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Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. I'm just trying to make you some money. My job is not just to entertain, but to educate and to teach you to be a better investor. So call me at 1-800-743-CBC or tweet me at Jim Kramer.
Tonight, I want to share some of my accumulated wisdom, and there's a lot to accumulate in this business. There are so many different things you need to balance in order to be a great investor that it can be hard to keep track of everything. Now, and a lot of this stuff is much more important than the day-to-day action in a particular session. This stock went up, this stock went down. Without the right discipline, the right framework, the right, dare I say, philosophy, you're going to get yourself into trouble.
And that's why we're all about discipline when we manage the Chappell Trust for the CNBC Investing Club. It's why we constantly fall back on the rules in our investing guide to guide our decision making for every kind of market. And tonight, I'm going to share some of them with you.
But I know that the big picture financial advice can be hard to process. A lot of it is downright contradictory. That's a key word. We tell you to have conviction, to stick with the companies you believe in, and then we say you need to be ready to change your mind on a dime if the facts change?
You need to be cautious, but you also need to be ready to pounce on opportunities when they present themselves. You need to be skeptical, but you also need to know when to suspend your disbelief. You need to avoid chasing stocks that have run too much, but you also shouldn't care too much where a stock is coming from if you believe it's headed higher. Believe me, I get it. If you take all my rules literally, you're going to be running around in circles while tearing your hair out. How do you think I went, Paul? So tonight we're going... Can't resist.
Today, we're going to take a step back, try to put all this discipline stuff in perspective. Now, if you pick your own stocks, which you know I love, in addition to having a healthy balance of index funds, which you know you need, the thing, well, let's just say what you've got to have is good judgment.
But obviously, good investing judgment is not the kind of thing anyone can teach you in an hour of television or even a year of television. That's why I try to help you build good habits. I try to teach you the better ways to think about individual stocks and the whole market. I try to give you the tools you need to develop your own judgment and why I focus on guiding you through the whole process more intensively in my investing club. Now, all my best professors in college focused on teaching us how to think.
not teaching us what to think. I've always tried to take my cue from them. I want to teach you how to be a better investor, not just tell you the stocks that I think are good investments. I would have stopped doing this show years ago. The problem is it's a heck of a lot to process. So what do we got to do? Well, we got to try to put it in context. Now, first and foremost, when you're managing some of your own money before any other consideration, you need to know yourself.
Now, I've said this before and I'll keep saying it because it's so important. You simply can't know which stocks you should buy if you haven't taken the time to really consider what your objectives are.
Do you need to build up your wealth to ultimately make a major life-changing purchase like a home? Are you just trying to get a decent return as you save for retirement? Do you have enough money to burn that while you're taking a risk on more speculative positions, it won't hurt you? So many people don't do that. They put all their money in speculative stocks hoping that they'll hit a home run. And then the truth is there's no one-size-fits-all approach to investing. And anybody who tells you it's different is either dangerously misinformed
or they're flat out lying to you, probably in order to sell you something. But far too often, people will invest in the stock market with the simple, poorly defined goal of making money. That's right, poorly defined goal. Yet we all want to make money.
I want it, you want it, but how quickly do you want that return? What are you willing to risk in order to get there? How much can you even afford to risk in the first place? These are all the crucial questions that you need to ask before you start picking any individual stocks. Why? Because without a clearly defined goal, you have no way to determine which stocks you should be buying. In other words, your 401k or your IRA or brokerage account do not exist in a vacuum. If you're trying to save up for retirement, a stock like Tesla might not be the most appropriate place to put your capital.
On the other hand, if you've already got a decent-sized nest egg set aside for retirement and you just want some capital appreciation, then higher-risk growth stocks all start to look a lot more attractive. In short, before you can start making judgments about individual stocks, you need to figure out what your own internal yardstick is going to look like. That's the foundation of good investing, judgment, knowing what you need so you can find stocks that suit those needs. It's called suitability, and it's important.
maybe one of the most important parts of investing. Let's put it another way, just in case that doesn't get through to you. Let's say you want to fly across the Pacific Ocean. You're doing an airplane, like a Boeing 747. You don't try to fly across the Pacific on a Ford Fiesta. Now, if you want to pick up your kids from school, taxiing down Main Street in a 747 would be a little impractical, wouldn't it? In that situation, you are indeed better off with that Fiesta.
