have to sell the cyclicals and buy secular growth when the economy starts to slow. Then do the reverse as it starts to pick up steam. This is the playbook that all the hedge funds use. And even though these hedge funds can often behave like herd animals, wildebeests who often buy and sell the same stocks at the same time, they operate this way because their playbook works.

The reason for that has to do with another piece of Wall Street gibberish lexicon that you absolutely must know if you're going to pick stocks by yourself. It's called the price to earnings multiple or P slash E multiple or just the multiple. They all refer to the same thing. And it's the cornerstone of how we value stocks. In fact, when you hear talking heads pontificate about some stock has become overvalued or undervalued, they're almost overvalued.

must always really talk about the price range multiple. When you hear someone say that Pepsi is more expensive than Coke, OK, they don't mean that Coke's cheap because it's trading in the 50s while Pepsi's trading in the triple digits. No, the share price tells you nothing about a stock's valuation vis-a-vis another stock. To make any kind of apples to apples comparison, you take a step back.

See, when you buy a stock, you're actually paying for a small piece of a company's future earnings stream. That's what a stock is. So to value a stock, you have to look at where it's trading relative to the earnings per share, which you often see rendered as EPS. And that's what the multiple allows you to do. Now, here's the basic algebra, not even math, that

that any fourth grader, I think, should be able to do. The share price P equals the earnings per share, E, times the multiple M. The multiple tells you how much investors are willing to pay for a company's earnings. We don't care that Coke's stock might be at $55. We care that it sells for 19 times earnings. We don't care that PepsiCo's say might be at the time 165. We care that it sells for more than 20 times earnings.

Or to put it another way, the multiple is the special sauce of valuation. The main ingredient in that sauce, growth. How much bigger the earnings will be next year than they were this year, and the year after that, and the year after that, on and on. The stocks of companies with faster growth tend to get rewarded with higher price-to-earnings multiples. Why?

Why? OK, remember, the multiple is all about what we're willing to pay for future earnings. And the more rapidly a business grows, the bigger its earnings will be down the road. So if a fast growing software sell stock sells for, let's say, 25 times earnings, that doesn't make it more expensive than a slow but steady grower like Pepsi at 20 times earnings. The faster grower actually deserves the bigger multiple.

Now, here's where it gets real interesting. Price to earnings multiples aren't static. In different markets, people pay more or less for the same amount of earnings. When they pay more, we call that multiple expansion. And when they pay less, it's called multiple contraction. Two more terms that sound much more complicated than they really are. For example, whenever interest rates skyrocket, making the bond market competition a lot more attractive, we see market-wide multiples contract because everybody's future earnings are suddenly worth less by comparison.

Of course, the earnings aren't static either. When you buy a stock, you're either making a bet that the E or the M part of the valuation equation is heading higher.

So what goes in the earnings? How do you make sure that they're increasing and not about to collapse? Okay, here's some more vocabulary. When you hear people talking about a company's bottom line or perhaps their net income, they all mean the same things. Earnings. We call it the bottom line because the number is the bottom figure on a company's income statement. To figure out how quickly a company's earnings could grow in the future, you have to look for clues when it reports its quarterly results. That's why I'm always telling you to listen to conference calls.

By the way, we do that homework for you in the investing club with all the travel trust holders. That's why I think it's such a good identity member of the club. Step one to getting your head around the future earnings trajectory, you need to look at the top line. Oh boy, another unnecessary piece of Wall Street jibberish that's totally interchangeable with revenues.

