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 Cramerica. Other people want to make friends; I'm just trying to make a little money. My job is not just to entertain, but to put it all in context. So call me at 1-800-743-CBC or tweet me at @JimCramer. I am constantly on this show telling you that discipline always trumps conviction. I tell it to you over and over and over again. In other words, no matter how much you may love a stock, no matter how enthralled you are with the underlying story, if the rules say sell, sell, you sell it.
One thing I've learned from my investing career: no matter how much you might believe in something, you violate the rules of the road at your own peril. That's why we obey them religiously with the Charitable Trust, and they become our core guide for the CNBC Investing Club, which I want you to be in. But where the heck do these rules come from? It's not like they were handed down from on high and carved into stone tablets. Hey, they're not the laws of the Commandments from the history of the world, part one. They're not like the laws of physics. You can't just deduce them from observing the way markets work, the way you can say gravity. No, the rules come from my experience. That's right, from my experience. I've spent over 40 years in this business, and in that time, you better believe I've learned some powerful lessons. In many cases, I did have to learn them the hard way. And because I don't want you to repeat my mistakes, because I want you to have the benefit of my whole career, tonight I'm going to lay out some of the most important rules for investing, and they are indeed timeless. Some of this stuff may seem basic, but again, you forget the rules at your own peril.
Back at my old hedge fund, I occasionally convinced myself that it was okay to make an exception, to have a cheat day, so to speak, to ignore my discipline just this once for some reason. This seemed compelling at the time, and whenever I broke my own rules, I almost always got burned. It's like that old joke about the doctor: the guy who goes to the doctor and he says, 'Hey doc, doc, listen to me. It hurts when I stretch out and shake my hand around.' To which the doctor says, 'Then don't do that anymore.' So, so what exactly should you be doing or not doing, as the case may be? All right, let's tick down my most important rules for investing. We're going to start with the first one, which is: bulls make money, bears make money, pigs, well, they get slaughtered.
Look, I say this all the time because so often in my business I see moments where stocks went up and up and up so much that people were intoxicated with their gains and thought they were geniuses. However, it's precisely at that point of intoxication that you need to remind yourself that you don't want to act like a pig. I first heard this phrase on the old trading desk at the legendary Stein, Our Partners, an amazing old hedge fund. I'd been having a big run in some stock, and the brilliant Michael Stein would tell me that I'd made a lot of money, perhaps too much money, and maybe I was being a pig. I had no idea what he was talking about. How do you make too much money? I was just grateful that I'd caught a major gain. Of course, not that long after, we got a vicious selloff, and I gave back everything I'd made and then some.
And that's when I enshrined the 'bulls make money, bears make money, pigs get slaughtered' thesis as one of my own rules. And it's now so deeply ingrained that I've got a barnyard full of sound effect buttons to tell the whole story: the bull, the bear, the pig, and of course the guillotine. Just to be clear, bulls don't have a monopoly on piggishness. The same idea applies to investors who press their bets too aggressively on the short side. We've had some major declines over the years, but other than the dot-com bust in 2000 and the financial crisis of 2008-2009, most stocks bounced back pretty darn quickly. Even in the Fed-induced meltdown that started at the end of 2021, the market had turned positive by the fall of 2022. Because if you pushed your luck by staying short too long, you got sent to the slaughterhouse.
So the question is, how do you know when you yourself are being a pig? Look, allegedly there's no such thing as stupid questions, only stupid answers. But honestly, you really don't need me to tell you when you're being a pig. The Nasdaq more than doubled from March of 2020 to November of 2021. If you didn't feel greedy up there, you didn't need an investment advisor; you needed a psychiatrist. If you took profits, you sidestepped the huge decline. If you let your winners ride, you gave a lot, if not all, the money back. The financial crisis was even more stark. If you were walking around owning a huge amount of stock in 2008 as the banks started dropping like flies, well, you were beyond piggish.
Why is this rule so important? Simple. One of my chief goals is to help you stay in the game. You know, that's the hardest part of investing: holding on through the difficult periods, taking short-term pain so you can have long-term gains, which is what's happened in the stock market for a century. The people who got wiped out in 2022 or the dot-com collapse tended to be the ones who never took anything off the table. They never felt greedy, and their piggishness, well, they never felt it, and so they got slaughtered. Being cautious and ringing the register near the top ended up keeping you in the game. Notice I said near, because catching the ultimate top is just so impossible. Just catch it near the top. That's great. That's why I remind people every day: have you taken any profits? Have you booked anything? Or are you being a pig? Because you never know when the stocks you own are going to crash. You never know when the market could be wiped out. You can't have certainty. The stock market doesn't let you have certainty. If you assume stocks will keep going up forever in a straight line, well, you are in for the house of pain.