How about if you're renovating your home? Do you need to go to Home Depot for a metric ton of lumber and tiles and paint and maybe some power tools to get the job done? The Ford Fiesta is probably too small. And there's no way you're going to take a 747 to a packed Home Depot. But a pickup truck, maybe a Ford Lightning, maybe that can do it. Now, this may sound simple, even downright obvious, but it's the same way with stock.
When you're saving for retirement, you want low-risk holdings that will give you a slow and steady return. For those of you who don't have time to research individual stocks, you really can't go wrong with a basic low-cost S&P 500 index fund that mimics the performance of the broader market. Look, I've recommended index funds endlessly, and I'll keep doing it because they are phenomenal.
At their best, they helped democratize the incredible engine of wealth creation that is the U.S. stock market. America remains a growth country that's very business friendly compared to the rest of the developed world. And when you buy an S&P 500 index fund, you're basically betting on the long term performance of the U.S. economy. Historically, it's been a very good bet.
That's why I always say that you need to invest your first 10 grand in an index fund. Don't bother trying to pick individual stocks until you have at least that much money in an index fund, and preferably more. It's the most important bedrock of your portfolio. Now, if you're looking to make slow and steady money over a period of decades,
That's retirement investing in a nutshell. You might also consider certain kinds of individual stocks, especially consistent steady-edging companies with big dividends. A 4% dividend yield may not sound all that spectacular, but even if the underlying stock goes nowhere, that 4% annual return will double your money in 18 years thanks to the magic of compounding. Of course, you've got to reinvest that money. That is vital.
get the same thing from treasury bonds, but stocks tend to offer the possibility of more capital appreciation than you'll ever get from a bond. Of course, not every investor is simply trying to fund their retirement. And even if you are, that may not be the only thing you want to do with your savings. This is another important point. You can have multiple objectives. You can and should have multiple pools of money. I'll
I like to break things up into your retirement portfolio, where you need to be pretty cautious, and your discretionary mad money portfolio, the extra money you're not going to need in order to support yourself after what the kids call late-stage capitalism has ground you down and you're no longer able to work. That discretionary portfolio is where you can afford to take more risks in order to generate higher profits.
But, and this is a mighty big but, for the vast majority of people, your discretionary portfolio is going to be much less important than your retirement portfolio. Because it's not just retirement. If you want to pay for a house to send your kids to college, you should take a more conservative approach to managing that money. Whatever kind of account you put it in, your strategy for college tuition savings or future house savings should look more like your retirement portfolio than your mad money portfolio.
So please get to know yourself before you jump down the rabbit hole of getting to know individual companies. Something we always try to emphasize in the CBC Investing Club, as you know, the bottom line. Trust me, I get it. When you get excited about a particular stock, you often want to just dive right in. First, though, you need to consider what you're trying to get out of the market. You need to know yourself. The answer to that question is not going to be the same for everyone.
But everything else stems from it. You can't make judgments about stocks until you know what characteristics you actually are seeking and you value. Tony in Washington. Tony. Hey, Kramer. Thanks for taking my call. Of course, Tony. What's up?
uh you know when i was working and contributing to my 401k the only choices i had were mutual funds you know i never made any real money until i started buying individual stocks i really i don't understand why mutual funds are so popular
Well, I mean, let's give mutual funds their due. I mean, there have been some that have outperformed the market. And the 401k plans tend to have an array of mutual funds that you can pick so you kind of craft your own portfolio. I happen to like individual stocks, and I like the S&P 500 because I like a low-cost index fund that can continue to give me good returns, and I'm a believer in that. So I understand. But I'm not going to knock the mutual funders. There's some very good companies that do a great job.
Let's go to Rambo in California. Rambo. Booyah, Jim. This is Rambo from San Jose. How are you doing, Rambo? Awesome. Jim, I've got a question for you. One of the first metrics that I look at when evaluating an investment opportunity is the company's debt and enterprise value. In many cases, I've found that although a company looks attractive on a price-to-earnings perspective, it becomes far less attractive on an enterprise value-to-earnings perspective, especially in this high-interest rate environment. Can you
Can you give us a sense of how you factor in a company's debt and enterprise value when forming your investment thesis? I think it's a great question. I'm going to be very cut and dried and very simple. I look at how much money the company has to pay in interest. I look at how much money they make, and I decide if they don't make enough money to cover that interest, then it is a sell, sell, sell. And every time I violate that principle, I'm out.
I go wrong. Look, before you start investing, you have to find out what you're trying to get out of the market. And then you set your goals accordingly for you. And once you know what you need, then you can pick stocks. But not before that. On Mad Money Tonight, from being flexible and having the right attitude, I'm sharing some more investing rules that might help you become a master of this market. And you just can't miss this show. So I want you to stay with 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.
