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Jim Cramer’s Real Money: Sane Investing in an Insane World
I. Introduction
A. Most investing books, like most of the mutual fund managers would do worse for
you in the stock than if you picked a portfolio of the Standard and Poor benchmark
of 500 stocks.
B. Cramer builds in speculation, similar to the way that good-tasting beef is built into
the Atkins diet.
C. Remember the biggest return generators of our life, the Home Depots, the Best Buys
were incredibly risky, if not considered outright dangerous, just when you had to
buy them aggressively. These were the stocks that turned thousands into millions
but would have been avoided by conventional investors because they were too
dicey.
D. Cramer wants you to like the equity (stock) regimen. Why equities? Because every
academic study shows than in any twenty-year period in history, no asset-
outperforms high-quality equities that can pay good dividends.
E. Cramer says if he cam make you money legally, using speculation, who cares if we
do it with nonacademic methods, because making as much money as possible in a
short period of time is the goal.
II. Chapter 1—Staying in the game
A. Cramer says his first job reminds him that the opportunities (in stocks) are too great
not to be in them.
B. “Say in the game” is the only mantra that is worth repeating. It keeps you from
picking stocks than can wipe you out. It keeps you from speculating on situations
that is worthless.
C. Cramer has been able to make big money when big money could be made because
he was not discouraged or fed up or desperate when times got tough…..because
he knew that when the game eventually turned he would be there to pounce on
what was to be gained.
D. Staying in stocks (the game) makes sense rationally and empirically because, over
the long term, we know stocks outperform all asset classes.
E. The reason more people do not get rich with stocks, is….They get bored, tired,
frustrated, defeated or reckless. They get discouraged. They get beaten…not by
investing, but investing “successfully.”
F. Managing your own money is like playing hockey, where everybody has an
opportunity to defend and to score and everybody is expected to take the
opportunity.
G. Do not buy or sell on emotion.
III. Chapter 2--Getting Started the Right Way
A. Stocks can be fathomed, but you need the basics.
B. Cramer has always believed that stocks can be mastered if someone would just
show him the landscape.
C. Three foolish rules (not to believe in).
1. Buy and Hold Stocks because that is how you make the most money.
2. Trading is always wrong, owning is always right.
3. Speculation is the height of evil.
D. Buy and Homework
E. Am I Diversified?
F. Reminiscences of a stock operator by Jesse Livermore (pseudonym Ed Lefevre).
G. Picking Winners by Andy Beyer
H. Three Smart Rules:
1. If you learn from mistakes, you will not repeat them.
2. Only go the tracks (stock markets or go to stocks) were there are not a lot of
good players so you can clean up (only invest in stocks where the research and
information is not perfect and many minds are not trying to figure it out).
3. Only bet on situations where you have total conviction.
I. Two reasons to own stocks:
1. There is an enterprise value to the whole company than can be bought or sold and
can grow over time from the retained earnings of the company (dividends). If you
own a stock that pays a dividend, you could be getting both the income stream
and value of an appreciating stock.
2. Stocks are not perfectly priced.
IV. Chapter 3—How stocks are meant to be Traded.
A. The only thing Cramer cares about with a stock is what is going to happen next.
B. Owning a stock is a bet on The future, not The past.
C. Jim Cramer’s wife known as the “Trading Goddess” used to ask Cramer what he
“thought” and how he “would rank” a stock on a scale of 1 to 5, 1 being a stock he
wanted to buy more of right now and a five being one I need to sell pronto.
D. Lesson # 1 in trading stocks—when it comes to buying or selling a stock, do not tell Cramer “why you bought it, only where it is going.” That is all that matters.
E. When professional traders buy stocks they call it “taking the stock” a sell is called
“sell at market.”
F. Lesson # 2 in trading stocks. Always use limit orders when you buy or sell any
stock especially when you are buying in unseasoned situations (IPO’s, new stocks,
or just issued stocks like The Street.com on the day it went public.
G. What matters is (for a stock anyway) is the price-to-earnings ratio of each stock. To
figure the price-to-earnings ratio you need the last price of a stock and divide it by
the amount per share the company earned in the pervious year. Example: $27.00
divided by $2.18 and you get 12 (rounded to the nearest whole number). M x E =
P or 12 x 2.18 = $27.00.
H. We take the earnings and we figure out what we are willing to pay for the earnings-
the multiple-then we times them and arrive at the price.