Everyone would own stocks if that were the case, and we know they don't because it's so risky. Sure, there will be times when stocks just go up and up and up; they just keep going. When I coined the term FANG over a decade ago for Facebook, which became Meta Platforms, Amazon, Netflix, and Google, which became Alphabet, I loved them all. But I did give up on Amazon after an incredible run. I was trying to be disciplined, yet it did continue to move up another 50%. I did feel like a pig after the stock's extremely popular run, but when I felt like, well, say I felt like a fool after it kept galloping. You've had the feeling. You know what it's like. That's just the price you have to pay for following the rules. I had been a pig, but the pig didn't get slaughtered. Fortunately, we got back in Amazon for the Charitable Trust when then-President Trump kept bashing them for ripping off the post office. You remember that? Probably you don't. But it was torture to watch it go up without being in it; it was terrific to get back in.
Now, you need to recognize, though, that for every huge pile of cash that gets left on the table with a situation like Amazon, you're sidestepping gigantic losses of the kind you would have had if you had left everything on the table in 2000, 2008, or late 2021. Experiencing the turn turned two generations of investors against stocks, and hopefully I'm trying to preserve the last one. So never forget: bulls make money, bears make money, but pigs get slaughtered. Yeah, you get it. And I'm going to keep repeating that forever. I'm going to use the sound effects because it is just that important.
How about rule number two? This is one that people, I see them on the street, almost everyone says this to me when I ask them if they've made some sales. Rule number two is: it's okay to pay the taxes. Look, no one ever likes paying taxes. I don't. You don't. But like death, taxes are inevitable and unavoidable. Yet the aversion to paying taxes on stock market winnings often borders on the pathological. So many times people have gigantic gains, but they simply refuse to take any profits because they don't want to incur taxes that cut into their winnings. Never mind that capital gains rates are pretty darn low versus ordinary income. Wall Street is littered with the broken hearts of investors who made this mistake.
Several years ago, for example, I went to a presentation from a prominent hedge fund manager who recommended buying Macy's because of its real estate value. The stock had already run a great deal before the presentation, and it was ripe for some profit taking regardless. But I know people who'd owned it for years with hefty profits, and they didn't want to ring the register because they would have to write a check to Uncle Sam, and of course they were thinking about how much that real estate was worth. Next thing you know, Macy's saw its stock get cut in half, and it wasn't a two-for-one split. The whole shopping mall space had hit a tipping point courtesy of competition from Amazon, and the darn thing got obliterated. Those who didn't want to share their profits with the IRS ended up with no profits at all, instead of hoping a stock could go to 100 because it might have a lot of real estate.
So I want you to make your peace with the tax man. Some gains are simply unsustainable. A profit on paper is not the same as a profit in your bank account. Gains can be ephemeral. You haven't made any money until you ring the register. The last thing you need is to be worrying about capital gains taxes when it's time to sell. You sell. In short, stop fearing the tax man; start fearing the loss man. You won't regret it. The bottom line: remember my first two rules. Bulls make money, bears make money, but pigs get slaughtered. Don't be greedy. Be disciplined. And don't be afraid to pay the tax man on profits that you've earned. Let's go to Tyler in California. Tyler?
At the end of the day, we're only human. If you remember only one thing about being an investor, that's it: nobody's perfect. Everyone's fallible, and it's inevitable that we're going to make mistakes. It's just the nature of the business. That's why if you want to own individual stocks, you need to follow a set of rules. Rules are designed to protect you from yourself. Which brings me to my next commandment, and this is a really important one: never buy all at once. I can't stress it enough. Do not, under any circumstances, buy your whole position at once. This is something you can see us put into practice constantly at the Charitable Trust. One more reason I think you should join the CNBC Investing Club. Shameless promotion.
Buying all at once is sheer folly. Yet no broker likes to fool around with partial orders. No financial advisor has the time to buy stocks methodically over time. The game is to get the trade done at one level in a big way. Make the statement buy. Boy, do I hate statement buys. Get the position on the sheets or in the portfolio. Now, I don't like that either. Where I stand, it's all wrong. 100% wrong. You should never buy all at once, and you should never sell all at once. Instead, I need you to stage your buys, work your orders, try to get the best price over time. Why? Okay, when I first started as a professional manager, I really wanted to prove to everyone just how clever and smart I was and how right I would be. So if I felt like buying, say, Caterpillar, okay, I said, 'By golly, I'll buy it now, big, all at once. Make a statement,' because I was so sure of how right I was. 'Put me up on 50,000 CAT,' I'd scream, as if I were the smartest guy in the universe.