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Indeed.com/madmoney. Terms and conditions apply. Hiring? Indeed is all you need. Regular viewers know that I've got a lot of rules. The result of more than four decades in the money management business, first as a broker, then as a hedge fund manager, then as a journalist, and then as a commentator. I've got rules for investing, rules for trading, rules for what to do in a rally or a sell-off, rules for picking winners, avoiding losers, all of which we stress constantly when we show you how we run the charitable trust portfolio for the CNBC Investing Club.
It'll be a lot to take in. But as I mentioned before, the point of all these rules is to help you learn from my mistakes and develop your own judgment. I just explained why you need to have a clear understanding of your own objectives before you start buying stocks. Something more focused than really trying to make some money. So let's pretend you've already done some self-reflection and you know what you're trying to accomplish. Now you start buying individual stocks enough to fill out a diversified portfolio of five to 10 names. Right. That's what I want.
Hold up. Before you buy anything, I need you to do one more thing. First, you have to do the homework.
Now, I've covered this before, so I'll give you the quick version. If you're going to invest enough money in a company for it to matter to your portfolio, you need to know what the heck the company does. You need to know how it makes its money. You need to know how much money it makes. The Internet has made this whole process much easier. You can go online and read the SEC filings, which contain a wealth of information. You can listen to or read the transcripts of the conference calls, which I regard, by the way, as the best way to get familiar with a business and the key metrics that will drive the stock. Hey,
feel free to read some journalism on top of that. Just Google it. Listen to some opinions. Anything to familiarize yourself with both the company itself, the way it stocks, trades. I know that's going to be daunting. It's the kind of homework we do for you. Uh,
on our favorite names, the CNBC Investing Club, it is a must to join people. Join it, please, after tonight's show. So just sign up so we can show you the hard work that we do. And by the way, lately I've been starting with the website. I have to admit, I used to start with a conference call. But I like a company's website because they've all gotten so much better. The actual research is just part of doing the homework. After you learn what you can and develop the thesis, a theory about why you think the stock is headed higher, this one final step, you need to be able to explain that story
to another human being, ideally an adult, to ensure it makes some level of sense. If you're walking down Wall Street, you see me, you're buying a stock, I'm going to say, what does it do? You better know the answer. For those of you who are tuning me out because you can't stand to hear another word about homework, the craft, as I call it, I'm done. That's all I'll say about the process of preparing to buy a stock here because tonight I'm trying to focus on the big picture. So let's fast forward a little.
Once you've done homework, you can build a diversified portfolio of five to ten individual stocks to go with your index funds. If you are so inclined, pick your favorites from the club. Then you will know that they've been thoroughly researched. That's what we do. Any more than ten and you likely won't have time to keep up with them. The idea here is that you should be able to do this in your spare time. Not that you'll turn money management into a second or even third job.
Let's assume you own shares in a bunch of companies that you genuinely believe in. You now have a thesis for each one, right? You got to have one. There's no sector overlap, meaning you have five to 10 companies in distinct industries that don't tend to trade together. Diversification. Of course, if you know what a company does, you can find out whether it's too much like another company. In short, what you have, in theory, is an ideal portfolio.
What's the most important thing for you to keep in mind? Above and beyond everything else, you need to know that your perfect portfolio won't stay perfect for long. Those five to ten stocks you thought were winners, yeah, unless you're absurdly lucky, not all of them will stay winners. Hey, some of them are going to be losers. Some of them will do nothing. And some of the companies you like best will inevitably disappoint you. What can I say? The game is full of heartbreak.
Which brings me to my next meta rule. Always try to stay flexible. You've got to be flexible because business by its very nature is dynamic, not static. Things change. Markets change. New competitors will enter into an industry and undercut existing players on price to take market share. Previously well-run companies start executing poorly.
Customers cancel orders. Unforeseen events happen that hurt business or simply make some category of stock seem less attractive to the big institutional money managers who dominate the market. Remember, you don't. They do. When something like this occurs, when the story of a company that you own shares in changes, you need to be willing to acknowledge that things are
are changing, that they're different. If your thesis is no longer intact, if the reason you gave for buying a stock in the first place is no longer valid, then you know what you have to do? Sell, sell, sell.
