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Hey, I'm Cramer. Welcome to Mad Money. Welcome to Cramer. I'll be one of my friends. I'm just trying to make you a little money. My job is not just to entertain, but to educate and teach you. So, call me at 1-800-743-CBC. Tweet me, Jim Cramer.
You want to know the single most useless thing you can do in this business? Oh, that's easy. The most useless thing you can do as an investor is to worry about what everyone else is worrying about. The flip side of this is also true. There's no point in getting excited about something that everybody else is eagerly anticipating. Why? See, because when the vast majority of investors agree that something's going to happen, that thing is already priced into the stock market.
Priced in, while the real economy moves at its own pace. For example, you've got to borrow money to build out equipment, then you use that equipment to manufacture goods and transport them to retail outlets and wait for the customer to come along and buy them. The stock market has no such limitations. Stocks don't quite travel at the speed of thought, but they come pretty close. So the moment a preponderance of hedge fund and mutual fund managers decide that the economy is slowing or speeding up or flatlining, stocks start trading like that's already the case.
Usually it takes some time to build that kind of consensus, which is why you rarely see these moves happening instantaneously. But once the big institutional portfolio managers are on the same page about something, you can be pretty darn confident that it's baked into the averages. This is some basic economics 101 stuff.
Now, I don't have a ton of use for economists as a professional on this show. They tend to take a totally ivory tower approach to this discipline. Meaning, they have all sorts of models for how the world's supposed to work, the economy is supposed to work, often very boring models, by the way. But they rarely let the empirical facts get in the way of a good theory. If the data conflicts with the model, economists have a bad habit of throwing away the data and not the model.
However, as long as you keep that caveat in mind, some basic economics is incredibly useful when you're trying to manage your own money. For example, let's take something a little bit difficult, but we're going to get to this together. What's known as the efficient markets hypothesis. This theory says that at any given moment, stock prices already reflect all the relevant information that's out there. And when some new piece of data comes out, stocks immediately adjust to reflect the new reality.
You often hear index fund purists citing this theory to explain why it's impossible for stock pickers to get any kind of edge. Because whatever you know about a company should already be baked into its share price. As far as they're concerned, markets are so efficient that investing in individual stocks is basically the same as gambling. If everything you could possibly know is already priced into the stock, that means your homework's meaningless. And the only thing that can push a stock higher or lower is some random new piece of information nobody knows about.
It has to be something totally unknown. Because if anyone did know, they would have acted on it already. Ergo, it would be baked into the share price. That means under the extreme version of the efficient market hypothesis, the only thing that can move stocks are unknown unknowns, to use the parlance of former defense secretary Donald Rumsfeld. And if you're merely betting on unknown unknowns, you might as well just be playing roulette. It's more fun.
Again, that's why index fund advocates adore the efficient markets hypothesis. This theory tells them that it's impossible for individual investors to consistently beat the averages. So, if you want equity exposure, the only smart way to do it is putting your money into a nice low-cost index fund that mirrors the S&P 500.
Now, as anyone who watches the show regularly knows, I have no beef with index funds. In fact, I think they're the best way for the vast majority of people to invest in the market. I've held that position since the year 2000. Even if you've got the time and the inclination to pick individual stocks and manage your own portfolio, you should still direct a big chunk of your savings, if not the plurality of it, into some cheap S&P 500 index fund. It's the safest way to give yourself equity exposure. It's perfect for your retirement accounts.
Think of it like this. It's not that easy to be a good individual stock investor. It takes real work, which is why, of course, we try to help you if you join the CNBC Investing Club. But it's an incredibly easy thing to be an index fund investor. Putting money in a 401k or IRA, oh, that's index fund territory. You can gradually contribute over time with every paycheck. And as long as you believe the US economy can keep growing over the long haul, you can park that money in an index fund and check in on it maybe once or twice a month.
But to get back on track, this idea that you can't possibly beat the averages because of the efficient market hypothesis tells us stocks are always perfectly valued. And you know what? That's just totally bogus.
Putting aside the fact that I did consistently beat the averages nearly every year at my old hedge fund, giving my clients a 24% compound annual return after all fees over the course of 14 years versus 8% for the S&P. The simple truth is that markets are not perfectly efficient. In fact, frankly, they're often irrational. They ignore things, make mistakes, misvalue information every day. And that's a major reason why anyone can make money picking individual stocks. These anomalies are everywhere and they can be great for your portfolio.