When I think back about that young Cramer, mostly full head of hair, by the way, all I can say is that I was one arrogant son of a gun. Arrogant and wrong. What was my mistake? If you want to buy 50,000 shares of Caterpillar, you don't pick them all at once. That's pure hubris. What happens if it goes down? You feel like a dope, and it might go down. Thus my rule: never buy all at once. Instead, I should have bought CAT in increments of, say, 5,000 shares, gradually over time during that day, trying to get the best price I could. You put on a small position, then you cross your fingers, hope it goes down so you can buy more at a lower level to get a better cost basis. Hear what I said: I don't mind when a stock goes down if I can buy more.
Now I no longer trade institutionally, as you know. I no longer trade in size, as we used to call it. Probably still do. But I still invest my Charitable Trust. And whenever we have a new name, we buy in small increments, say 500 shares at a time, to get, say, a 2,000-share position over the course of multiple days, preferably again at lower prices. That's right. We like it if our stocks go down so we can get an even better cost basis. And we lay out this whole process to members of the club. It makes sense. When you buy low once, you're basically declaring that the stock absolutely won't go any lower. I mean, come on. That's crazy. Nobody has that kind of insight all the time. Buying gradually in stages is about recognizing that our judgment is fallible.
So why don't more people do it my way? Why don't investors, if they want 500 shares in Exxon Mobil, decide to buy it 100 shares at a time? Why won't they? I think it's because they want to be big, too. They don't want to waste the broker's time. Your broker wants to get the trade done. I know my brokers hate it when my old hedge fund would place incremental orders, but it's just plain hubris to put a major chunk of your net worth into any stock all at once. Who knows? Maybe it'll go into free fall. And of course, this doesn't just apply to having a broker; it applies just as much to electronic trading, too. At the same time, many others simply want to pull the trigger on the whole position and then get it over with. They don't want to agonize over each increment. Wrong. Again, that's why you need to resist feeling like you're making a statement buy when you purchase a stock.
I bought and sold billions of shares of stock in my time, both at my old hedge fund and for my Charitable Trust. Do you know how often I got in at the absolute bottom? How often the last price I paid was the lowest and then it was off to the races? I mean, maybe one trade in 100. And I'm pretty good at this game. So resist the arrogance. Buy slowly. Even buy over a couple of days if you have to, as I do for the Charitable Trust. Humility beats hubris every time.
Next rule: I need you to buy damaged stocks, not damaged companies. Let's say the mall's having a sale and you pick up a piece of merchandise only to find out that it's broken when you get home. Maybe it doesn't work. Maybe there's a hole in it. In the real world, you can return that merchandise and get your money back. There are guarantees and warranties galore on Main Street. Wall Street is different. If you buy a stock and it turns out to belong to a defective company, yeah, you eat the losses. There's no money-back guarantee. Caveat emptor. And that's why you need to be very careful to distinguish between broken stocks, names that are down for no particularly good reason, and broken companies, which absolutely deserve to see their stocks trade lower.
Sometimes damaged companies can be easy to discern. Look, when nearly everybody got their COVID vaccinations and we put the pandemic in the rearview mirror, all sorts of COVID winners fell by the wayside. Some of them were unfairly punished, but many of them got obliterated because a big chunk of their business disappeared, as we knew it would happen. Take Zoom Video, a company that took the world by storm during the worst days of the pandemic to the point where the very name became a verb. We would Zoom, just like we Googled. But once we got quality vaccines, the growth opportunity evaporated, and the company struggled to use all the money it made during the pandemic to pivot into something else. It had a huge cash position. Then gradually its competitors caught up. Very tough to go up against Microsoft and Google and Cisco. Zoom only plunged from 588 at its all-time high in October of 2020 down to the mid-70s less than two years later.
There were points on the way down where people assumed it had to be a bargain. But every time they did, they got burned, because you can't call a bottom in a stock that's in free fall if the business is changing and getting slower. We saw something very similar with all the fintech stocks that had roared during the period of ultra-low interest rates that coincided with the pandemic. Lots of buy-now-pay-later outfits, Affirm, which is one of the better ones. But once the Federal Reserve warned that it would start rapidly raising interest rates, the whole business model was called into question, and this group was annihilated. The worst of these was a company called Upstart, which is really supposed to facilitate loans. But they started leaving many of these loans, what's known as on the balance sheet, just as the Fed caused credit card risk to skyrocket. The stock plummeted, get this, from just over 400, its late-2021 peak, down to the low teens less than two years later, before eventually rebounding somewhat from its lows.