You have to. This is why you need to explain your picks to another person so that you can recognize when your original idea has stopped being workable. We get so many calls where people say they like the stock, they bought it for X, and X is no longer even the case. I don't like that. You need to be better than that. You can't afford to say I like it because X and X ain't there anymore. Now, this may sound straightforward, but for decades, so-called experts have peddled the idea that when you buy a stock, you should be prepared to hold on to it until it.
The heat death of the universe. How many times have you heard someone say, buy and hold, buy and hold? Hey, buy and hold is nonsense. Don't get me wrong. I would love to buy a stock and hold it from here to eternity because the story pans out and the darn thing just keeps going higher. But if the story doesn't pan out,
You've got to be willing to sell. The facts change. That's why I always tell you it's buy and homework, not buy and hold. There are only two stocks I've ever given my highest blessing, own it, don't trade it, and they're Apple and Nvidia, a pair of revolutionary companies with outstanding management. Even then, though, you still need to do the homework or watch us do the homework in the CNBC Investing Club in case something drastically changes in those two companies. Now, I bring this up because people hate, hate, hate admitting when they've made a mistake. Why?
Once you make up your minds that things are great for, say, Coca-Cola. We don't want facts getting in the way of the story. We like Coca-Cola, so shut up. But you know what? You can't afford to fall in love with any stock. It's a piece of paper. When you buy shares of a publicly traded company, you're not joining that stock in holy matrimony. You don't swear to stick with it in sickness and health, for richer or poorer. You don't need to go to a judge to get a divorce. It's just a piece of paper. The judge to the divorce. All right.
Anyway, so acknowledge when something's changed. If you buy a stock because you believe the underlying company is going to take a ton of market share and then it fails to do so, don't move the darn goalposts. Don't search for new reasons to hang on. Just get out of Dodge.
You must be willing to recognize that companies can take a turn for the worse. Managers can make mistakes. CEOs make bad strategic and tech lawyers every day. Heck, look, here's one that you probably know, Bed Bath & Beyond. Do you know that they literally spent $11.8 billion buying back their own stock from 2004 to 2022? No.
In an ill-fated attempt to boost their stock price, it didn't really work. The company kept losing market share to online competitors like Amazon, and the buyback couldn't prevent Bed Bath from going bankrupt. Think about it. They spent more than $11 billion on stock buybacks, and the darn thing still went to zero? Hey, if they didn't put that money in their mattress, the company might still exist. You know what was their mistake?
The guys running Bed Bath & Beyond weren't flexible. They kept buying back their own stock in the mistaken belief it would help instead of saying, putting money into the technology that would help them manage inventory, please customers, customer retention.
And by the time they brought in new management to turn the situation around, I think it was far too late. Don't make the same error. When something goes wrong with the company you own, be ready to stop hoping and start selling. Listen, being unwilling to recognize the term for the worst, as bad as it might be, almost always seems to lead to much larger losses than you've already accrued.
A wise person once said to me, "Your first loss is your best loss." That's what we're talking about. The bottom line, before you buy a stock, please do some homework and come up with a thesis, a reason why you think that stock is headed higher. Once you own it, stay flexible. If your thesis doesn't play out the way you expected it to, sell the darn stock as we try to do for the club. Don't keep bashing your head against the wall. Just recognize that things don't always go your way.
and then move on. Their money's back, get to the ground.
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Tonight, we're zooming out and talking about the big picture. The stuff you absolutely have to do if you want to manage your own money in the stock market. Before I get back into it, let me just say that if you don't feel like reflecting on what you need from the stock market, if you don't want to do the homework, if you don't want to watch the underlying companies and give up on their stocks when something goes wrong, nobody's forcing you. See, there's no gun to your head.
It's OK if stock picking is not for you. And that's why Vanguard invented index funds. It's why the Dutch invented bonds. You have plenty of other investment options. It's why we created the CBC Investing Club to help you understand the whole process. So if you're going to play the stock market, you should put in the effort to do it right. I think stocks are the greatest engine of wealth creation in history. And you can harness that engine, make it work for you. But only if you know what you're doing.
Now, a lot of this comes down to discipline, the stuff I've been talking about all night. But there's another ultra important component here. Call it the emotional side of the equation. You need the right attitude toward the market because without the right attitude, stocks will break you. I mean it. They'll break you. See, this is a brutal game. And you need to make sure you're in the right headspace if you're going to play it.