Ironically, this core dogma of free market economics is a lot like communism. Makes a lot of sense in theory. It doesn't necessarily work in life. So, why the heck did I bring up the efficient markets hypothesis in the first place, if it's such a boneheaded idea? Because even if the most extreme form of this theory isn't true, and it's not, empirically, we know for a fact that markets are all kinds of inefficient, it's still a very useful idea.
As an ironclad law of the universe, the efficient markets hypothesis can't help us. But as a rough guideline, it can lead us in the right direction. Markets try to be efficient. They aspire to efficiency. When a company reports a fantastic quarter, the stock spikes immediately because that kind of data can get baked in very quickly.
When the Federal Reserve changes policy telling us it's probably done raising interest rates, like we saw in late 2023, that's huge news and it takes longer to get reflected in the averages. Baking that in can take months. Even when the Fed abruptly changed course at the end of 2018, it took weeks to work through the averages. Stocks that benefit from lower rates will instantly soar, but it can take days or weeks or even months for the averages to fully reflect the new normal because it takes time for portfolio managers to reposition. We're talking about huge slugs of stock here. No hedge or mutual fund is going to buy or sell them all at once. Sooner or later, though, we do reach a new equilibrium.
So let me give you the Mad Money version of the efficient markets hypothesis, the kind of sort of efficient markets corollary. When there's a widely held consensus view about something, anything, be it positive or negative, you have to assume that view is already being discounted by the stock market. So when everyone's feeling euphoric about the strong job market, that's probably baked into stock prices already. When everybody's worried about a temporary Fed-mandated slowdown, it's probably baked in. When investors are hunkering down in fear of a bad earnings season, don't expect the stocks to get slammed on disappointing numbers. People are already anticipating a disappointment.
In short, when all the talking heads and journalists and media-friendly money managers are telling you to be afraid of the same thing, that might be the one thing you don't actually need to be worried about. Let everybody else worry for you. From the stock market's perspective, the fact that most investors believe something's going to happen means that Wall Street's already treating it as a reality.
Yet, it's so easy to fall prey to groupthink when you're managing your own money. Emotions are infectious, like a communicable disease. Frankly, when you see all sorts of experts coming on television and saying the same thing, while the newspapers print similar stories and your friends echo this stuff back to you, it's only natural to assume it must be true. And you know what? Very often it is true. But that doesn't mean it's going to move stock prices. By the time we get any kind of real consensus on an issue, that move is probably over. You missed it.
The bottom line: if you want to be a better investor, don't tear your hair out fretting about the same things as everybody else. Instead, you should worry about the things other people don't seem to care about, because the real threat is the one that you don't see coming. Let's take questions. Let's go to Mary in Idaho. Mary?
Hi Jim. Nice to talk to you again. I have a comment and a question for you. The comment is regarding when you were talking about the conventional stupidity. Yes. I sent you an email on that and I hope you'll have an opportunity to read it. I thought you'd enjoy it.
The question is: at what percent of increase in the stock should a person consider taking some or all of their profit, either to reinvest immediately or to just hold back as cash to buy something down the road?
Okay, let's take this from the point of view that you need to sell something in order to be able to buy something. What I like to do, and we talk about this at the CNBC Investing Club, is that if a stock has changed, if there are fundamental differences from what happened when I bought it. In other words, let's say I bought a stock and then subsequently it has two bad quarters. Well, that's when I want to sell. I rank the stocks. I lower a stock's ranking if they've missed a couple of quarters and then I boot that to buy something I think is better.
There are going to be moments where a third quarter turns out to be good and I didn't get it and I kick myself when that happens. But what I've done is create a level of discipline, and that's what you should do, Mary. And thank you for your email, too. Let's go to Dave in Colorado. Dave?
Hi Jim. Colorado. Booyah to you, sir. Longtime listener, first-time caller. Thank you for all you do. A side note: my mom got me into investing decades ago and had me watch Wall Street Weekend Review with Lois Ruka, Marty's wife, and you are carrying on their legacy.
That's how I got involved, too. So, we're in the same boat. Let's go to work.
