Mad Money w/ Jim Cramer 12/30/24
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It's CNBC's Big January with CES from Las Vegas, Biotech and Pharma at JPM Healthcare, the World Economic Forum in Davos, and the first Fed decision of the year. Start the year ahead of the game. CNBC. My mission is simple, to make you money. I'm here to level the playing field for all investors. There's always a bone working somewhere, and I promise to help you find it. Mad Money starts now.

Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I'm doing it like friends. I'm just trying to make you a little money. Now, my job is not just to entertain, but to teach you. And that's what we're doing tonight. So call me at 1-800-743-CNBC or tweet me at Jim Kramer.

Yes, tonight I'm letting you in on something big. The method to my madness. I believe that you can do everything I do at home if you're willing to put in the time and effort. Investing, specifically investing in individual stocks, running your own portfolio rather than dumping your money in some buy-and-forget index fund is something I am confident all of you can do by yourselves.

I always emphasize the homework, and I hope you do the homework for my travel trust stocks if you join the CBC Investing Club. In the old days, my rule was that you need one hour per week per stock. These days, though, the research is so readily available online that I'm willing to count this less than an hour a week for a portfolio of five stocks, say a few hours a week.

if you own 10 stocks unless you belong to the club itself and you have a much easier time and cut down how much well-earned work you have to do because we do it with you. Investing in more than just 10 stocks, then I get worried because that can be difficult unless you're managing money full-time.

Of course, if you don't have the time or the inclination to pick stocks, then you are better off parking your money in a low-cost index fund that mirrors the S&P 500. And I like those. They're good. I'm in some. But if you're willing to put in the work, regular people can trounce the averages as long as you're disciplined and you follow the rules, rules we constantly highlight as part of the CNBC Investing Club. Well, how do you start? Well, that's what we're talking about tonight. Like I said, the show is all about the method or methods to break from strictly quoting the bar to my madness.

How do I pick stocks? What gets on the show? How do I tell you some stocks are worth buying and some aren't? Those are the questions that people constantly ask me. Tonight, you're going to get a piece of the answers. The truth is that I've got far too many methods, far too many ways of picking out great stocks to ever cover all in one show.

But I want to give you some of the tools of my trade, enough so that you can start to pick stocks like me on your own. Remember, I want you to be a manager, a great manager of your own money, because you can focus on a smaller number of names while I have to follow practically everything, particularly for the lightning round. At the end of the day, this show is about educating you, giving you the ultimate insider's perspective on how the market works and how it can help you try to make money.

I'm not here just to dole out stock picks like the proverbial fish you give a man if you're too lazy to teach him to shop for fish at Whole Foods. What I'd really like to do is empower you. And that starts with me teaching you all the many tricks I use to pick out great stocks and invest in them like a pro. Methods that have served me well for more than four decades. And that allowed me to generate a 24% annual return after fees for 14 years of my old hedge fund. Not bad. Three times better than the market.

These skills are what refresh the show and guide me as I manage my own travel trust now. A learning exercise that you can follow, of course, by joining the club. Now let's get rolling. One of the easiest ways to identify potential Kramer names, the stocks that could possibly I should possibly own, but not necessarily end up on the show is by watching a list that comes out every day. It's called the new high list stocks in that illustrious list, the highest of the high. Obviously,

obviously has something going for them, and that's especially true when the market's in bad shape, as only the best of the best can hit new highs when the averages are falling apart. So what does it tell you when a stock's on the new high list? Either that it's part of a broader bull market because its sector is on fire, or the company itself has some serious earnings or sales momentum.

No matter how they get there, many stocks in the new high list often keep going higher because it's kind of a list of A students that are worth betting on. They tend to keep getting straight A's on every quarter, just like the real smart kids in school. In a great bull market, we see this over and over and over again. The same stocks would hit new high after new high after new high. And following them was a terrific way to make money, even as the bears claimed endlessly that the bull market was false and couldn't be trusted.

Listening to the Bears has caused you to miss out on some of the greatest rallies in history. Of course, I'm not saying you can just chase any stock that's hitting new highs because they'll keep going higher. That would be the ultimate in foolishness. True Bozo the Clown behavior. I am saying that if you want to identify potential winners, unless there's been a stunning sea change in the market caused by changing interest rates, possibly the political environment, then a good place to start, a wonderful place to start, is the new high list. Emphasis on start.

See, that's the thing about the market. It's not always that hard to play once you understand that there's often more continuity than change. Things pretty much keep going the way they were going until something major shifts. And then you have to order your course. Those course changes, they can be pretty radical, though. And that's why you always have to be reevaluating your ideas. And you should never dig in your heels when the facts change, something I emphasize over and over again when I send out these investing club bullets.

