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Speculation Can Be Fun - Cramer's Mad Money Recap (9/30/08)

by: SA Editor Joan Wickham September 30, 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, Tuesday, September 30. (Originally Run December 29,2006.)

Speculation Can Be Fun

Cramer said he knows how hard it can be to keep one's head in the game, and as far as he's concerned there are three "forces" that keep people out of stocks: "boredom, bummers and brokers." Boredom, said Cramer, is a big problem. If market players are not interested in the stocks they own, they won't pay attention and that can lead to unexpected losses. "That's a recipe for disaster," Cramer said. But as long as people invest well and stay interested, they could make a fortune. The one cure for boredom with investing is speculation, said Cramer, who believes people need to speculate if they want to be good investors. Speculation, he explained, means trading in a "high-risk, high-reward" stock and "trying to turn a little money into a whole lot of money in not a lot of time." Although some might consider speculating to be form of gambling, Cramer says he has made a lot of money with "high risk, high reward" investments which can generate cash in not much time; "I'm telling you it's OK to speculate and make those risky investments that most of the talking heads frown on," he said. "And not only is it OK -- it's entirely necessary. It's prudent and responsible." In fact, he says that a portfolio that lacks speculative stocks is not really diversified.

First, Cramer says not to invest retirement funds. Second don’t ever have more than 20% of your non-retirement money in speculative stocks. On the other hand, he urges the most conservative investors to devote at least 1% to 2% for speculative stocks in order to "stay interested." He explains that a speculative stock is a small-cap stock, with a market cap from $250 million to $2 billion. Although Cramer is wary about companies with no revenue, he would consider buying a stock with accelerated revenue growth and no current profits if it is a good company. One can either speculate with one stock or with an entire sector with a basket of speculative plays by "casting a wide net" to distribute risk. When speculating on an industry, it is a good idea to pick one that has been unfairly "beaten up." Since small caps fluctuate dramatically, Cramer says that it's important to buy with an exit strategy to avoid losing profits. He tells investors not to give up, even after a major loss. If players see a "market wide nosedive" or a "big, ugly downturn," especially one that's caused by interest rate hikes, they should identify and sell their high-multiple stocks, as they are the only certain types of stocks that are "truly vulnerable" to multiple contraction, Cramer said. He also warns that the market has corrections occasionally, which can be scary, but it is essential to be patient and wait for the next upturn. Expect corrections; don’t fear them. "A correction is when the market's been roaring, and then one day, boom, it gets crushed," he explained.

Multiple Contractions

Cramer urges his viewers to watch out for multiple contractions, when the market will pay less for the same amount of earnings. When there is a "market nosedive" or a "big, ugly downturn" investors should sell high multiple stocks, since they are the most vulnerable to contraction. Also, he suggests selling high multiple stocks before they report earnings to avoid "a world of pain." Finally, Cramer urges investors to use limit orders instead of market orders: "Limit orders keep you in the driver's seat, they keep you from being totally ripped off, and they're really easy to execute," he said. "Please, if you listen to nothing else I say, use limit orders instead of market orders."

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This article has 3 comments:

  •  
    Sep 30 11:11 PM
    people vote against this bailout or you will be reduced to poverty not seen since the great depression, this was on kudlow tonite: 9/30/08

    "Paulson and Bush threatened to veto the legislation if there was an explicit prohibition of transfers from foreign banks to an American subsidiary."

    THE ASSETS DO NOT EVEN HAVE TO BE AMERICAN MORTGAGE ASSETS - THEY CAN BE AN OFFICE TOWER IN SHANGHAI!

    YOU ARE GOING TO GET FLEECED FOR HUNDREDS OF BILLIONS OF DOLLARS IF THIS BILL PASSES - THAT MONEY IS GOING TO GO IMMEDIATELY OUT OF THE COUNTRY!




    SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.

    The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.


    votenobailout.org/
    Reply
  •  
    Oct 01 11:29 AM
    Cramer has zero credibility. The first comment makes sense.
    Reply
  •  
    Oct 01 01:38 PM
    @Norman Lepoff:
    The opposite of love is not hate or derision, it's apathy. If you really don't like Cramer, the logical thing to do is nothing -- yet comments identical to yours appear in every posting that mentions Cramer on this site. Why the obsession with Cramer? Are you trying to disguise a secret love of bald men? A lust for overweight blowhards? Or is it just a juvenile, pathetic attempt at making yourself feel better by putting down someone else?

    The web is thick with sites devoted to Cramer hate -- why would you want to drag down this one?

    As to the second part of your carefully crafted, well thought-out posting: the first posting here is daft. Not only is it entirely off-topic, it uses Kudlow as a source, which is ridiculous, and offers no other analysis or intelligent commentary.

    Thanks, though, for doing your part to dumb down SeekingAlpha as much as you possibly can in only 2 sentences.
    Reply
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