Or sales. They all mean the same thing. You want to see strong revenue growth, which tells you that there's demand for a company's product. This is ultimately the key to the ability of most businesses to sustainably grow their earnings long term. And that's why it's especially important for younger, smaller companies to have fast-growing revenues. Oh, and investors will really pay up for accelerating revenue growth. Accelerating revenue growth. Let's see. A-R-G. ARG.

which means the sales are growing at a higher and higher rate. With a more mature company, it should be able to turn its revenues into profits by cutting costs, and then it can return those profits to shareholders in the form of a dividend or potentially a buyback. Beyond the top line and the bottom line, it's also crucial to consider the gross margin, which is in no way disgusting and not the least bit marginal. The gross margin tells you what's left after you subtract the cost of goods sold from the sales. It's a key profitability metric. To figure out the

To figure out the gross margins, you have to consider the competition, the cost of production, and the cost of doing business in general. Businesses with cutthroat competition like supermarkets tend to have terrible margins, while virtual monopoly like Microsoft has margins that are down, they're obese. In some industries, the margins can vary widely. Take the oil business where the margins swing up and down with the price of crude. In that case, you need to watch supply across the whole industry. Oil production for energy and for retail, too much oil pushes price down, right?

Too much retail inventory forces stores to discount their goods aggressively in order to make space for the new merchandise. Both are what we call margin killers. So here's the bottom line. You need to know the vocabulary before you can evaluate a stock. When you're comparing, look at the price-to-earnings multiple, or P.E., the growth rate, the top line, the bottom line, and the gross margins. I know this might sound basic to many of you, but I'm here to educate people, and I don't want anybody trying to pick stocks

without a firm understanding of the basics. It's another great reason, by the way, to join the CBC Investing Club. Mad Money is back after the break. Coming up, finance is full of $5 words. But don't despair. Kramer is breaking down the Wall Street lexicon. Some key terms made easy. Next.

This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts.

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Tonight, I'm going into pen and teller mode, demystifying all the overly complicated, technical-sounding Wall Street gibberish that you hear constantly but might not understand. I want to translate the most overused, underexplained terms in the business, putting them in a language that's fit for human consumption. Consider this show your Wall Street to English dictionary, a televised glossary that'll help you navigate your way through tough markets and the tough-sounding terminology that keeps so many people out of stocks.

Not doing myself justice. And I got to help you to understand this stuff so you can be better. Of course, joining the club is going to help. Now, again, all this investing terminology sounds difficult because the pros who speak Wall Street shippers fluently, well, they want it to sound difficult. They're the opposite of me. They want you terrified. They want you feeling totally ignorant.

and at a complete loss when it comes to managing your own money. My mission is just the opposite of theirs. I am here to try to enlighten you, to teach, because I know that you can do better for yourself than the professionals. I've been down here for 40 years on Wall Street. I know this stuff. And most of the professionals, they kind of just want your fees.

I'm not managing anyone else's money, and I don't own stocks except for my charitable trust, so I give away my winnings to charity. And I walk you through the whole process of running the trust for the CNBC Investing Club. It's the anti, well, establishment.

Look, it's not enough to come out here and tell you which stocks I like because you can't own them if you can't understand them. Knowing what you own is a must. It's one of my cardinal rules. It says if you don't have a good grasp of what you own and what your holdings are, you won't have any idea what to do when the stocks turn against you. And believe me, inevitably, at some point, they will. You can't know when to hold them and know when to fold them in the immortal words of StocksHK.

Katie Rogers, and lets you know what the heck it is that you're actually holding and what might make you fold. Unfortunately, the profusion of arcane terminology on Wall Street makes it much harder to know what you own. So let's continue our vocabulary lesson with another ultra-important piece of verbiage that's hardly ever explained to you, even though it's used constantly.

Risk-reward. The risk-reward analysis pretty much defines short-term stock pickings. So what does it mean? All right, let's break it down into its component parts. Assessing risk is all about figuring out the downside, how much you potentially stand to lose in a given stock, how far it can conceivably fall in the near term. Assessing the reward, on the other hand, means figuring out the potential upside, how much the stock could rally if everything goes right. Too many investors only focus on the potential upside when they're analyzing stocks, and that is a great, great mistake.

It's much more important for you to understand the risk side of the equation because the pain from a big loss hurts a lot more than the pleasure from an equivalent size gain. Trust me. But how exactly do we figure out the risk reward? OK, these are determined by two different cohorts of investors. The reward, the upside is defined by how much growth oriented money managers could be willing to pay for stock. They create the top.