On the other hand, sometimes the stock will sell off for reasons that have nothing to do with the underlying company. It could be caused by ETFs or problems overseas or washing worries. Just because the stock is down doesn't necessarily mean that there's anything wrong with the underlying business. Damaged stock, not damaged company. So how do you distinguish between a broken company and a broken stock? Complicated, complicated question. What I like to do is develop a list of stocks I like very much. I call this the bullpen of my investing club charitable trust portfolio. We give you the bullpen all the time. When Wall Street throws a sale with the whole market coming down, we use that as an opportunity to pick up the stocks on our list, made in the calm of no trading versus the battlefield of when the market's open. We know these stocks ahead of time, so we know there's nothing wrong with the underlying companies because we've done the research ahead.
But the bottom line is you never really know. That's why this rule works in tandem with the last one: never buy a position all at once, because what you think is merely a damaged stock might turn out to be a damaged company. If you take your time, you're much less likely to end up with a large quantity of broken merchandise. And remember, there's no money-back guarantee. The word on the street is caveat emptor. Mad Money's back.
If you want to build a portfolio of individual stocks, that's a big if. Since there's nothing wrong with getting all of your equity exposure from a cheap index fund that mirrors the S&P 500, you've got to be rigorous about it. Which brings me to my next rule: do the homework. Listen, growing up, my kids hated doing the homework. They thought it was punishment. Sometimes when I looked at what they were studying, I could see where they were coming from. I mean, what's the relevance of most of the things they teach in high school? How will it help you later in life? Why even bother? Of course, that's a terrible attitude. As a parent, I always encouraged my kids to study because you never know what you'll turn out to be interested in later in life.
But I bring this up because I think many of you have the same attitude to the homework you need to do on your stocks. You suspect it might be just as irrelevant to your portfolio as schoolwork seemed to my kids. When I tell people that they need to listen to the, let's say, Starbucks conference call or know what the analysts are expecting from Netflix, they don't want to hear it. They think I'm being a scold, but that's not true. You need to do the work if you're going to own those kinds of stocks. When I remind people that doing the homework means listening to the conference calls, reading research reports, they want no part of it. They look at me as if I'm some sort of old-fashioned teacher who's asking for way too much in this busy 21st-century world. That's just plain wrong. Owning stocks without doing the proper research, frankly, is lunacy. But people still do it, and they do it for a couple of different reasons.
On the one hand, there's the buy-and-hold school of thought: the idea that you don't really need to do any work. You don't have to keep track of what's happening at the company because, hey, you're in it for the long haul, so what? On the other hand, you've got people who just don't have the time to be diligent. For those of you who don't have the time, I've got a simple solution: get someone else to manage your money, for heaven's sake, or do what most experts tell you to do and invest in a low-cost S&P 500 index fund. Or there is a third option: find someone else to help you do the homework for you while teaching you to be your own portfolio manager, which is what we do with the CNBC Investing Club. And I still urge members to do as much of their homework as they can. The truth is, if you can't devote a couple of hours per week to your portfolio, you really shouldn't be messing around with individual stocks, unless you join the investing club, which is what we're meant for. Investing may not be a full-time job like trading, but it's definitely a part-time hobby. That said, it's the buy-and-hold premise that's a lot more pernicious.
Back during the 1990s, buy-and-hold became the be-all and end-all of all investing. You know what? I'm just going to own and hold on to my CMGI because it's got to go back to 100 where I bought it. Yeah. I mean, experts told you that if you hold things for the long term, everything will work out. Of course, it went to zero. This philosophy took a real blow during the financial crisis when so many people who practiced buy-and-hold got obliterated. That was easy. A house of pain.