Now, I rarely recommend buying stocks straight off the new high list unless there's some special circumstances. Circumstances I'm going to talk about later tonight. What I like to do when I'm hunting for stocks and what you should do is wait for something to pull back from the new high list because that is the best place to start. Buy, buy, buy! When you're buying. New high list is not a shopping list. It's an inspiration list. You keep an eye on those names, then wait for them to come down so that you can pull the trigger.

The pullback, ideally 5% to 8%, 5% to 8%, gives you a good lower price entry point in a stock that likely has a lot of positives going for it that maybe has been pulled down by an overall move in the stock market. That's been the optimal level. I found less than 5%, and you're probably too early, more than 8%. And it's more likely that something's gone wrong, very wrong, maybe even with the underlying company.

Pouring over the new high list is a fabulous way to identify potential. And I stress that word, potential stocks to buy. You only buy stocks that have pulled back from the new high list if you're confident they'll make a comeback for substantive reasons unrelated to the broader market. OK, unrelated to the broader market, but related to your stock. You need to do all the same homework you ordinarily do before buying a stock. You absolutely must have conviction, even if it's a cynical conviction that the stock's going higher, that it deserves to go higher.

And the biggest caveat of all, when you're shopping for stocks that have pulled back from their highs, make sure they haven't pulled back for a good reason. The sell-off needs to be extraneous to their business. Don't go buying a home builder that's down because interest rates flew up, because that could genuinely hurt the numbers. But if a big pharma stock gets hurt by higher rates, it's nothing to do with their earnings, so maybe it's worth buying.

No, no!

Now, more than ever, stocks are traded like commodities by ultra-leveraged funds, ultra-levered hedge funds, frequently causing huge sell-offs that make no sense whatsoever. So you'll see high-quality stocks pull back off their highs for unrelated reasons to their core business. But if the fundamental picture changes and whatever made that stock attractive as it climbed its way up to the new high list goes away...

then that stock is no longer a candidate for your portfolio. The story has to be intact or this method won't work. Here's the bottom line. That's the first method to pay for spandex. Watch for stocks that have pulled back from a preselected list, the new high list, especially because a broad market sell-off is sometimes a great opportunity. Some of my best picks for the club have come out of the process, and hopefully some of yours can too. Let's take some calls. Let's go to Andrew in Georgia. Andrew.

a bit the camera but today uh... good day how do you enjoy on dual well thank you for asking for a little bit really new investor of all the benefits about thirty years one i just want to appreciate everything to do for the for the uh... people that you guys don't know what they're built thank you that's terrific how can i help you my question is about burning the mac and joe's i want to know after converting the mouth of all laws typically weight

Okay. How long do you wait after an IPO?

Okay, so you know, I find that after an IPO, you really have to be very careful because what you've got are a lot of analysts who kind of want to say positive things and they tend to lose their critical faculties. My advice is very clear that when you get a stock that's down substantially from where it opened, that's how you look at it. Because a lot of times the opening is controlled by people who are just way too enthusiastic.

a company with actual earnings and a good balance sheet that trades at a premium to the stock market but has a premium growth rate, that might be okay. But otherwise, no thank you. I'll find better stocks. How about Drenna in West Virginia? Drenna. Well, good evening. Good evening, Drenna. Thank you, first of all, for everything that you do. I think you're a national treasure. I have learned so much from listening to your show. You're very kind. Thank you. When you want to generate cash, how do you decide...

What stocks to sell? Okay, we talk about this a lot on the club, and I tend to rate my stocks one to four about following their fundamentals. Always willing to sell a four or even a three on any lift.

What I try to look at is I look at like paintings. I'm like painting collection. I don't want to buy a new painting without selling an old painting. I want to have a museum. And what I look for are companies that reported a bad quarter. OK, that was disappointing to me that have a little bit of lift that I can start lightening up from because I don't want to sell a company that just reported a good quarter. I'm looking for companies that disappoint. They're already always there. And you have to have the discipline to sell as hard as it might take.

Timothy in New York. Timothy. Yeah. Hi, Mr. Kramer. Thanks for taking my question. Sure. I want your opinion on quants. My understanding of quants is that they screen dozens of parameters on thousands of stocks and use algorithms to rank them in terms of valuation, growth, momentum, profitability, revisions, and so on. Outcomes are graded by hold or sell recommendation.

Some quant portfolios have a very good repeatable performance. It seems to me that at a bare minimum, these are a valuable tool. On the other end, why wouldn't an investor use them exclusively?