I cannot stress this enough. For many of you, managing your emotions will be the hardest part of investing. Harder than picking winners, harder than identifying new trends, harder than knowing when to cut your losses. Why? Because the market is a harsh mistress. At times, owning stocks can feel like being in an abusive relationship. But we just keep coming back because long term, it is a great way.
to try to make money. The thing is, unless you can perfectly predict the future, you're going to make lots and lots of mistakes. And when you make mistakes, well, and you lose money, it can be very hard to handle. It really is. You need the patience of the Dalai Lama to not get upset when you buy a stock and it falls off a cliff.
Imagine what it was like for me at my hedge fund before I milled out. I was the opposite of Deli Lama, even though, I mean, look, when I got something wrong, I would flip out. I was not Jimmy Chill. You do not want to be around me on a down day, or at least back then. So I can tell you from experience that this is not a productive attitude.
I know better than anyone that you need to try to remain calm because constantly getting mad at yourself just isn't sustainable. You'll end up running out of patience and giving up on the whole asset class. Look, I'm not telling you you got to be the Dalai Lama. You don't need to be a Buddhist monk to be a good investor. It's OK to get mad or sad when the market punishes you with this behavior. But you can't afford to punish yourself. The market's brutal enough on its own. Now,
In other words, your head matters in this game. You need to have it on right every day if you're going to spot opportunities in Aklan. Yet so many of us approach the market with, say, let's say, an inferior attitude, an inferior state of mind. Our heads are clouded by negative thoughts that genuinely throw us off target, making us do the wrong thing. And we won't pick good stocks this way. So let me be your stock market therapist for a moment, $300 an hour. There are a lot of harmful recurring thoughts that you can have that will mess with your judgment.
But the worst of the worst, when you think to yourself, if only I, as in, if I'd only acted sooner on Electronic Arts, or if only I pulled the trigger on NVIDIA ahead of that quarter, or if I only staged short chess with McKenzie, I could have made a fortune. Don't get hung up on the woulda, shoulda, coulda.
Not anymore. It took
be a long time, but eventually I was able to see just how destructive playing the woulda, coulda, shoulda game can be. And this is a key rule we always stress to members of the CMEC Investing Club, where we highlight exactly what the messy parts of money management is. And we do it not just in the emails. We also do it, of course, in the morning meetings and in the home stretch. If you're an emotional guy like me, you may need to trick yourself into a more productive pattern of thought.
I've had to build in all sorts of methods of tricking my mind into not playing this game, chiefly removing the stock symbol from my desktop and my mobile stock list when I get it wrong. Just clear it out. Mute the ticker on your social media. If you like it so much after you sold it, then go back and buy it for heaven's sake. But don't tell me what you could have done or should have done differently. You didn't. Whether you walked into a big loss or missed out on a big gain, it's irrelevant. Stop beating yourself up about it.
The bottom line, the stock market can be punishing enough. You don't need to make things harder by punishing yourself. Don't play the if-only game. If you need help curving this kind of destructive thinking, go to that extreme. Take the stocks off your monitor or your portfolio watch. You'll be surprised how much better your decision-making becomes when you stop the woulda, shoulda, coulda, and the obsession. It will not help you make money. Let's go to Joe in New Jersey. Joe!
Mr. Kramer, thank you for taking my call. You're welcome, Joe. I want to say that I have learned from you and I have earned from listening to you over the years. Thank you so much for that. I like that. Learned and earned. It's going to be adopted using tomorrow's show. What's going on?
Okay. My portfolio has grown significantly thanks to you. Thank you. And there's a lot of qualified dividend-paying stocks in there. The dividends that are being paid are being reinvested, and it's almost equivalent to my earned income salary.
I'm 58 years old, but I plan on retiring next year at 59 with a modest pension. Do you think this would be a good move?
Absolutely. Absolutely. I think it would be a good move, and you've got the wherewithal to do it, and that's what really matters. I will tell you, though, never bet against yourself. Long life, and you're going to have to stay invested more than most people realize. I'm one of the few people in the world who feels that a person saying he's 75-80 should be 50% in equities. I need that because I don't want people to bet against their long-term existence.
All right. The stock market can be punishing enough. You don't need to make things harder by punishing yourself. You'd be surprised how much better your decision making becomes when you stop the woulda, shoulda, couldas. There's much more money ahead. I'm giving you some top tips that I wish I had back when I first started investing. So stay with Kramer.
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.
Let me give you a piece of advice that would have saved me a lot of cash and even more heartache back when I was running Money Professional. This is some genuine sage investing wisdom from the late, great Maya Angelou. Quote, when someone shows you who they are, believe them the first time. I know she wasn't talking about publicly traded companies, but man, if the shoe fits, I say wear it. All night I've been trying to hammer home...