The risk, the downside is created by what value oriented money managers do. What value oriented money managers would pay on the way down. They create the bottom. To figure out the risk, you need to consider where the value guys will start buying on the way down. To solve for the reward, you need to think about where even the most bullish of growth guys would start selling on the way up. When asked, I usually boil the risk reward down to something quick and dirty like five up.

Three down. But how do I get there? How do you know where growth money managers will start selling and value guys will start buying? Okay, for that, you need some insight into how they think. And that requires translating another piece of esoteric Wall Street lingo. It's called growth adverting.

At a reasonable price, I really believe this, by the way, growth at a reasonable price, a.k.a. GARP. When we talk about growth at a reasonable price, that's not subjective. It's a method of analyzing stocks first popularized by the legendary Peter Lynch by comparing a stock's growth rate to its price to earnings multiple. If you want to figure out the maximum that the growth guys would be willing to pay for a stock, you need to be able to look at the world according to GARP.

You want to learn more from Peter Lynch? It's easy. Go to Amazon and buy one up on Wall Street or beat the street. These are two of the most important investing books ever written.

Now, here's a quick and dirty rule of thumb that's hardly ever let me down, although there are some exceptions. A rule that can really help us figure out when a stock might be overvalued or undervalued based on what the growth and value managers would be willing to pay. If a stock has a price earnings multiple that's lower than its growth rate, then that stock's probably cheap. And any stock selling at a multiple that's more than twice the size of its growth rate

probably too expensive. So if a stock's trading at 20 times earnings and it has a growth rate of 10%, then it probably doesn't have much more upside. It's reached the two times growth ceiling. Always remember that. Here's another piece of Wall Street shippers that can help simplify the process. The PEG ratio, P-E-G, that's the price to earnings to growth rate, or the P-E multiple divided by a stock's long-term growth rate. A

A peg of one or less is extremely cheap, and two or higher is prohibitively expensive. Sell, sell, sell. A high-octane superfast grower could suffer 40 times earnings and still be inexpensive because if it has a 40% plus long-term growth rate, giving it a peg of just one right at the cheap end of the spectrum, and the growth keeps accelerating, sending the stock to a new high after new high. That makes sense to me.

Where did I come up with these numbers? Observation. The value investors who will be attracted to stocks selling at pegs of one or less create a floor. You'll usually be able to find a buyer if the stock's multiple is at or below its growth rate. The growth investors who'd be buying high multiple stocks hardly ever pay more than twice the growth rate, a peg of two, which means there's almost no way that stocks go higher. So stick with the example of Google back when it still held that mega growth mojo. With a 30% long-term growth rate, it would have become...

become a sell if it traded to 60 times earnings, just too darn high, as I have learned over and over and over again since the show began oh so many years ago.

Like with any of my methods, or anyone else for that matter, this one is rough approximation, a bit of subjectivity. It's useful, especially when you're trying to figure out the risk-worth. But it's not always right, and it only applies to companies that trade on earnings, not unprofitable companies with stocks that trade on sales. Plus, stocks will often get cheap on an earnings basis simply because the estimates are too high. You see this all the time going into a slowdown. In those cases, the stock could trade well below the one-times growth flu.

its peg could just keep sinking and sinking. And the fact that it looks cheap

It's a value trap. It's not a buy signal. On the other hand, the best time to buy sickle stocks, think the smokestack industrial types, is when their multiples look outrageously expensive because the earnings estimates are way too low and need to be raised to catch up with reality. That happens when the economy is bottoming and about to rebound. The bottom line, know what you own and know what others will pay for. That means you need to understand the risk reward, the potential downside and potential upside.

upside before you purchase anything by figuring out where the growth investors put in the ceiling and where the value investors create the floor. Nicholas in Nevada. Nicholas. How's it going, Mr. Kramer? This is Nick Michelle from Las Vegas, Nevada. I'm a college freshman out here in California trying to start my own investment management company. I was just looking for some quick advice and kind of personal, I guess, advice on how to run that.

from a freshman's perspective. Well, I'll tell you, you're young, and that means you have to go with higher risk stocks than I typically talk about on the show. Maybe some smaller cap stocks, maybe some biotechs, maybe some companies that are on the ground floor of AI. I don't want you to be loaded up with companies that are older because you have your whole life to make it back if they go away.