That's a great question. Look, I think that a lot of times the quants go up and down, trade too much. They recommend stocks, and then the chart says no or the numbers say no. I like to buy great companies with great management that have good secular tailwinds behind them. And the quants don't necessarily catch those. But I do think that everything, whether it be quants, whether it be charts, whether it be everything that is from research, I like to include it all. And if some quants have some great records,

and they share us data that they're using? I'm a buyer too. Okay, so now you know the first method to Kramer's Madness. Watch for stocks that are pulled back from that preselected list of good companies called the new high list, especially because of a broad market sell-off and not because of something happening at the company itself. Some of my best picks have come out of this process. Hopefully some of yours can too. On Mad Tonight, I'm giving you an in-depth look at many more methods to my madness, from watching shorts to trading around key positions.

If you want a better, more well-rounded sense of how to curate your own stock portfolio, you do not want to miss the rest of this show. So stick with Ed Kramer.

Don't miss a second of Mad Money. Follow at Jim Kramer on X. Have a question? Tweet Kramer. 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. Get

CNBC.

Welcome back to tonight's Methods Demanded special, where I'm revealing some of my best tricks for buying and selling stocks. Trying to give you the real sure ones. You could call it truly timeless investing wisdom for the ages, but I'm too humble to say that. If my audience were older, I'd tell you to think of me as the pen and teller of the stock market with a physique that's a whole lot more like teller than pen. I want to pull back the curtain and show you how a professional looks for stocks to buy and knows what to sell.

There's no magic. There's no hidden talent. Just a bunch of disciplines. Disciplines that can help you try to make mad money if you master them. You don't have to be a genius. You don't even have to be all that smart to be completely honest. You just need to know what the heck you're doing and put in some homework. And that's where Kramer the Sabbath wise clown comes in. Maybe less of a sad clown these days and more like the fool from King Lear. Something to think about. Enough Shakespeare.

Let's move on to more important things like how to find stocks that are great buys. Now, earlier I was talking about picking up off some stocks that have pulled back from the new high list because you get a cheaper entry point, something that's already been approved in winter. I said you rarely want to buy names right off the new high list because you're paying too much for them. You usually get a better chance, a better deal if you're patient and wait for some weakness, you know, 5% to 8%. Given how volatile the market can be, even when things are going well, there are very few occasions when buying a stock right off the new high list can be justified.

Have some patience. But sometimes the stock's so hot that you've got to buy it even whenever you can.

as soon as you can because it's not heading lower anytime soon. I've felt that and you've felt it. You won't find these often. But when you find them, you have to remember not to buy all at once. You want to buy 100 shares of a stock and you think it's got so much mojo that it won't get a pullback for the high? Hey, how about this? Buy 25 shares. Worst that happens, it goes higher still and you don't get to buy more. So you grab a quick profit and find the next one. Believe me, there is always another one coming down the pike. Now, I've got one exception where it's okay to buy stock that's hitting a new high.

If you see insiders buying the stock when it's already up a great deal, that's a total green light. Don't laugh. It does happen. It's rare, but it does happen. In my experience, it's rare still that this method of picking stocks doesn't work out. I love it when I see insider buying after a decent run. That is a terrific sign of the confidence that the insiders have that the rally may be just beginning or that there's a big runway ahead. And they sure think it's going to be long lasting. FYI.

insiders can't flip a stock that they buy immediately. They have to wait at least six months. Otherwise, the government takes away the gains. That's the law. So these people are seeing positive things that likely aren't going to disappear in six months' time. Boy, do I like that. Normally, insider buying ranges from meaningless to small, but it's on its own insufficient reason to buy a stock. Sometimes you'll catch insiders buy

their stock because they want to give the impression of confidence, create an illusion that they're doing better than they really are. Insiders aren't stupid. They know that if they're seen buying their own stock, even small amounts, then the market will smile upon them. So occasionally they game the system. That's fair, but it means we ignore most insider buying that is not substantial because it could be pure flim-flam.

That's it. When you get truly colossal insider buy, even if it's not all at the high, but you're then you might want to take another look at the stock in question. When the insiders buy a whole lot of shares. What a powerful endorsement. Crucially, if the volume of the insider buying that really does declare its sincerity. But we're only focusing on one sort of insider buying right now. The kind you see in stocks that have been running and are perceived as being historically cheap or low dollar amount plays.

Those sometimes can be down there for a reason. See, there's nothing more arrogant and yet telling than when an insider backs up the truck for their own stock when it's been rolling along at a good clip. Think about it. What they're saying is, yeah, we know we rock. Our stock has been in fuego and we're so darn confident it'll keep going higher that we're going to buy shares right now, hand over fist.

Arrogant? Sure. But it's rare, but it is bankable hubris. Corporate insiders aren't fools, with some notable exceptions occupying the mad money wall of shame. Plus, if their stocks are already on a tear, there's probably a good chance the executives know what they're doing. Of course, not everyone deserves the benefit of the doubt in this business, and after so many investors got burned by the 2021 boom in IPOs and SPACs,

I know that a lot of people assume most CEOs and execs are really a bunch of liars, frauds, crooks, mouthbags. But look, that's the wrong lesson to draw from the IPO implosion. Healthy skepticism is one thing. A total unwillingness to believe anything positive is something else entirely. If you're going to invest in the stock market, you need to be willing to extend some measure of trust to the people who run the companies that you own shares in. Otherwise, why bother? Just go buy the index fund.