Important bedrock principles of investing. Principles we show you how to follow in the CNBC Investing Club all the time. This is another essential one. When some company shows you who they are, believe them the first time. Or to put it as bluntly as possible, when a CEO tells you that business is bad, take the word for it. Don't try to make excuses for them. Just get the heck out. Sell, sell, sell.
at least until the smoke clears and you get a better assessment of the damage. Let me read you the rest of that Maya Angelou quote, because there's another valuable insight in here for investors. She continues, people know themselves much better than you do. That's why it's important to stop expecting them to be something other than who they are. End quote.
The same thing holds true in the corporate world. A company's executives are almost always going to do their business better than you will, unless they're being ridiculously negligent. That's why it's so important to listen to what these CEOs and CFOs have to say, whether on the quarterly conference call or when they come visiting on our show or even someone else's show.
High-level executives are your best resource. That's why we put them on all the time. Don't get me wrong. You can't just take everything that comes out of a CEO's mouth as gospel. There are plenty of executives who are excessively promotional, who talk like they had rose-colored glasses welded directly to their face.
I try to ask more skeptical questions whenever my cockeyed optimism alarm goes off during these interviews. Because I don't want to get snowed, I don't want to hurt you. That's what I did with most of the SPACs and IPOs in 2020 and 2021 when it felt like a whole market ran on hype and nothing else.
Occasionally CEOs can be misleading, almost nerve and flat out lying, though, because their lies about material information is what we call a crime. So sometimes you need to take what they say with a grain of salt, if not a full carton of Morton's iodized. But the more cynical among you might be surprised by how many straight shooters you'll find at the highest levels of corporate America. Some of them are just plain honest. Others don't want to go to prison. Good call. Either way, they tell the truth.
And again, when we have someone on the show with a track record of being extremely candid or extremely reliable or both, I try to point that out to you. It matters. When honest, smart executives tell you that something's going incredibly well, I think you should believe them. This can be a very profitable strategy if you get it right. I'll give you the best example ever. When Jensen Wong, the visionary CEO of Kramer, Fave, and NVIDIA, came on the show in September 2022, the stock had been eviscerated for the better part of a year.
Everybody was giving up on tech in the face of the Federal Reserve's relentless rate hikes. Jensen's stock had been beaten down to the 120s. But he told an incredible story about NVIDIA's ability to reinvent itself, including the notion of what artificial intelligence can really do if it's powered by the right engine. NVIDIA's engine.
Less than a month later, the stock bottom. Four months later, we witnessed the birth of the artificial intelligence boom, one that Nvidia had been planning for ages. They had the best chips by far, and they built them out aggressively in advance. By the spring of 2023, Nvidia was making new all-time highs. By the way, we told you to stick with this one for the charitable trust because Jensen had earned the benefit of the doubt.
And video is always able to reinvent itself in the past. So we told you to hang on, even when things were at their most ugly in the great tech bear market of 2022. Something very similar happened with Mark Benioff, the bankable CEO of Salesforce during the depths of the Great Recession is another important travel trust name from pretty much the get go. He explained his cloud software company would be fine and we should just. Well, he just said it's going to be the future of the industry.
He said there had been no real slowdown at all in his business, even though it was slowing everywhere else. He was right. And if you listen to him, you made a killing. More important, if management tells you something is wrong, oh, then you've got to take the person extra seriously. Specifically whenever a company announces a shortfall. You need to wait at least 30 days before you even think about buying a stock.
especially if they give you a pre-announcement. A lot of people are tempted by these negative pre-announcement names as they're pummeling, you know, they're getting pummeled on bad news. They figure, hey, bad news must be out already. Wrong. In practice, I've found that other than some rare exceptions, the opposite is the case. When business is so ugly that a company is forced to come out early and cut numbers, that
typically means there's even more bad news ahead, especially because pre-announcements these days are few and far between. Companies are more likely just to slash their forecast on the next conference call. If they go so far as to pre-announce or they give a really bad slash, things are going to be terrible for a while. Why? It all comes back again to Maya Angelou. When someone shows you who they are, believe them the
first time. That negative pre-announcement is the first time. When management pre-announces a bad quarter, they're not just looking at the past. They're looking at their own order book for the future. Believe me, if there were any hope that business would get better, the company wouldn't have to cut numbers between its regularly scheduled quarterly reports. If they thought that maybe something could get better, not worse, in the next 30 days, they just keep their mouth shut.
