My mission is simple: to make you money. I'm here to level the playing field for all investors. There's always a bull market somewhere, and I promise to help you find it. Mad Money starts now.
Hey, I'm Cramer. Welcome to Mad Money. Welcome to Cramer America. Other people, my friends, 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 Cramer. 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, a lot of this stuff is much more important than the day-to-day action of any 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 charitable 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 it went, Paul?
So, tonight we're going... can't resist. Tonight, 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, well, let's just say what you 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. Else, 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 only 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 a speculative stock 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 otherwise 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, a poorly defined goal. Yeah, 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 me 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 do it in an airplane like a Boeing 747. You don't try to fly across the Pacific in 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 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 stocks. 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 help democratize the incredible engine of wealth creation that is the US 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 US economy. Historically, that'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-Eddie 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 got to reinvest that money. That is vital.
You can 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 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 like to break things up into your retirement portfolio, where you need to be pretty cautious, and your discretionary 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 risk 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 or 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 CNBC 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.
I think it's a great question, and 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. And every time I violate that principle, 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.
All Mad Money tonight, from being flexible to 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 Cramer.
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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, 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 could 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 can start buying individual stocks, enough to fill out a diversified portfolio, five to 10 names, right? That's what I want. Hold up. Before you buy anything, I need you to do one more thing, though. 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 the 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 and the way its stock trades. I know that can all be daunting. It's the kind of homework we do for you on our favorite names at 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've learned what you can and developed a thesis, a theory about why you think the stock is headed higher, there's 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 the homework, you can build a diversified portfolio of five to 10 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 10, 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 10 stocks you thought were winners, yeah, unless you're certainly lucky, not all of them will stay winners. Hey, some are going to be losers. Some 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 have 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 just cut price and 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 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 liked it because of 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 the heat death of the universe. How many times have you heard someone say, 'Buy and hold, buy and hold'? Hey, that's 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 got to be willing to sell. The facts change. That's why I always tell you it's buy your 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 at those two companies. Now, I bring this up because people hate, hate, hate admitting when they've made a mistake. Once we make up our minds that things are great for, say, Coca-Cola, we don't want the facts to get in the way of the story. 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, sickness and health, for rich or poor. 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 goalpost. 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. Managements can make mistakes. CEOs make bad strategic decisions 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 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'd simply put that money in a 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 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 turn for the worse, 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. The money's back after the break.
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 okay 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 CNBC 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 mailed it out. I was the opposite of Dalai 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 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 okay 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. 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 and act.
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 is when you think to yourself, 'If only I,' as in, 'If I'd only acted sooner on Electronic Arts,' or 'If only I'd pulled the trigger on Nvidia ahead of that quarter,' or 'If I'd only stayed short energy, I could have made a fortune.' Don't get hung up on the would have, should have, could have.
This is a wasted, damaging emotion. It's destructive to the positive psychology you need when you're making investment decisions. For a long time, I took it to the extreme. I would sit and be mesmerized by a couple of big losses, by things that I got wrong. I would be obsessed, going over and over and over the big miss. It just was the wrong thing to do. Not anymore. It took me 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 CNBC 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 curbing this kind of destructive thinking, go to that extreme. Take the stocks off your monitor, your portfolio watch. You'll be surprised how much better your decision-making becomes when you stop the would have, should have, could have, and the obsession. It will not help you make money. Let's go to Joe in New Jersey. Joe.