What else could be going on to spurn insider buying? Even when the FTC and the Justice Department Antitrust Division are hostile to mergers, you still get some takeovers. Sometimes executives will buy their own stock because they hear footsteps of a potential acquirer. They've been told by bankers there's a lot of companies interested in them without anything specific. Maybe they've been contacted by companies and they turn those companies down. Spurned overtures happen all the time. And if executives expect that they may be next, well, it's a healthy and honest reason to buy.

Or maybe they realize that the business is indeed worth more than they thought and can be broken up by bringing out some value. All different generations have seen it. Altria, Tyco, even DuPont. We've seen tons of these breakups over the years, and they genuinely produce long-term gains because Wall Street likes smaller, more straightforward companies that are easier to get your head around. Think of

Think about it. Think about Carrier, about Otis, about the old United Technologies. Maybe the executives see the ability to create value and they want it on themselves. Or maybe the stocks run just a bit, but they don't think the run is over because they recognize how much better the business will be once it's broken up. For me, buying after a big rally can certainly feel a little reckless and even lazy. Most investors are smart enough to wait for a pullback before they pull the trigger.

But insider buying after a decent run tells me that one of the people who knows the business best doesn't believe there will be a pullback. And there's nothing more bullish than that. Sure, ideally you want to wait until the stock sells off after the insiders have bought, but that's the best of all possible worlds. It doesn't happen all that often.

I've seen it happen in some red hot tech stocks that cool off very momentarily. And that's a terrific sign to buy. Bottom line, one more method of Kramer's Mantis. When you see insider buying in a stock that has already had a solid run, admittedly a rarity, you might want to do some buying too. MenBuddy's back after the break.

Coming up, need another tool in your belt to help identify the right time to buy a stock? Kramer's revealing how short interest in a name could be your telltale sign to buy it. Next. It's CNBC's Big January with CES from Las Vegas, Biotech and Pharma at JPM Healthcare, the World Economic Forum in Davos, and the first Fed decision of the year. Start the year ahead of the game. CNBC. CNBC.

You're in luck because you caught Kramer on a good night. I'm not going home to sit that cheap scotch on my dirty linoleum floor. And by the way, I apologize to Dewars, which I once suggested was linoleum floor scotch of choice. It's actually pretty good stuff, especially that boutique 18-year-old. Hey, have you guys ever tried the 18-year-old Jameson?

Sweet. All right, don't waste that one on the dirty linen floor either. Nope, I'm in a great mood, a manic mood even, which is me at my best because, well, let's just say I'm pretty darn productive and prescient when I'm in high gear. I'm so revved up that I'm revealing many of my secrets, the methods to my madness. Better than giving you a stock pace, I'm giving you some of the best ways I know to pick stocks. I'm teaching you to invest and trade like Kramer, if not to be like me, because I have some emotional issues that, frankly, you probably would prefer not to emulate.

somewhat off track. So far, I've given away two of my precious secrets, two of the tools that I used in my hedge fund and still use my travel trust, which, of course, you can follow by joining the CBC Investing Club, where, unlike Lady Gaga, I play with an open hand, not a poker face, allowing subscribers to see all my trades before they happen.

What I'm teaching you tonight are really what I call tells. They're signals that a stock might be worth owning, that it's worth your time and effort to go through the often boring process of reading through the conference call transcripts and quarterly filings to do the necessary homework. There are thousands of stocks out there, and any method we can use to narrow down the ones that might be attractive to us is a method worth having.

I've talked about insider buying near the high. And while I don't usually use insider buying as the only way to determine whether or not a stock has got it going, there's one other scenario where insider buying makes for an incredibly bullish tail. And that's when a stock has a heavy short position.

Meaning a lot of people out there have borrowed shares, sold those shares, and are now waiting for those shares to go lower before they buy back the stock. Return them to the bank they borrowed them from and collect the difference between the price they sold them at first and the price they bought the stock back later. You can think of shorting as like regular investing, only in reverse. We try to buy low and sell high, right? Isn't that what we do? Shorts just turn that around. They try to sell high and then buy low.

When a stock has a high short position, that means a lot of smart people have serious conviction that the stock's headed lower. In fact, it takes more conviction to short a stock than it does to go long. Because when you're short, the potential downside is infinite. When you're long, a stock stops losing money when it hits zero.

