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Monday,
April 13, 2009
(Cont'd from
above)...
Jim (cont'd):
Now lots of people
had convictions that
the stocks would
work forever… that
conviction… what did
it do… it cost them
fortunes… even if
you had the
conviction…
tempering it with
discipline just
would have kept you
more safe… and
discipline comes
from rules… so here
is rule number one.
Okay, this is really
important… I know
all the time, people
say, Cramer is a
trader… Mad Money is
a trading show…
isn’t it terrible
how Cramer
encourages people to
trade in and out of
stocks… boy that
Cramer sets such a
bad example, telling
people they should
trade… blah, blah,
blah… the truth is,
Mad Money has always
been about
investing… about
helping you make
money in stocks that
will for months and
even years… but also
keeping in mind that
sometimes you do
have to sell… you
have got to learn
how to sell… sell is
sometimes a dirty,
it is not a dirty
word when you are in
with the managers,
it is just a dirty
word on TV… when
they tell you that
they should give the
money to them… I am
not here to give
advice to
professional
traders… they do not
need my help… I am
here to help you...
Remember from the
day that I started
this show… I have
said that this
business who do not
have the time and
inclination, and I
urge those, those of
you who can’t manage
money yourselves… go
ahead and buy index
funds… but if you
have the time, and I
think you are
watching the show so
you do… I believe
that you can beat
those funds… is it
idle believe… I did,
I can teach… anyway,
here is the rule…
and it is from
Stay Mad For Life,
this is another one
of the gospels
according to Cramer…
my personal
finance/long term
investing guide… if
there is even a
difference between
these two things…
and I don’t think
that there is…
Here is the rule… I
never want you to
turn an investment
into a trade… now in
Real Money,
the first gospel
according to Cramer,
which is basically a
hand book from the
old hedge fund… I
had a similar rule…
never turn a trade
into an investment…
what does it mean…
don’t turn an
investment into a
trade, and visa
versa… what does it
mean… so now what we
have to do is do a
little defining… you
have to know what
the difference is
between trading and
investing… something
that people mutter
about how this show
is corrupting the
youth don’t seem to
quit… a trade is
when you buy a stock
for some specific
event, it is called
a catalyst… you are
betting on a short
term move… and when
that move happens
you sell… investing
completely
different… based on
a long term thesis
not a catalyst… an
idea that a stock
has the potential to
work over a long
time horizon…
doesn’t mean that
you buy and hold,
that is reckless… we
always do buy and
homework… if we can,
one hour per week
per stock once we
buy… that does not
mean that when you
are investing that
you are not in it
for a quick gain
too.
Now, when I tell say
don’t turn
investment into
trade I am telling
this… don’t sell a
stock that you
believe in for the
long term just
because it has gone
up a lot… you know,
off of some
catalyst… don’t
treat it as a trade
and sell if after
something good
happens… you are
leaving a lot on the
table… if you are
investing, you
believe that many
good things will
happen for a stock…
so selling after the
first time that it
jumps in price,
means that maybe you
are getting out
before the best
gains, the ones that
you are planning on
have ever arrived…
now I know that you
will make this
mistake… because I
have made it running
my charitable trust,
ActionAlertsPlus.com,
that you hear me
talk about, an
example to give to
explain the mistake
that I made is
something that most
of you should
understand.