All right, let's go to work. Here's the setup. I'm calling on behalf of my girlfriend who is in her early 60s. She's retired with a state pension. She has an investment management firm managing $600,000 in stocks and ETFs in tax-deferred accounts, but they're charging her 1% per year. They haven't kept pace with the S&P 500 and have actually avoided the Mag 7 and growth stocks almost completely. She wants to manage her money on her own. Two questions: how should she construct a portfolio of her own? And over what time frame should she make the change?
Okay, so I would put two-thirds of it in an S&P index fund. Obviously, if they can't beat it, just go for it and join it. Then one-third I would structure around what we've been saying, a portfolio of say six to 10 stocks, of which two or three can be overweighted and large, mostly Mag 7, I should add, stocks that we think are really great. CNBC Investing Club can help you pick those 10 because we have a portfolio of more than 30, and you just take the 10 that you're most excited about, and no more 1%. You're now free to move, and well, she is. And tell her congratulations for having saved up that much money. That's terrific.
All right. The most useless thing you can do as an investor is to worry about what everybody else is worried about. Remember, the real threat is the one you didn't see coming. I made money today. I'm giving you my Madanomics 101 course and giving you all my best practices for investing. Sometimes you need to take a step back and evaluate not just what you're investing in, but how. So if you want to better your investing skills, I say yes indeed. Stick with Cramer.
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Like I told you before the break, when you pack into a crowded trade, you're playing with fire. If everybody's on the same page about a stock or even a whole sector, that usually means the easy money's already been made. Doesn't mean you can't profit from something obvious. But when you're late to the party, you're going to have lower returns and higher risk. Look, that's just the nature of the beast.
Fortunately, nobody's putting a gun to your head and forcing you to follow the hedge fund herd. In fact, you don't even have to think about spotting tops and bottoms by gauging sentiment if you don't want to. There are lots of different ways to invest. Some of them take less work than others. For example, there's timing. You could try to call every gyration in the averages, buying stocks when they look poised for a near-term bottom, then selling them when they look toppy.
You can trade around a core position. You take a large holding, then you lighten up on part of your position when it gets overextended to the upside and buy it back when the stock sells off. You can keep your powder dry, waiting for the perfect moment where the whole market sells off dramatically, giving you a chance to pick up your favorite stocks for much less than they're worth. My fave at the old hedge fund. Love doing this stuff.
If you've got the time, and of course you need the inclination and the right resources, it is a terrific way to make money. But if you've got a full-time job, this whole approach is just nuts. And I say that as someone with a terrifying extended family history of mental illness. Regular people who work for a living don't have time to stare at the tape all day. Even if you work the night shift, it's just not a good use of your precious free time.
More importantly, trading this actively just isn't worth the agitation. That's why I come here every night to do the show. I focus on the market like a hog so that you can take a less intense approach to investing, one that lets you go to work and have a personal life. It's why we help walk you through all these different things with our charitable trust when you join the CNBC Investing Club, which you know I really want you to do.
So, how should you approach the market if you're not prepared to devote your entire waking life to watching stocks? What's the safest way to handle individual stocks part-time? For starters, let me say once again that index funds are a wonderful thing. If at any point what I'm describing sounds too daunting to you or just too time-consuming, please do not hesitate to say individual stocks are not for me and just put most of your mad money, that's the cash you invest that's not part of your retirement portfolio, into a nice low-cost index fund or ETF. They have very low fees and mirror the S&P 500.
I said this before the break, too, but that's because it's good advice. Being a savvy stock investor takes work. Being a savvy index fund investor, well, let's just say it's relatively easy. Sure, if you manage your portfolio well, if you do the homework and stay disciplined, I think you can beat the S&P 500 with a diversified group of individual stocks. And I do like one or two overweighted, just, you know, but not everybody has that kind of time. Not everybody has that temperament. Not everyone is comfortable taking on more risk to chase a higher return. And that's perfectly fine, too.
See, you've got to do what's right for you. Call that suitability. What suits you? So, keep that index fund option in your back pocket. Now, assuming you really do want to try to profit from individual stocks, let's talk about how you can do that without the stock market taking total control of your life.