Shorts lose money when stocks go higher and there's no lid on it, right? The other thing about short sellers is that if there's a lot of them, then a stock all of a sudden gets some great news. We get what's called a short squeeze. And it sounds exactly like what it is. In order to close out the positions, the shorts have to buy. This is called covering, short covering. When a lot of shorts cover at the same time in a panic, the stock will surge because what you really have is a lot of people desperate to buy the stock to cut down their losses.

A lot of demand. They have to buy unless they want their performance to be wiped out. This process is so predictable that sometimes concerted buyers will foment a short squeeze. Hey, listen, that's what GameStop was all about. That's what AMC was all about. That's what the meme stocks were all about.

So where does insider buying fit in the short selling equation? Okay, let's say you have a stock with a high short interest. Then some of the people who run the company start buying shares for themselves. Or maybe an outsider takes a more than 10% stake in the business and indicates it wants more.

It's almost like drawing a line in the sand for the short saying, our stock goes this low and no lower. This is an explosive combination, people, and one that often leads to a short squeeze that sends the stocks much higher. Shorts are smart. In fact, they often tend to be smarter than regular long-side investors, but they usually don't know more about a business than the insiders who run it.

If a lot of people are shorting a stock and management starts buying it in sizable amounts, you should start doing your homework right then, right there. Really. See, usually it makes sense to side with management. Then you can ride it higher and higher in true Jackie Wilson style. Higher and higher. Lifting me up. As the shorts panic and push shares higher in their desperation to cover their positions, cut their losses, and move on. Similarly, when a company with a heavily shorted stock announces a jugular buyback,

But bigger than any previous one, that's another line in the sand situation where management is contradicting the shorts. Companies often repurchase their own shares. And while not all buybacks are bull, some of them are just outright waste of money. A substantial new buyback in the face of the shorts is often a good reason to take a closer look. Now, a note of caution here. You need to be very careful when dealing with a company that's in the crosshairs of the short sellers, especially when people are nervous and the market's in bad shape. Know the landscape.

The shorts have the ability to wreck a stock, even if the fundamentals of the underlying business are fantastic. These days, stock owners no longer have the benefit of rules that used to slow down short selling and make it harder to create bear rates. When I got started in this business, it was much harder to bet against stocks, but the SEC guided those rules under both Democratic and Republican administrations.

All in the name of creating more efficient markets. Without these protections, we can't smash the stock down. The shorts can easily assassinate stocks if they smash them down. Anytime something goes wrong. We see it during the financial crisis back in 2008. Oh, my God, that was such a horrible period. And we saw a smaller version of that during the mini banking crisis of 2023.

For the short, it was like shooting fish in a barrel. So many regional banks traded like they're going bankrupt. But other than a few narrow wells like First Republic, they were fine. Of course, in recent years, the short sellers have found themselves targeted by bull raids, facilitated by social media platforms. So they have to be careful. But only when the meme stock crowd goes after them in force. You never know when that's going to surface. These are highly unusual situations, though.

You can still find great opportunities in stocks where the shorts have overreached and the insiders are buying. But before going into one of those situations, I have to warn you that the balance of power still favors the short sellers. That means even if the short sellers are wrong about a company's prospects, they can still demolish its stock, especially if they mount highly visible campaigns against the stock.

And look, many times the shorts are right. The stock deserved to be slaughtered. Just don't underestimate the amount of damage the shorts can do to the stock. In the end, the best protection against bear rates are stocks that pay good, solid dividends. Because when you short a stock, you have to pay those dividends to whoever you borrow the stock from. That's a terrific deterrent. When you see a stock with a big dividend that's being attacked by shorts and the yield's going high,

That's often a terrific place to be, especially when the insiders are snapping up stock, too. So let me get to the bottom line here. Insider buying plus heavy short interest can equal raging bull buy as long as you avoid situations where the shorts are determined to crush the stock at any cost. Let's go to Debbie in Colorado. Debbie.

Hey, Jim, my husband and I are proud members of the club. We absolutely love being members. It's so much fun. Thank you, Jeff Marks. I'll pass it on to Jeff Marks, my colleague. That's fantastic.

My question for you today is, I have a 31-year-old son and he's finally starting to listen to me. So I was wondering if you had some tips and tricks for us to get him involved in the market. He's got a goodly sum of money to spend and he's really excited about getting involved. Well, that's fantastic. If he has a science bent, I mean, there's so much he can do. I would first look at biotech, which has got some amazing, amazing situations, by the way, like Danaher.

because that serves the biotech companies. I like Vertex. I think you should look at Vertex.

That's a terrific company. And, you know, let's just not forget, you do want to have a diversified portfolio. It's OK to be able to take a look at some of the stocks that you and I both know, like a Honeywell is still really incredibly cheap that we have. And then, you know, maybe you have a stock that's a bit of a flyer, like a like a footlocker. So build a diversified portfolio, but emphasize the science. I think you'll be in good shape. Now we're going to go to Vincent in New York. Vincent. Hey, Kramer. How are you? I'm good, Vincent. How are you?