Yet pre-announcements or severe guidance cuts signal ongoing weakness that you can't be tempted by. That's why I recommend waiting at least 30 days to see if anything's improved before you even think about buying this kind of stock. That's another rule we try to follow religiously for the CBC Investing Club. Sure, you may miss some great opportunities every now and then when a stock bottoms ahead of time. That can happen.
But most of the time, though, and I've studied this extensively, after 30 days, you'll have sidestepped yet another brutal leg down. I know 30 days sounds arbitrary, but I've done enough homework on the question, and I've found that it usually takes at least a month for the bad news to finally...
We'll be right back.
what the analysts are looking for during the regularly scheduled quarterly report. Trust me, these people don't like slashing their own numbers. They do it because they don't see much hope of things improving by the time their company's scheduled report its next quarter. So in the wake of a shortfall, you have to presume that the stock won't be bouncing back anytime soon. For the next 30 days, you should treat the darn thing as a falling knife. In short, even if you're not a huge fan of Maya Angelou's poetry.
You should trust her investment advice. Mad Money's back after the break. I spent a lot of time here tonight talking about the many ways in which you can make mistakes. And you need to guard against them by knowing when to admit that you're wrong. But let me be crystal clear. The market can be just as wrong as any individual investor, just as wrong as you.
Maybe you're smarter than the market. Contrary to what so many of the great leaders claim, the market makes mistakes every single day. So this is my next big picture lesson for you. Don't just assume that the action makes sense, like so many do. A lot of times, stocks go up or down for the wrong reason or no reason or an outright stupid reason. It's something we try to walk through with you in the Travel Trust, the CNBC Investing Club, because so many times the market, well, people try to come up with theses that just don't exist, all right?
When a company reports earnings and the stock goes down, there's a natural impulse to believe that the company is disappointed, correct? Must have been a bad quarter, right? Why else is the stock going down? You know what? Often that will be true, but it's...
Not always true. Sometimes there are other forces at work. Stocks will go down on the initial earnings release, then bounce right back when management explains things on the conference call. How many times does that happen? Or vice versa, which is why I'm always telling you not to jump through conclusions until after you've listened to the call, especially when we're in the middle of earnings season with hundreds of companies reporting every day. The market makes a ton of mistakes.
But it's not just about errors and judgment. The truth is that stock prices do not always reflect the underlying fundamentals, the actual facts and figures about how the business is doing. The fundamentals are a big part of it. Over the long term, I'd say the most important part, which is why I spend so much time focusing on them. But they're not the whole picture. You have to understand, a stock market is first and foremost a market. And just like any other market, it's prone to all sorts of distortions. When Adam Smith wrote about the invisible hand of free market capitalism, he forgot
Not to mention it's the hand of someone with bad reflexes, lousy coordination, and possibly even some kind of neurological disorder. The poor guy needs to see a doctor.
Insured stock prices do not somehow reflect reality as if by magic. They're as much a product of perception on Wall Street and the mechanics of the money management business as they are a product of the fundamentals. I tell you all this time about short squeezes. It's the mechanics of the market. It can't handle the short sellers. Hey, by the way, this is why it's possible for you to beat the performance of the average by investing in individual stocks.
If the market worked perfectly, you'd never be able to exploit any opportunities because the whole point of the game is that you can spot stocks that are mispriced because there are stocks that are mispriced every day. So why do I bring this up? Because when the action is irrational, as I find it often, it can be frustrating. I want you to be able to take advantage of these moments where stock prices are simply wrong. Or at the very least, I don't want you throwing up your hands in disgust and giving up on the whole enterprise because nothing seems to make sense to you.
So let me go over some of the larger distortions I've seen in my time that are in play right now. For instance, I spend a lot of time talking about what I call the ETF-ization of stocks, as this has become a major issue for me. For most of my investing career, you could bank on the fact that about half of the stock's performance, half, came from its sector, meaning how the sector was doing and about how Wall Street felt about it. And the other half came from the actual fortunes of the company itself. It was never 100% the company's fortunes, never, unless there's a takeover.
In other words, your average company was in control about half of its own destiny. This was a good situation for stock pickers as long as you made sure to avoid sectors that were out of favor with the Wall Street fashion show. You generally could do pretty well researching companies, trying to predict which ones would do better than its competitors in the sectors that are in favor.