A lot of our older viewers and middle middle aged viewers cannot afford that to happen. So go with high risk, potentially high reward stocks. Mark in Iowa. Mark.

Hi, Jim. I'm a happy club member, and thank you for taking my call. Thank you for being a member of the club. It's terrific. How can I help? Well, Jim, I have a real estate question for you. Okay. Higher interest rates make it more difficult for families to afford a new mortgage. What effect will this have on REITs containing single and multifamily units? Well, I think they're going to be under pressure, and I think it's natural that you ask that question, and it's one of the reasons why I'm not recommending any of those stocks, because you correctly...

have thought about what is the nemesis of those particular stocks. Now, as long as you understand the risk-reward, the GARP, and the PEG ratio associated with picking stocks, you're much better prepared to know what you own and know what others, more importantly, will pay for. Now, much more mid-money, do you know the difference between a rotation and a correction?

I'm not done cracking the Wall Street code. And you better be seated when Professor Kramer opens the dictionary. Plus, my colleague Jeff Marks and I are taking all of your burning investing questions. So stay with Kramer. Coming up, what big investment lesson can you learn from a bottle of milk? Kramer's working till the cows come home. Keep it here.

Managing your own money is a whole lot less daunting than it seems when you have a translator, someone like me, who can help you decode the intentionally obscure terminology that the experts use to talk about stocks all the time. And that's why I've been giving you my televised Wall Street gibberish to English dictionary, so that you can see through the mystery and understanding of this. I've got to get to the essentials of investing. It's the most important thing I can do. That's what I do for a living.

So far, I've been explaining the complicated sounding pieces of jargon that are actually pretty simple. Stuff we do every day at the CBC Investing Club. But the difficulty goes in two directions. Just as there are many concepts that seem misleadingly complicated, there are also plenty of other terms that are much less simple than they appear.

Take the notion of a trade versus the notion of investment. A lot of people say these two words are interchangeable, that there's no difference, but that couldn't be further from the truth. They're distinct, and in the immortal words of those 90 stock gurus' offspring, you've got to keep them separate. Isn't this just splitting hair, something that's not recommended for the follicling challenge like myself? Isn't it casuistry? That's a SAT word of the day. That might send you searching for a real dictionary. Nope, a trade is not the same as an investment.

And if you treat the one like the other, if you treat a trade, if you turn a trade into investment, breaking my first commandment of trading, then in true Mr. T fashion, a la Best of the Rockies, Rocky III, my prediction for your portfolio is pain.

When you buy a stock as a trade, you're buying for a specific catalyst, some anticipated future event you think will drive the stock higher. Maybe the company is about to report its quarterly results and you think it will deliver better than expected numbers. Although I don't recommend trying to gain earnings, there's just too much chaos and confusion in individual earnings report, which can cause the stock to get clobbered, even if it delivers stellar numbers.

The catalyst can be news about some event you're predicting. For example, let's say a pharma company getting FDA approval for a big new drug or even just some clinical trial data you think will be positive. These are data points that can send a stock story if they go your way. So when you make a trade going into it, you know that there's a moment to buy before the catalyst and a moment to sell.

after the catalyst happens. Sometimes your trades won't work out. The event you're waiting for won't happen. Or maybe the data point you're expecting simply turns out to be less positive than you expected. Either way, when you buy a stock as a trade, it has a limited shelf life. There's only a brief window where you want to own it. Once the window passes, you must sell.