I. The formula can also help us figure out future prices. If we know what the earnings
estimates are going to be (E) and we can figure out what might be willing to pay for
those earnings (M) we can arrive at a future price or we can figure how above or
below a stock might be from what it might trade in the future. The multiple allows
us to make apples-to apples comparisons with the stocks or other companies in the
cohort.
J. If we have the price, and we have the future earnings estimates, we can measure
whether we are paying too much or too little for the stock now versus its peers.
Any change in the earnings estimates or any change in the economic landscape
(such as lower interest rates) can affect what M we will pay.
K. The subjectivity is in the comparisons to other equities of similar nature. Now we
something that allows us to compare two companies; we have something that
explains the relative worth of each company’s shares.
L. The real reason why one (stocks) trades more expensively than the other is that one
grows faster than the other.
M. How is growth measured on Wall Street? To chart future growth, you have to start
by looking at the pattern of earnings per share, or EPS. Wall Street pays a
premium for high growth and awards a discount for slow growth.
N. While not always an accurate predictor of future growth, past growth is terrific
starting point.
O. In business, a company is favored because it has more consistent growth over
time. The company is favored, and the cheaper company is the underdog.
P. We are looking for imperfection (in the market and also something called
imperfect information). Is there something about that pricing that could be
wrong, either higher or lower (earnings) than it should be.
Q. Look at companies with capitalization between 100 and 400 million dollars. These
stocks are considered to be speculative.
R. Also consider dividend yields as well. To calculate the yield say you earn 72 cents
you divide that by the share price $27.00 and you get 2.5.
S. Cramer agrees though that a company which grows its earnings twice as fast as
another company might eventually boost its dividend at a faster pace.
T. Most analysts only look at the P/E ratio and the growth rate. Analysts consider whether or not the companies are growing slower than or faster than all companies (in all stock markets) based on the P/E ratio. Look for companies that
are 2nd or 3rd in their industry group because they could a target of a takeover by
another company.
U. Sometimes analysts only consider the stock as a piece of paper, not as a company
with an ongoing business. Wall Street loathes stocks as come down in price
(earnings) because they (Wall Street analysts) think the companies ratios are more
important than earnings. Cramer loves stocks as they come down, because he
knows the enterprise underneath (the business) may not be deteriorating as fast as
the stock price.
V. Look for stocks where the merchandise underneath is not badly damaged but just a
damaged stock price.
W. What is the company’s gimmick (or story) so you can distinguish between
damaged companies and or damaged stocks. Websites like Factiva and First Call
can help us do that.
V. Chapter 4-Some Investing Basics
A. Consider two streams of income:
1. The necessity stream
2. Discretionary stream
B. Homework-you must read every report from quarterlies to the annuals, you have to
listen to all of the conference calls, and read all the analysts reports.
C. When listening to conference calls you are looking for how the company is doing.
What is the temperature of the company? If your company is young you are
looking for fast growth. Older companies look at dividends.
D. How can you tell if a company is doing better or about to grow earnings faster than
would be expected?
1. The rate of revenue growth.
2. Gross margin or how much profitability each sale can generate.
E. Some businesses have higher-margins because they have little competition
(monopolies). Examples Apple Computer, Intel and cable companies. Look out for
satellite T.V.
F. Some other businesses such as drug companies have patent protection that gives
them a hefty payout for 17 years (however after the 17 years the patent is worthless)
unless they develop new products.
G. Some companies have big profit margins only when the world’s economy is
booming. These are called “cyclical” concerns. Examples would be farming,
road building, military, aircraft building, have big profits during the “boom.”
H. Others have profit margins regardless of the world’s economy. These are called
“secular” growth stories because they are independent of the cyclicality of
economies. Examples of these types of companies are Cola and Medicine.
I. Each industry has what is know as a metricor a series of metrics that measure
how it is doing versus its peers.
1. For example the cable industry uses enterprise value per subscriber.
2. Hotels –average revenue per room.
3. Retail Stores and Restaurants—same-store sales.
4. Airlines—average revenue per seat.
5. Technology—gross margin per product sold.
6. Financials—net interest margin.
J. You want to buy cyclical stocks only when the “line” or multiple to earnings is so
out of whack with the growth prospects that you are compensated for the
vicissitudes of the consumer and the economy.
K. The main thing that homework should identify is whether your company is
growing faster than the average company. To determine that, you take the
company’s P/E multiple and compare to the average company (in the
industry your looking at) P/E ratio.
L. A bargain company is one that is growing sales and earnings faster than the
average S & P ( S & P refers to the Standard and Poor’s Stocks) company; BUT
sells for a lower multiple than the average (S& P company)company.