Well, what advice would you give a 26-year-old that's been day trading for about two years and is...

looking to do better and go as far with this as he can. All right, but let's look. If you're day trading, it's a full-time occupation. So what you want to do is put some money in the Vanguard Total Return Fund and put some money in the Vanguard S&P 500 Fund. And just keep putting money away every single month. If you have some good day trades and you've made a lot of money, take off some of that capital and put it in those Vanguard accounts. That's the way I would suggest doing it.

because I want you to have exposure to the broader market, not just to the stocks you're trading. All right, look, in most cases, a stock with insider buying and heavy short interest equals buy. As long as you can avoid situations where the shorts are determined to crush the stock that you own. Much more made money ahead. I still have some tools in my belt that I want to share with you, including my method of trading around a core position. So stick around.

Regular viewers know that this show is all about investing, owning stocks for the long haul, not really short-term trading, because it's much easier to be a good investor than to be a good trader, especially when you're doing it part-time.

However, knowing how to trade makes you a better investor. And trading around a core position is one of the most basic and useful disciplines out there, especially in markets that often get hit by wild swings. And that's most markets in recent years. So what does it mean to trade around a core position? Okay, let's go through it step by step. First, you need a stock.

Pick one that you like, one that you have an opinion about, one where you have a bias, a stock you believe is headed higher over the long term. What you're really searching for here is a great company with shares that might get tossed around by market volatility, even as you believe they'll ultimately go higher if you're patient.

Now, if you were just investing, then you just have a position in the stock. Buying in gradual increments, because we all know that buying all at once is just pure arrogance. And that'd be it. By the way, this whole process of buying in increments is something that we're constantly showing you how to do if you belong to the CNBC Investing Club. We also talk about trading around positions.

Take something like NVIDIA. That's a chip maker with a fantastic long-term story because they make the most powerful semiconductors on Earth. They'll be needed for cutting-edge applications like artificial intelligence. I love NVIDIA for the long haul, but it's got an insanely volatile stock. Now, let's say you want to own 100 shares of NVIDIA over time. Then the way to set a position would be buy 25 shares four times over a period of weeks or even months. And that's your core position as an investor.

But let's say you want to trade something that's hard to do, but also cheaper than it's ever been, because home gamers can now fit in. Yeah, they can fit in and fit out. No stock commissions. Now, I wouldn't recommend pure trading something like the NVIDIA. My stance is own it, don't trade it. But trading around a core position, different story. So let's go back. You own the 100 shares of NVIDIA. And let's assume it's sitting at, I don't know, how about $500 for the purpose of it? It's $500. Every time the stock jumps another 5%, you could sell 25 shares. Of

a quarter of your position. You shave a little off to bring in some profits. So once Nvidia hits 525, you don't have 75 shares. Keep scaling out of the same way on the way up, but don't ever sell the final 25 because that is your core position.

Then you wait until something happens to knock the stock back down. And as long as nothing's changed with the underlying thesis, you use that. This is a stock a little more invidious. We've done this for the Chappell Trust. It's going to happen pretty often. Since we're in a world where stocks can get crushed by all kinds of factors, nothing to do with fundamentals, that's what happens.

Now, as the stock comes down to the original cost basis, you buy it back in increments. Since we started with 100 shares, let's keep using increments of 25 to buy it back. On every 5.4% decline, you can go beyond 100 shares if it comes down low enough, too. Now, this might appear to be small potatoes, up 5% until 25 shares, down where you started by 25 shares, and repeat the process on the way back up. But over time, your profits will add up. And that's what trading around a core position is all about.

Now, a lot of people think trading is incredibly exciting and it can be. But if you're good at trading around a core position, you should be pretty bored. All you're really doing is watching the stock move and then trimming or adding your position accordingly. Contrary to the image of trading as something that's reckless and irresponsible, trading around a core position is really the height of prudent portfolio adjustment. Boring, by the way, is good in this business. Exciting? Save it for the stadium.

Obviously, you can scale these numbers depending on how big your position is. But the basic idea is avoid putting yourself in a spot where you have too much on the table in case the stock gets swatted down or too little on the table to take advantage of any upside that comes your way. Trading around a core position is an important basic strategy that everyone can use, even those of you who find the notion of trading totally abhorrent, because it's less trading and more just a supplement to investing.

So here's the bottom line. Now you know the basics of how to trade around a core position. Yet another method to my madness, one that allows you to generate lots of small gains that I am telling you will add up over time. We have money. It's back after the break.

