Trading Psychology - Cramer's Mad Money (7/25/08)

by: SA Editor Joan Wickham July 25, 2008    

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Joan Wickham

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Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Friday, July 25.

Note: The following Mad Money program is a rebroadcast of a show that first aired on December 27, 2006

Don't Buy and Hold

In spite of the fact that Cramer was a money manager "with a terrific track record" he admitted to having made every mistake he describes in his book, Jim Cramer's Real Money, Sane Investing in an Insane World, as well as every faux pas mentioned in his new publication, Jim Cramer's Mad Money: Watch TV, Get Rich. Cramer identifies the single worst and most common mistake as adopting a "buy and hold" strategy, which is disastrous because "it's just not true that your stock will necessarily bounce back." Just hanging onto a stock might have worked 30 or 40 years ago when "taxes were high and commissions were even higher," but in today's world, investors need to do homework on their stocks, and investors who don't have the time to research their investments on a weekly basis should go into mutual funds.

Don't Dwell on Regrets

Although Cramer says he is the worst offender when it comes to this vice, he urges investors not to waste precious time grieving over past mistakes, since one "cannot afford to get thrown off their game." Instead Cramer emphasizes the importance of going forward and not losing confidence.

Tips are for Waiters not for Traders

"You have to discipline yourself so that you never, ever take a tip seriously," Cramer said, and he discussed the non-existence of real stock tips. For instance, if someone would say that Nokia is about to buy Research in Motion, the only way he would know is if he were an insider, and taking a tip from an insider is illegal. Cramer emphasized the importance of avoiding temptation in such a case: "Having the Securities and Exchange Commission investigate you is pure hell even if you haven't done anything wrong," he said. "Imagine how bad it would be if you were actually guilty of something." However, A non-insider who would tell an investor about a potential, unpublicized merger would have no basis for knowing, and should also be ignored: "If you get a tip, it's either illegal, incorrect or straight-up manipulative."

Diversify, Diversify

"I like to think that I'm universally loved, but people really tend to hate me when one sector is en fuego and I tell them to take some money out of it and spread it around because you can't keep all your eggs in one basket," Cramer said. However, once the "hot" sector falls out of favor, people thank Cramer for telling them to stay diversified. Cramer warns investors not to have more than 20% of their money invested in a single sector. "You absolutely must stay diversified, and this rule can't be bent, broken or spindled."

Don't Buy an Entire Position at Once

"The single most arrogant thing you can do as an investor is buy your whole position in a stock at once," Cramer said. Investors who buy incrementally make more money and do not have the regret of having jumped hastily into a stock. Cramer suggests looking for opportunities to buy gradually.

Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round, Stop Trading and his Wall Street Confidential Picks.

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This article has 15 comments:

  •  
    Jul 25 09:29 PM
    this is from the guy who said don't sell bear sterns? this guy is a shill for wallstreet his track record sicks and its proven
    Reply | Link to Comment
  •  
    Jul 25 10:05 PM
    Maybe, but your comment sheds no light on this article. I pay little attention to his picks, but Cramer's "big picture" advice as above is usually worth the read. Apparently you read it.
    Reply | Link to Comment
  •  
    Jul 26 08:29 AM
    Cramer gives good advice SOMETIMES! I thought his most recent show about not just holdin, and holding onto a loser was appropriate but his recommendation to buy financials now is a huge mistake. It all shows that he is simply human, like the rest of us, with good ideas and bad. Buy gold, not financials!
    Reply | Link to Comment
  •  
    Jul 26 11:30 AM
    Cramer's advice is good but we have to separate it from his persona as a television personality and comedian.

    He is a buffoon (on his television program and not in real life) who makes money entertaining us first and educating us (a distant) second.

    And as Louis Rukheyser showed every year on his television show, very, very few investment advisers and/or mutual funds they represent, consistently make more money than the famous monkeys throwing darts, so we have no right to be furious when Cramer gets it wrong so often.