M. Value investors look at or for something good (in a company) like a takeover
or turnaround. These buyers look at abstractions such as book value, and or
replacement value of an enterprise, or what other companies have been
willing to pay for similar entities in the same industry.
N. When doing analysis on an individual stock compare the numbers versus the S & P500.
VI. Chapter 5-Spotting Stock Move Before They happen
A. The essence of a stock move is simply supply and demand. Supply and demand
determine the minute-to-minute pricing of stocks.
B. In the real world, there are many forces that can affect the pricing and selling a
stock that does not have much volume. Finding out when a stock is about to have
a “Game Breaker” move requires only some knowledge about the way stocks work
as they grow.
C. The landscapeto Cramer look likes the following:
1. There are undiscovered companies that are undervalued stocks. The typical
(unfortunately) uninformed speculators are buying stocks already exploited by
the process of discovery.
2. We begin to believe that the catalyst for a big move requires a recognition that
there is more growth to come than anyone knows.
3. There are four (4) groups or types of stock moves:
a. Undiscovered/Undervalued company
b. Discovered/Undervalued company
c. Undiscovered/Fully Valued company
d. Discovered/Fully Valued
D. The earlier you move (buy a stock), the more your actions resemble gambling.
However, the earlier you pounce, the greater gain you can have.
E. The reasons behind traditional moves of large cap stocks can be grouped into
two logical catalysts:
1. Rotational Catalysts: Decisions by portfolio managers to shift from group
to group depends upon the macro economic backdrop: weak-to-strong economy
dictated by the Federal Reserve. These involve switching between secular
growth to cyclical stocks.
2. Estimate Revision Catalysts: We must be able to detect when companies’
estimates are going to rise. We have to be able to spot product cycles or
demand cycles before they occur so we can profit from surging estimates.
F. The discipline involved in the undervalued and unknown stocks are completely
different than those involving large capitalization. The reason is most small caps
never will reach big cap size.
G. Cramer believes that sector analysis and specific stock analysis explains about
50% of a stock’s move. He also believes that no matter what howgood a stock may be it cannot get away from it’s sector.
H. The vast majority of stocks is driven by the formula E x M = P. There are only
two (2) ways a stock can obtain a higher price in the market.
1. The earnings can go up.
2. Someone will pay a higher multiple for those earnings.
I. New product introduction, better sales, better margins—is the reason for higher
earnings estimates.
J. The first reasona multiple expands or contracts is the macro (economics)
concerns which is known as “top down” thinking which means, that if you have a
understanding of the nation’s economy you can predict the multiple’s direction.
You can measure the multiple simply by looking at where a stock has traded at
(stock price) and earned in the past. The way Cramer explains this is to say that
“the M anticipates the E, and if you shift your portfolio towards stocks that should have a greater E when the economy is about to expand, you are going
to find yourself riding a wave of multiple expansion. The P/E multiple of all
sectors responds to the giant macro picture.
K. Cramer uses a chart or as he calls it his “playbook” what or what should not be
bought in the various parts of the economic cycle they include:
1. -2 with the economy expanding back toward flat lining; 0 to 7%. In a
recession, the Federal Reserve can be counted on to cut interest rates on the
short end.
2. When you get to a recession, the stocks with the highest multiples are those
of companies with recession-proof earnings:
a. Drug companies
b. Food companies
c. Soap and Toothpaste companies
d. Beer and Soda companies
At a slowdown’s depth before the Federal Reserve takes any action, these
stocks are prized possessions (when cyclical companies are missing
estimates i.e. Proctor and Gamble). At the height of the recession you switch
from recession proof companies to beaten down cyclical (when companies are
at 25 to 30 times earnings). After that you switch to smokestack companies
that are cyclical in nature and finally discretionary stocks.
3. When the Federal Reserve lowers interest rates it is a big event for cyclicals. As
the downshift occurs (at the very bottom of the cycle) prices are crushed. When
When the cyclicals are downgraded by the analysts and their multiples are at
their highest is the time that you buy and you sell your noncyclicals when their
multiples are their highest.
4. Some stocks known as secular growth stocks can transcend almost all cycles
because they grow so fast. Examples are Yahoo!, eBay, and Amazon. They
have organic growth and are not interest rate sensitive.
5. Since sector rotation is so hard to detect, you can also consider investing in
Exchange Traded Funds.
6. As interest rates rise you will see all things financial (real estate, savings and
loan, banks, insurers, brokers, mortgage companies, and home builders) trade
lower. During this period, though technology and cyclicals will do very well.
7. When the economy goes to 5% you start selling retailers and autos because the