First, from the get-go, you need to accept that the best is the enemy of the good. There's no point in trying to buy or sell stocks at the perfect moment. Nobody's that talented. Even making the attempt will drive you nuts. You need to accept results that are good enough rather than trying to chase perfection. For example, if a stock you like gets hammered down from $60 to $50 and you pull the trigger, but then it goes down another couple of points before it bottoms and rebounds to $60, please don't kick yourself for making a mistake. You didn't screw up. You made a good pick. Okay? Yeah, you could have made a couple extra points if your timing had been flawless, but a win's a win.
Second, regular viewers know that I don't believe in the concept of buy and hold. I believe in the concept of buy and homework. Meaning you need to keep researching your companies after you own a piece of them. And if something goes terribly wrong, well, you may have to bail. I think it's a good idea to buy stocks slowly on the way down and sell them gradually on the way up. All this requires a certain amount of active management.
Please don't feel compelled to be too active, though. Now, the last thing you need is to be flitting in and out of stocks with every gyration in the broader market. You want to be an investor, not a trader. You think you can time things perfectly and flit in and out, but most gains occur in concentrated bursts. So, you're liable to miss them if you're on the sidelines. Thank the great Peter Lynch for putting that in my head.
Again, if you've got the time and the inclination to trade, that's great. However, most people don't. When you've got a full-time job and you're trying to manage your own portfolio, you need to be willing to sit tight with the stocks you believe in. There will be selloffs. There will be rotations out of one group and into another. There will be crazy action on a week-to-week and even day-to-day basis. You don't have to constantly adjust your holdings based on these moves.
If you believe in the stocks you own, and you shouldn't own anything that you don't believe in, then you should be willing to stick with them when the backdrop gets tough. Ideally, you'd be able to trade in and out. But like I told you, the best is the enemy of the good.
In reality, when everybody's panicking over the latest crisis, you're going to be tempted to panic, too, and just sell everything. Get out now. You might even avoid a substantial decline by bailing on the whole stock market. Sooner or later, you're going to need to get back in. The whole point of sidestepping a decline is to sell high and buy your favorite stocks back at a lower level. Unfortunately, again, it's really hard to nail the timing here. Do you see my theme? It's I don't want you to do the impossible.
If you dump everything, there's no guarantee you'll be able to buy your stocks back before something changes and the market comes roaring back. Witness when the market bottomed in October of 2023, when long-term interest rates peaked and started heading lower. Well, something almost nobody saw coming.
What's the solution? If you don't want to give yourself a panic attack every day, keep doing the homework so you know what you own. When your stocks surge higher, use that opportunity to ring the register just on part of your position. Raise a little cash after a 20% move or more. You need to take something off the table. That's my limit these days. When your stocks get hit, put that cash to work buying more shares at lower prices. But you don't have to nail every short-term top and bottom.
Let me give you the bottom line here. To trade or not to trade, that is the question. If you're trying to be an investor who doesn't need to stare at the tape all day long, it's nobler in the mind to suffer the slings and arrows of outrageous fortune. You don't need to be perfect at managing your money. You just need to be good enough. And that means you shouldn't waste your time trying to anticipate every little gyration in the market. Take a page from Jimmy Chill and relax. Mad Money's back after the break.
Hey Jim, your mission has been very successful in our family. I listen to your show multiple times a week for investing knowledge. I just want to say thanks. I love your show. Thanks for always looking out for the little guy. A huge thank you for all you've done to make me a better investor. I got to call Cramer because I can't make a move without this guy.
I want to make people better investors. If they make money, fantastic. Let's go to work.
The stock market talks to me, and I mean that figuratively, not literally. Contrary to what you may have read on X, formerly known as Twitter, I do not hear voices. Although periodically I think that my left molar crown does indeed play music, but that's not what we're talking about here. I'm constantly listening to the tape, not music, to get a read on what the big institutional money managers are up to. And to do that, I need to separate the signal from the noise.
What do I mean by that? Okay, on any given day, there might be monster moves in individual stocks. It's tempting to assume that all these swings are equally significant, but some are a lot more meaningful than others. So, when you see the cloud stocks getting killed, for example, the natural conclusion to draw is something must be wrong with the cloud. When a really loathed group bounces, it's not much of a stretch to assume that the pain must be over. The house of pain.
But that's too easy. The truth is, some of these moves are a signal and some of them are noise. Signal means something. It tells you that the stock will probably keep moving in the same direction. Noise, on the other hand, well, is noise. To borrow my favorite line from Macbeth, noise is a poor player that struts and frets his hour upon the stage and then is heard no more. It is a tale told by an idiot, full of sound and fury, signifying nothing.