Hopefully, you'll turn out to be the right catalyst and you'll rack up a nice game. If that happens, no point in sticking around. Ring the register and lock in your profits before they evaporate. But if you turn out to be wrong, well, guess what? You still need to sell.

I want you to think of it like this. When you buy a bottle of milk, you don't drink it after the expiration date, right? You throw it away. The logic of trading is pretty similar. You can't just buy more and call it a longer-term investment because without the catalyst, you've got no reason to own the darn stock, and you never, ever should own anything without a reason. I've watched an endless parade of people lose money by turning trades into investments. They come up with a lot of things.

with the alibis for staying in a stock long after its expiration date. They're really fooling themselves into believing they're doing the right thing. And then more often than not, they get crushed. So remember, without a catalyst, you don't have a trade. If you find yourself in that position, then you better sell and cut your losses. No catalyst, no point. An investment, on the other hand, is based on a long-term thesis. The idea that a stock has the potential to make you serious money over an extended period of time.

You're not just banking on one specific catalyst. You're expecting many good things will happen in the company's not too distant future. And that's not excuse to buy a stock and then forget about it, though. Investments can go wrong, too, which is why I'm always telling you to keep examining your stocks after you buy them.

That's called buy and homework, not buy and hold. Of course, we help you with that homework for our charitable trust teams in the CBC Investing Club. So when a stock you like as an investment goes down in the short term, it makes sense to buy more as long as the fundamentals are still sound. The corollary here is that you don't ring the registry after the first time the stock jumps in price. With an investment, you're looking for longer gains, larger gains,

And what you do is you measure it not in terms of trade and sell, but it's a much longer period of time. And again, that is what we do at the Investment Club.

the club. Bottom line, not all Wall Street gibberish is deceptively complicated. Some of it's deceptively simple, like the distinction between a trade and an investment. Don't confuse them. Remember, they're not the same. And it's a big mistake to turn a trade based on a catalyst, whether successful or unsuccessful, into an investment, which is a long-term bet on the future of the business. Dead Money's back after the break.

Coming up, if only the market were as reliable as Joe DiMaggio. When the tape turns red, remember the Yankee Clipper. Kramer explains next. Welcome back to the Wall Street Gibberish to Plain English Translation Guide edition of Mad Money. All night I've been explaining overly arcane and esoteric investing concepts and financial jargon to help you become a better investor and make the whole process

whole process of managing your money seem less daunting. So what else do you need to know? OK, here's one of the most dreaded and poorly understood terms in the business. The correction. What a euphemism. A correction is when after the market's been roaring, it turns around and then it gets crushed. Maybe a decline of as much as 10 percent. Make you feel like the world is ending. Of course, the sky is falling and you never want to own another stock again in your life.

And that's precisely the wrong reaction. It may feel horrible, but stocks can come back from corrections. They bounce back from big declines all the time, especially coming off a major run higher. Think of it like this. When the market goes on a 56-game hitting streak like Joe DiMaggio and then doesn't get on base the next day, that doesn't mean you'll never make money again. It doesn't mean all your holdings will be pulverized. It's just what happens when we go up, say, too far, too fast. And that's why you should expect correct.

They can happen to an individual stock, an index, the whole market. They can even happen to bonds, as we saw in the great bond retreat that started in 2022, and then rage beginning in the spring of 2023. And you'll most likely never see these corrections coming. So you shouldn't beat yourself up.

for not anticipating them. Sell-offs are a natural feature of the stock market landscape. We don't have to like them, I know, but we do need to acknowledge that they will happen no matter what. So you shouldn't get flustered or worse, panic when they inevitably smack you right in the face. Let me give you another piece of investing vocabulary. Executionary.

Now, this is a tough one because it's comparatively subjective. When we talk about execution, we mean management's ability to follow through with its plans. When you own a stock, there are all kinds of risks associated with execution. Messed up mergers, failed new product launches, bad cost controls. The number of ways a bad management team can screw up business is practically infinite.