    Cramer is at least as entertaining as the monkeys and that's what we pay our money to see.
    Reply | Link to Comment
  •  
    Jul 26 11:44 AM
    TO MUCH KRAMER.
    Reply | Link to Comment
  •  
    Jul 26 12:01 PM
    Jim has lost his touch. The reason being, he has become human. At his hedge fund he manipulated, did naked shorting, was the most greedy and did morally corrupt things, (rumors). All hedge funds do this. Now he is telling the world all about what is wrong with the market. Its broken and I believe it will never get fixed. I have changed my mind about the idea of SS money being put into the market. Its a complete fools game!
    Reply | Link to Comment
  •  
    Jul 26 12:07 PM
    I would like to also add that Jim still tries to maniputate for the advantage of himself and his buddies that run companies and others that own the company's stock.
    Reply | Link to Comment
  •  
    Jul 26 04:11 PM
    I've said it before look what he does to make his money...
    Reply | Link to Comment
  •  
    Jul 26 09:55 PM
    He's actually more well grounded on the Street.com videos. You'd have to admit that some of his advise were right on the dot, like getting out of nat gas just days before it crumbled.
    Reply | Link to Comment
  •  
    Jul 26 10:24 PM
    I think Cramers overall picture is good. But if he told you to hold bears and stearns, then he is on the payroll of those big guys
    Reply | Link to Comment
  •  
    Jul 26 10:40 PM
    I bought qualcomm on a Action Alert Plus tip. 21% gain is good for me. Also, a pharm play that popped 12%. However, I did my homework. I agreed and I am in the "House of Pleasure"!!!!! So, you may not like Cramer Cramer everywhere but he does give good general advice and has lead me to a train of thought that bought me another 20% pop in Novagold before quarter report. I was not a pig and took the profits. Can't look long term unless great dividend with well known name in a strong sector. Bang Cramer all you want but I get it, you just don't know how to listen to advise of any sort , especially Cramer's.
    Reply | Link to Comment
  •  
    Jul 27 05:33 AM
    I bought just a few of the following stocks just like he advised, that is waiting, researching and buying incrementally. Fortunately, I didn't spend a lot of money. Notice I didn't use the word invest.

    These stocks tanked soon after his tout: MELI, SIGM, RVBD, ADCT, EMC, NLY & CIM. One or two have come back and then tanked again. The rest are hopeless.

    His response: "My bad" and feigns flogging himself with his whip. I bet there's a lot of people that would love to lay it on him.

    Nice picks, Cramer!
    Reply | Link to Comment
  •  
    Jul 27 10:04 AM
    Ha!! Good Advice? Let me simplify......Own Stock and lots of different sotcks....Buy and Sell....and whatever you do don't lose "confidence"... when your a confidence man working for folks who skim off the top of every buy and sell....you sure aren't going to tell folks to find two good companies with solid real returns and sell em only when the fundementals change or you have to.....No far better to Sell more often and buy more often in the name of "diversity".... Teh simple truth is small investors do not have the level of capital necessary to make "diversity" an effective strategy for capital appreciation. If protection of capital with a real rate of return + or - 2%ish is the goal there are far better risk effective methods than this tired old crap.
    Reply | Link to Comment
  •  
    Jul 28 04:18 PM
    Where have you been Jim Kramer. I have to admit you have lost your fan base in the last few months. I know it is a bad market, but leading us off track was a terrible idea. I am disappointed
    Reply | Link to Comment
  •  
    Aug 02 12:02 AM
    stoat brings an interesting point. I am a small investor.. but i have a big heart!! truth is just starting out trying to keep that diversity is tough. Trading platform of 7 smackers per and trading and buying.. visa versa.. it adds up and the % has to increase or you cannot win. The stocks have to be more precise in gains to be successful. When he is buying hundreds I am buying tens. After a year of hit and miss I am finally getting enough homework done to be successful.. very slowly and a few dollars at a time. Just remembering to make it I have to do better than the buy and sell 7 dollar commish.
    Reply | Link to Comment
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