The stock in
question… is
Apple (AAPL)…
Way back in 2004, my
youngest asked me to
get her an iPod for
here 10th birthday,
no big deal in
itself, right… but I
was stunned when she
asked for it,
because I had
already bought her
an iPod for the
holidays… so
naturally I told her
that that was
ridiculous… but then
she said something
that gave me my long
term thesis in
Apple, she said that
I loved the blue
iPod that I gave her
for the holidays,
but now she wanted a
pink one… a pink
one… and here is
where it
crystallized, she
said dad it is like
having two
pocketbooks or two
pieces of jewelry,
just because you
have one doesn’t
mean that you
shouldn’t have
another… no one
would get mad at
someone who wanted a
second piece of
jewelry, if you know
the person loves
jewelry… like I said
in the book, it hit
me like a ton of
iPods landing on my
head… the iPod is a
fashion accessory,
that is why the kids
love it… that was my
investment thesis…
it was all mine… I
went thru every
piece of analyst
research and not a
single one of them
considered it
remotely like that…
no of them could
explain why Apple
could keep selling
iPod, after iPod,
because everybody
already had one… the
market was saturated
they said… they all
thought that Apple
could not keep
selling iPods at the
same torrid pace
because they could
not think of a
reason for a person
to be buying
multiple iPods.
I had the reason… I
always liked Apple
but now that I had
my investment thesis
I went in and I
bought it, I bought
it, I bought it at
$26... yeah… that
was a long time ago
when the iPhone was
just a glimmer in
Steve Jobs’ eye…
well, you know the
history… I was
totally right… Apple
quickly went up 5
fold, as people
began to realize
what I realize… that
Apple is
fashionable… and
fashionable is what
sells… here is the
problem… shortly
after I bought the
stock, it moved up a
quick 5 points… I
sold it immediately…
threw the investment
thesis out the
window… took the
great trading gain…
so instead of being
jubilant as analyst
after analyst
realized what I had
and the stock moved
up to $100 and then
$200... I was
kicking myself for
being an idiot…
don’t repeat my
mistake here… if you
know something is
going to work for
the long term… you
have to be willing
to sacrifice the
quick gains… you
have to hang in
there… you can’t
just take the easy 5
point win… that is
wrong… when you know
that there is 50
points to be had if
you had just hung in
there and let your
idea play out.
Here is the bottom
line…
▼ ▼
▼ ▼
▼
 The
Bottom Line!:
That is why when you
have a good
investment you never
want to turn it into
a trade… by selling
before your thesis
has a chance to take
hold… and the stock
goes much higher...
Never turn an
investment into a
trade and always
know the difference.
Remember, never turn
an investment into a
trade, and never
turn a trade into an
investment…
[verbatim recap]
▼ ▼
▼ ▼
▼
Jim went on after
this segment to take
questions from
callers, and
responded with his
comments...
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Q:
I have a question
about dividends.
Here is the
situation, I own
about 10 stocks and
I wondered if it is
better to have
dividend in each
those? Or is it
better to get the
money from the
dividends and have
all of the money go
into an account, and
then use that money
to buy a bunch of
shares of one stock?
Jim:
No, no, that defeats
the purpose of what
I try to do, which
is the reinvestment
of the dividends is
what makes the real
growth here… and as
long as you like the
stock, you are going
to continue to get
the reinvestment
obviously… a company
might cut the
dividend, we might
have to readjust…
that is why we do
buy and homework…
but no, absolutely I
want you to reinvest
those dividends…
that is how we get
the power of
compounding, rule of
seven, talk about a
lot of these things
in my books… that is
how you make the big
money.
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Q:
Would you explain
the difference
between derivatives
and puts and calls?
And what type of
company are apt to
use derivatives and
what effect would it
have on the price of
a stock?
Jim:
Alright, derivatives
are a large group of
different
instruments that are
either off of an
index that trade
relative to an index
or trade relative to
a stock… puts and
calls are part of
the derivative
family, if you want
to use like genies
filia… a put is the
right to be able to
buy, no, a put is a
bet in favor of a
stock going down… a
call is a bet in
favor of a stock
going up… if you buy
a lot of calls,
there is so much
pressure, upper
pressure on the
stock it tends to go
up… put you have to
buy in the
thousands… same
thing with puts, you
can knock a stock
down buying puts… I
have a very
sophisticated
chapter about puts
and calls in the
book,
Real Money,
if you want to know
more… I don’t talk
about them on the
show because they
are very, very
dangerous if done
incorrectly.
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[verbatim recap]
[end of segment]
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