Coming up, Kramer's revealed his tools to the trade of buying a stock. But what about selling them? Kramer's breaking down how to get out of a stock at the right time when Mad Money returns. I've got one more trick to teach you tonight. One more method in my madness. And this time I want to talk about selling. How do you know when to sell a hot stock? You ask me that all the time. How do you get out before the party ends so that you're not one of the last people around who gets stuck cleaning up the mess?

Now, this is a question that needs to be answered because there's a lot of money to be made by owning hot stocks with lots of momentum. But when you play the momentum game, you need to know when it's time to leave the table. There are always naysayers, and eventually the naysayers are almost always proven right. Because sooner or later, virtually all hot stocks implode. Remember, we're talking about the hot stocks here. Remember everything that reward in 2021, collapse in 2022? That's what I'm talking about. But the collapse usually occurs later rather than sooner.

And all the negative talking heads who kept you out of the momentum stocks with the recklessness disguised as prudence actually cost you a great opportunity to make money. People shy away from these stocks because they don't know where they're going to stop. They don't know where they're going to top out. It's understandable. And I'd be afraid to buy them, too, if I didn't have a discipline that let me know when to get out.

Lucky for you, I do have one, and you're about to learn it. First, when I'm talking about hot stocks, I really mean hot speculative stocks. Stocks of companies up with fairly low market capitalizations. Usually, these stocks begin with very little research coverage from major Wall Street brokerage houses. They often don't even have earnings. They may not even have sales. I would never buy these for the travel shops. We're not talking about that. These names can go up for a very long time. They can catch fire and stay on fire for years when they have the wind at their back.

The key to figuring out when interest has peaked and it's time to sell is not from the stock. It's by watching the analyst coverage. You have to use your own judgment here. But a good rule of thumb is that once one of these hot stocks has at least a half dozen analysts covering it, the run is going to peter out.

because the stock in question is becoming too well known. It's the rare speculative winner that can keep winning after it gets big. You can find out how many guys are on a stock by looking it up online. This isn't hard to find information. This formula has worked for me for as long as I can remember. As far as I can tell, it works because the number of analysts on a stock is a good gauge of how much awareness and interest there is in the name. Hot stocks get tapped out when there's nobody left to be attracted to them to go buy more.

When all the people would be interested in buying have already bought, they come out of nowhere attracting more and more attention, more and more backers. And eventually everyone who wants a piece of this stock has a piece of it already. When that happens, the run's over and it's time to go home.

Oh, and if the meme stock guys get their hands on it, take advantage of their enthusiasm to ring the register. That's a great sign that you want out because they can only push a stock up so much before they run out of firepower. Of course, there are other situations where speculative stocks go out of favor all at once, regardless of how much attention they're getting. In 2021, we had a huge run in anything related to electric vehicles. Think car makers, battery plays, charging stations. Same goes for enterprise software stocks.

Now, a lot of this was fueled by an easy money environment with near zero interest rates. There was a lot of liquidity kicking around back then, and it had to go somewhere, which is why so many money-losing companies had red-hot stocks. But then the Federal Reserve declared war on inflation.

back in November of 2021, letting you know that the age of near zero interest rates was coming to an end. At that point, we knew that the speculative fourth was about to be drained out of the entire market because that's what always occur when they tighten rates. Now, I very quickly told you we're in a new environment where anything speculative was toast. And instead, you wanted to own real companies that make things or do stuff out of profit. Now, I know it wasn't the most elegant way to phrase it, but these names held up much better than speculative plays that got obliterated in 2022.

But putting aside the interest rates issue, when the Fed's not tightening and it's safe to speculate, you need to watch how many analysts are following these little speculative stocks to know when the run's going to end. Bottom line, once a red-hot speculative stock gets too much attention, it means the rally's likely on its last legs because there are only so many people who are willing to buy these things, and eventually the bulls, they run out of firepower. Stick with Cramer.

Good evening, Mr. Kramer. Thank you. Thank you for everything you do. You've been such a wonderful source of information with your teachings. I have to say thanks. Thank you for all your advice and saving us from ourselves. Your advice let me quit a job that I hated. I love you to death. Thank you for everything you do. Thanks for making us money. And more importantly, thanks for keeping us from losing money. Thank you.

I always say we have some of the smartest viewers in television, and I love taking your questions, listening to your pitches, and hearing what Cray Americans want to know about. So joining me today just to do this is Jeff Marks, Portfolio Director for CNBC Investing Club. We're answering some of your burning questions and your hashtag mad mentions. Jeff does a great job helping out with the Trust, tossing around ideas, doing some great analysis for Mad Money viewers and members of the Trust. If you're not a member already, I mean, what are you waiting for? So let's start right now with Tim in Alabama.