That's one of the reasons why I like companies with proven management teams, because they're much less likely to make these kinds of unforced errors. And it's a big reason why, for instance, it's so important for you to pay attention. When I bring CEOs on the show with those interviews, nobody knows a company better than the people running it. And since you probably can't get these CEOs on the phone yourself, you want to hear what they have to say about their business firsthand on the show.

This notion of execution is also crucial when it comes to understanding why it's worth paying up for best of breed companies. Big emphasis there, best of breed. The top players in any given industry almost always come with proven executives. Best of breed stocks are typically more expensive than their cheaper competitors, but they're worth the price. A good management team is less likely to make mistakes and more important, less likely to get buried by big problems and more likely to figure out how to solve them.

Finally, one last piece of Wall Street gibberish, the dreaded rotation, which is just when money flows out of one sector into another or one big group into another big group, like a cyclical to secular rotation, the kind of thing we get when the economy's slowing so the cyclicals go out of style. Now, this is probably completely antithetical to what you've been told about the right way to invest.

The conventional wisdom is that you're going to pick your own stocks. Something which, by the way, the conventional wisdom regards as being the height of idiocy because you're not supposed to be able to beat the market. See, they sell you short. And then you should find high-quality companies and stick with them through thick and thin. Then eventually, if you hold out long enough, you'll make some money. Now, this is a brain-dead philosophy of buy and hold that I spend so much time trying to debunk to you.

It's a zombie ideology. They refuse to die, even though it's been utterly discredited by the market's performances. We're always teaching you in the CNBC Investing Club.

That doesn't mean that you should play the rotation game and only own the group that's in style. Not at all. Remember the need for diversification, another important piece of investing vocabulary, which simply means making sure you don't have all your eggs in one basket, one sector basket. To me, you're diversified when no more than 20% of your portfolio is in any single sector. That way you won't get annihilated if, for example, a sector rotation takes down your cyclical stocks because you have some secular growth names that are holding up much better than

or even making money at the same time. All tech, very bad because tech trades together. Bottom line, don't be afraid of rotations and corrections. Don't be intimidated by people who use the words. And remember, even though it's hard to quantify, execution is a crucial factor when it comes to picking stocks. You want companies with proven, seasoned management teams that are less likely to drop the ball. Stick with me.

Coming up, Jeff Marks joins Kramer to help handle your most urgent questions. The floor is yours when we return. I always say my favorite part of the show is answering questions directly from you. Then I bring in Jeff Marks, my portfolio analyst partner in crime, to help me answer some of your most urgent questions. Now, for those of you who are a part of the investing club, you're going to need no introduction. For those of you who aren't members, though, I hope you're not.

I hope you will be soon. And I would say that Jeff's insights and our back and forth help me to do a better job for you. So please, I want you to join the club tonight. Jeff and I are covering all grounds going directly to phone lines and answer some of your email questions. So let's take some calls. Andrew in New Jersey. Andrew. Hey, Jim. Mr. Kramer. Booyah. Booyah. How you doing? Not bad. How are you?

I'm doing pretty good. I'm a 66-year-old guy, ex-tech guy, and I'm all about dividends. And in this cash environment right now and the returns we're getting on them, I have more of a request than a question. Sure. And I'll get your thoughts on being able to do that in the future. I was wondering if at times you

you could do more about contrasting, acknowledging that you're not a tax advisor, but acknowledging more often which companies, which investments have the favorable 20% capital gains rate versus...

cash, which, you know, for, you know, the income tax brackets range from anywhere from 25 to 37 percent for some of the higher end people in the show. And then part two of my question, real extra credit is at the end of the year, as we approach the end of the year and we do think about a lot of tax harvesting of the losses, loss harvesting for tax purposes. Would you ever go so far to say this stock I'm recommending a hold?

But if you're thinking about the 30-day wash rules, maybe you want to sell it, harvest the loss, and then buy it back the 30 days. Did you ever go that far? No, these are—

These are very interesting issues. And I've got to tell you, in my first book I wrote, do not fear the taxman. What matters are the quality of the stocks. So I would not ever sell a stock if I thought it was going to be great for a wash sale. Again, if I thought it was going to be great, get improved. And I really don't want to sell any stock based on because you might be long term, short term. Jeff, I think that we're investing.