Buy-and-hold became popular again during the pandemic. It keeps popping up anytime there's just a nice smooth period when the market was flooded with cheap money and almost everything worked, right? I mean, all that money in. Bye, bye, bye. Once again, though, it got you burned when the Fed finally started tightening in 2022 and the cheap money just vanished. A lot of people who bought and held the SPACs got crushed because there was nothing worth holding.
holding. That was just a travesty. The spaxs. That's why I've always been an evangelist for a new concept, which is buy and homework instead. What is the homework though? Before you buy a stock, you should listen to the conference calls. Go to the company's website. I really like that. I tell you, I've been struck with that lately. Read the research if you can get a hold of research. Read the news stories. That's called Google. Everything's available on the web. Everything. You have so much more info available now. So much more knowledge that there's really no excuse. You aren't up there begging at the Goldman Sachs library for some micro fee statement from three months ago as I did four decades ago right down the block here. You have everything right at your fingertips. But if you fall back on a buy and hold strategy for any group of stocks and don't pay attention, I can assure you that you'll be soundly beaten by professional money managers with good track records who are actively searching for high-quality stocks all the time. More to the point, I'm quite certain that any index fund can beat someone who does no homework, which is why so many experts tell you give up on individual stocks and put your money in a cheap S&P 500 index fund. Buy and hold is not a strategy. It's lazy. I'm like I said, I am in favor of index funds for those who don't have the time, the predilection.
The next rule is another essential that I harp on constantly. Diversify, diversify, and diversify. Always be diversified. That controls risk. And managing risk is really the holy grail of this business. What's the biggest risk out there? It's called sector risk. Stocks in the same industry. They tend to trade together, especially at extreme moments. In the old days, only about 50% of the action in a given sector came down to the in a given stock came down to the sector. But thanks to the rise of sector ETFs, that number's gotten much, much higher. Some cases, like 80, 90%. I don't care how great a tech stock was in 2000. If you had all your eggs in that one basket, you got scrambled. I got to prevent that. Same with the financials in 2008. I got to prevent that. The oils in 2014 through 2016. And of course, tech during that discreet period in 2022 that was so horrible. And there's only one thing that can keep you from getting nailed by sector sector risk and that is diversification. I always say diversification is the only free lunch in this business.
It's the only investment concept that works for everyone. If you mix up enough different sectors in your portfolio, at least five, well, I'll tell you, you won't be wiped out when the one group gets obliterated. Something that happens far more often than you might think. But if diversification is such a no-brainer, if every adviser and commentator under the sun has been telling people to do it for years, how can anyone still be underdiversified?
I think it comes back to the homework issue. A lot of people simply don't own don't know what stocks they own. They don't understand what the companies do. So they end up with stocks that are frightfully similar. I mean, they don't understand that one is a distributor stock. It just drives me crazy. Hey, you know what? But also others have zero respect for the history of the bear and how it attacks individual sectors. I still feel quite a few calls from people who genuinely think that owning FANG is a diversified strategy. Hardly. With Facebook now Meta Platforms, Amazon, Netflix, and Google now Alphabet, you own a variation of the same thing: social, mobile, cloud. They trade together. That's what I call faux diversification. Or another example: no matter how much I might like the oil stocks at any given moment, I can't count as a portfolio made up of Chevron, Pioneer Natural Resources, and I don't know what they give me. I'll use Halliburton or two two high-yielding ones in a driller. I always say no to a portfolio of J&J, Eli Lilly, Bristol Myers, and UnitedHealth Group. Even as I like all four companies, they just leave you way too exposed to healthcare risk that could overwhelm the whole group all at once.
Having an undiversified portfolio is not just an amateur mistake, though. Many professionals don't like to be diversified because of the bizarre way the money management business works in this country. If you concentrate all your bets in one sector, that sector takes off, well, you'll pretty much beat everybody right then who's in a diversified fund. That is the nature of the beast. Even though I think it's ill-founded, it's why Cathie Wood of ARK Invest could be the best money manager of 2020, then far from the best in 2021, and among the worst in 2022. Her flagship ARK Innovation Fund went almost all in on high-risk growth stocks. That's not diversified. And those all stocks, they tend to trade as a group. But that one huge year in 2020 made her a household name. And once you're a household name, well, you do get it made in this business. Don't get me wrong. I have a beef with Cathie Wood. She's great at picking high-risk growth stocks and she's never claimed to be running a diversified portfolio. Not once. I just want you to be aware that when you go all in on an undiversified portfolio, it is likely to blow up in your face a couple times in a I don't know a few years' time. Here's the bottom line. Whether you're an amateur or a professional, you always need to do your homework and keep your portfolio diversified. This is the kind of routine maintenance that protects you from monster losses down the line. Remember, if you can keep your losses to a minimum and let your gains run, you almost always come out ahead. But don't try to rationalize those losses because stocks don't always come back to even or anywhere near that.
Let's go to Trey in Texas. Trey,