And I think it's really a question because how do you decide whether to take profit rather than keep a stock longer to receive capital gains tax treatment? These are always hard issues because I think that you have to worry about that kind of thing with your accounting professional. Because what I care about is whether the stock is going to go up or down.

And I believe that if a stock's going to go down, you should take it off the table, even if you have a big game. That's what matters to me. Of course, you want to see qualified advice for something like that. But for the charitable trust that you could follow along with at home, we don't really play the tax game too much because everything gets donated to

the gains, it's donated to charity at the end of the year. Yeah, I mean, look, I think it's, I've always felt from real money, my first book about investing, that never fear the tax man.

Fear the losses. All right, next up, we're taking a question from Russell, who asks, I always try to follow your advice to buy stocks in portions rather than all at once. Very good. Often, these stocks never pull back enough to buy more. I end up with small positions in lots of different stocks, making it hard to manage. What would you recommend? Okay, this is another one where...

This is a discipline that I came up with, which says that it's a way to figure out whether you missed the move or not. Like if you come in and the stock keeps going up, there's no doubt about it that you are late. There's just nothing you can do if you don't get it all in. I've accepted that consequence. If I'm late, then all I do is I have a small gain. That's just the way I look at it. Yeah, it's a high quality problem to have. If you're able to continue to do the homework, then you can still hold them, especially if the prospects...

are quite good but yet it's a it's a challenge because you don't want to spread yourself to stand with a whole different number of stocks uh... but look at their going higher uh... you know yet thought it should it's a quality issue that we deal with some time to put i mean you know what happens if you buy it all once it goes down

I mean, there's a good chance that that could happen. And we're trying to avoid that. That's the real worry. All right, now, let's take a question from Randy in Ohio. He asks, I know that when bonds sell off, the rate goes up. If bonds do sell off, why would it impact stocks? OK, there are many different ways you can answer this. One is that if interest rates go up for something that is risk-free, a bond,

then that has greater appeal than a dividend, which may be equal because the dividend, well, you know what? That's only part of the equation of what a stock returns. And if the stock goes down big, then you wipe out whatever gain you get from the dividend. And then, of course, there's long-term considerations, as you know, just about the value of a bond versus stock equity.

further out. Right. It's competition for dollars like you brought up, but you mentioned. But interest rates are also used in a discounted cash flow model where investors, they look at the cash flows out, they estimate them, they discount them back. And when the interest rates higher, they get discounted, discounted at a higher rate that lowers the present value, that lowers the value of stocks.

But there's also things like financing costs. If it's used, if a company relies on financing to sell their products, higher rates might hurt their business as well. You just have to just think stocks.

aren't as competitive in many different ways than bonds if rates go up. I mean, it's really that's the way you have to look at it. Even if you don't finally actually understand discounted cash flows, you kind of have to take it for granted that that's what occurs. Next, Lynn in Virginia wants to know, if I only have five shares or something remaining and you recommend taking some profits, should I close out the position or let it ride? I

These are just questions that are so hard because five shares reminds me of the tail end of when we have some wind. It's like a tail end. And what do you do? And the five shares is really so that if the stock goes down, you can buy more.

So if the stock goes up and we recommend sell, I would just get rid of it. I really would. I would just say, let's move on and find something better because there's always something better. No, it's absolutely a fair debate. If they are growing the dividend, growing profits, the outlooks are bright. Maybe you could sell one or two, but you also don't want to fall into that trap from the earlier question that we just had about managing too many positions. So there's always cross disciplines happening right now. And that's one of the things that people don't understand about investing.

is that there is no right or wrong. There's often two rights that compete against each other. Now, I have a question from Kyle, who asks, do you have a similar approach to investing in index funds as you do stocks, where you would wait until the oscillator is very oversold, or would you just dollar cost average in index funds? Now, this is very funny, because this is where I've got two disciplines. What I like to do, if I'm putting money in every month,

If there's a month that's down more than 10 percent, I double and put the like if let's say August is down 10 percent. I take July's contribution is keep that August contribution. And then I take September's contribution and I take September and August together.

And I just feel like that's a good level. So you might be, let's say you have one twelfth, one twelfth, one twelfth, two twelfths. Well, there you go. Well, I mean, look, stocks generally should be more attractive as the prices come in. You wouldn't run from a sale at a department store. But on the other hand, what I would say if it's index funds, it's more about time in the market than necessarily trying to time it oversold, overbought, overpriced.

You just want to be invested. Absolutely. And I think that that's a really important issue. We do not, by my method, try to imply that we're necessarily timing the market. We're just trying to put a little more money in at that one level. Right. But certainly do the rest. When prices come down. That's the way you should do it. Well, what can I say? Like I said, there's always a bull market somewhere. I promise you I'll find it just for you. Right here on MadMoney, I'm Jim Cramer, and we're going to 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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