But the rise of ETFs has changed the equation, especially sector ETFs, but also gimmicky ones like the dozen or so that exclusively own FANG, my old acronym for Facebook, now Meta Platforms, Amazon, Netflix, and Google in the alphabet. These days, even the stocks of incredibly well-run companies can get dragged down by an ETF-driven riptide.
Fang is the most ridiculous example because when, say, Netflix catches a cold, the other three stocks sneeze, even if the streaming video business of Netflix has nothing whatsoever to do with the advertising-based business of Meta? Strange.
A lot of times you get situations where sellers throw the baby out with the bathwater. If the worst company in an industry reports bad numbers, the whole group tends to go down, even if everyone else is doing well. These are opportunities. We saw them with the cybersecurity stocks in April 2023. One of the worst operators in the industry, a company called Tenable, reported bad numbers. Whole group sold off.
Turns out to be a great buying opportunity. It was one of the greatest opportunities ever to buy the stock of Palo Alto Networks, P-A-N-W, which roared higher over the next few months. The caveat here, though, is that sometimes when the market makes a mistake, it's not worth trying to fight it.
Because while the markets are often irrational, they can remain irrational for longer than you can remain solvent. To borrow a phrase from the late John Maynard Keynes, an important economist who, by the way, was a very good money manager. Your goal here is not necessarily to be right.
It's to make money. Sometimes that means being a little cynical about other people's expectations. I often hear people say, hey, listen, I was right. That guy made money, but I was right. No, you were wrong. That guy was right. Here's the bottom line. Don't just assume that stocks go down. Don't just don't presume they deserve it.
In the immortal words of Clint Eastwood in Unforgiven, Eastwood said, Clint made a point. You know what he said? He says, deserves got nothing to do with it. The market's going to make mistakes. Your job is to recognize when it's doing something wrong and then try to take advantage of it. Stay with Cramer.
I love your show.
I always say my favorite part of the show is answering questions directly from you. So tonight I'm going to take a few burning investing questions from our investing club members. If you like this, why don't you just join the club?
First up, we have a question from John in Arizona who asks, when profit is taken or there is a sizable cash on the sidelines, how would you pick a stock to add to my portfolio? Well, first of all, I would do it gently. A lot of times when you have a lot of cash, you kind of want to just say, you know what, this is the right level. Or you wake up and you say, you know what, I'm going to buy that stock. No, you have to be even more patient. You have to say, OK, look, I'm going to wait till the stock's down, then buy a small position, see if it keeps going lower. That
is the way to do it. Not just like, okay, this is the level. I'm going in. Let's go to Dan in California who wants to know why we named the show Mad Money. Well, Mad Money is kind of like, you know, that extra money that you have that I want you to invest. That's really what it is. Next up, a question from Mike in
in Maryland, and Maryland who wants to know, how can an investor choose which is more likely when the narrative flip-flops back and forth between recession and strength in the economy so often? Okay, forget about those things. We're not even going to focus on that. We're looking for high-quality growth companies that do well in thick or thin. It is a big mistake to game all that recession stuff. That's like what the pros allegedly do. We talk about it way too much on the network. It really does bother me. Why does I say that? Because it's keeping you out of the market. You think a recession, you can't own a stock.
Well, how about how Facebook did? Amazon, Netflix. I mean, that's when you buy these stocks. So let's not overdo the notion of the recession versus the acceleration. Now, let's take a question from Mark in Arkansas who asks, thank you for your valuable lessons that you bring every day. I now take profits along the way. Good. However...
This is a creative problem in that my positions are now too small. Can't seem to find good entry points in order to repurchase. Are there guidelines for which to add as stocks go up? Really great question. We always have to be mindful that when we do it for the club, what we do is we get to a certain level where we just say 2% position. Don't touch it anymore. It's too small after that. We're not going to want to be in it. So we look at the entire part of our portfolio. When it gets to that level, we say, uh-uh.
No more selling. Try to extrapolate the 2% for the number of stocks we have to what your positions are in your fund. Next up, we have a question from Jack, who asks, when do you know when to sell if a stock has been OK but not great and pays out no dividends? OK, forget the dividends for a second. We care about the company.
If the company is not doing well, then I don't want to own the stock unless there is some short-term concern. Because remember what I care about. I care about growth and I care about whether the company's making money and whether it has good profit margins. Those are all the things I worry about. If it's got good, good, good on that list, then you're fine. A big thank you to all our callers. I like to say there's always a bull market somewhere. Promise you I'll find it just for you right here on MadMoney. I'm Jim Cramer and I will 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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