And we're investing for the long term. And if a company does poorly, we sell it. And if a company does well, we don't touch it.

And I don't think the tax person should figure into our equation. No, and of course, all of our capital gains and dividend income, the Troutable Trust has each year gets donated to charity. But yeah, I think if you do have a really specific tax question, seek a tax advisor. They'll give you the best qualified advice. Yeah. But we're focused. We're very focused on how stocks are performing. People could be in all different practice and have all different ideas.

Why don't we go to Kevin in Maine? Kevin. Jimmy, booyah. Booyah, Kev. What's up? Thank you for helping millions of people build themselves into a better investor. You are single-handedly responsible for encouraging millions of Americans to get into the stock market who otherwise would not have, myself included. So thank you. Oh, man, you make my day.

Okay, thanks, buddy. I do appreciate everything that you do for all of us regular people Jimmy quick question my charts have only three tools on them price volume and OBP or on balance volume I'm sitting on a few 10 bags and 130 bag Jimmy if you were forced to choose only one tool on your chart other than price and volume Which one would it be? Okay, this is terrific

What I would check is to see the oversold overbought. Is it too down, far down? Is it too far up? And I use the same thing for stocks. I wish we had an oscillator for, I mean, for the stock exchange, the S&P. I wish we had an oscillator for each single stock. That's what I'd be looking at.

Yeah, well, I'm not a technician. It's a little harder for me to say. But I think also moving averages is something that technicians often quote. So that would be the other one I'd look at. Right, some of the stuff that Larry Williams does I really, really like. All right, so now let's go for some emails.

We're going to let's start with Diane in Ohio. And she asks, I am trying to build a position in the company at the stage of not owning as much as desired. How do you balance taking profits and building a position? Thank you. OK, so if you put it on a small position and if it jumps up, you just sell it. That means you missed it. You didn't get it. That's OK. We'll get the next one.

Otherwise, what you do is you build it on the way down in pyramid style. And what you'll do is you'll have a better basis, trying to improve the basis, provided the thesis is still right. And that's what matters.

Yeah, I think just because it's a smaller position, that doesn't mean you should break discipline and be greedy. If the stock's had a huge run, looks a little bit overextended. But we also don't want to chase stocks either. And just because it's small, just start buying because you think it may go higher. Right. Discipline, it always comes back to. Yeah, I mean, look, I hate having to wait. I hate having to build a pyramid. It doesn't matter. This is not a game of emotions. It's a game of empirical analysis. And it's worked.

All right, now let's go to Chris in Illinois, who asks, how do you address the weighting of different sectors in a diversified portfolio? Do you match the S&P or market weighting, or do you specify sector weightings based on macro trends, et cetera? All right, now this is another one where the club is very different from most people. What we do is we look for good companies. And if the companies are good, we don't care about the sector.

Now, we don't want to have all semiconductors, but we are about finding the right stocks. And if there are a lot of stocks in that sector, we pick the best one in the sector. But it's not the way we think of things. We're diversified. But if there's a mega theme that we like, whether it be electrification, clean energy, infrastructure, then we're not opposed to investing more heavily in that space because these are multi-year trends that are seeing growth.

a huge flow of investment dollars. And that's why you come to the club. We are unconventional, but we are rigorous. I like to say there's always a bull market somewhere, and I promise you I'll find it just for you right here on May of Money. I'm Jim Cramer. See you next time. All opinions expressed by Jim Cramer on this podcast are solely Cramer's opinions and do not reflect the opinions of CNBC, NBCUniversal, or their parent company or affiliates, and may have been previously disseminated by Cramer on television, radio, internet, or another medium.

You should not treat any opinion expressed by Jim Cramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Cramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Mad Money Disclaimer, please visit cnbc.com forward slash madmoneydisclaimer.

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