In short, while signal carries a message, there's no real takeaway from noise. In another life, Shakespeare would have been a dynamite investor. Distinguishing the signal from the noise is as much an art as a science. So, how do you tell when a major stock swing heralds something larger? Before we get into what makes a move meaningful, you need to understand that we get major single-day advances and declines with no real significance all the time.
Good stocks can get ahead of themselves, rallying too far too fast before selling off. The technical term for this is overbought, and chartists measure it with the slow stochastic oscillator or the Williams percentage R oscillator, named after the legendary Larry Williams we talk about a lot when we go off the charts. When something's overbought, it means pretty much everybody who wanted the stock at a given level has already purchased it. Even the highest quality company can have an overbought stock. And when you run out of buyers, you almost always get a pullback.
But this kind of overbought sell-off doesn't tell you anything except that the stock in question needs to take a breather and digest its gains. At the same time, even bad stocks can rally, and for similar reasons. If they get oversold because they've come down too quickly, you tend to get a nice oversold bounce. Once again, though, this is the sort of rally that doesn't convey much information. It's noise. A stock gets oversold, it bounces, and unless something else changes, it can go right back down once it works off the bounce.
I bring this up because when you see dramatic swings in individual stocks, your mind will try to draw a connection to the fundamentals, the real-world facts about how the underlying company's actually doing. Sometimes that connection genuinely exists. Other times the action in the stock is noise, not a signal, and you'll end up feeling very foolish if you take your cue from that kind of action.
Those who want to know more about this can go back to the canon on stock markets, and that's Confessions of a Street Addict, where I describe how easy it is to see a stock move a point...
and convince yourself something's really happening underneath. It's a really funny part of the book. All that really happens is that you have more buyers and sellers at a given moment, in a way that might be totally unrelated to the actual company. I demonstrated that a long time ago with a stock called Stride. It's pretty funny. Hey, by the way, this is something we're constantly walking you through with the CNBC Investing Club. Of course, it's not just the technicals. There are plenty of other reasons why a stock might explode higher or melt down that have nothing to do with the fundamentals. Sometimes the market simply makes a mistake and then the mistake gets rolled back. No greater significance. Maybe people misinterpret a good quarter as a bad one, something that happens quite often during earnings season because there's so many things happening at once. Maybe money managers are dumping stocks in one group purely to raise money so they can buy in another. Yeah, one that's hotter.
So, what kind of action carries real significance? How do you know when a big move is foreshadowing something even bigger down the line? All right, there's a lot of signal that's pretty obvious. A company reports a blowout quarter and the stock soars. Obvious. An analyst cuts estimates and the stock plummets. Obvious. That's just business as usual. Now, I prefer to look for the unusual. A company catches an analyst downgrade and its stock goes up. Interesting signal. Counterintuitive. In my experience, when a stock refuses to go lower on bad news, it often means it's putting in a bottom and is ready to rocket higher. By the same token, when a company reports a fantastic quarter and it gives you great guidance, a bullish call, and the stock gets slammed, well, look, that's the kind of signal I'm looking for, too. It means Wall Street believes this company's looking at its last great quarter. When your stock falls on positive news, well, you may be looking at the top.
For the most part though, you can't decipher hidden messages in the way stocks are trading. Except in some rare cases, you probably shouldn't even try. It's important to know what's working and what's not working in any given market. But you can't let your money management decisions be completely guided by what's in or out of style in the Wall Street fashion show. Otherwise, you end up owning stocks just because they're going higher. And that is a terrible place to be because you won't know what the heck to do with them once they inevitably start coming down. Here's the bottom line. When you're evaluating a stock, take your cue from the fundamentals of the underlying company. Don't put too much significance on day-to-day gyrations in the share price. Sometimes you can extrapolate a great deal from a big move in an individual stock, but more often it's telling you something you already know or it's just noise that means nothing.
Let's take calls. Let's go to Howard in New York. Howard, booyah.
Jim, this is Howie from the Bronx. First-time caller and club member.
Excellent. Thank you, my friend. Thank you, Howie. What's going on?
Every time I visit with my grandson, he looks at my portfolio because he knows I'm always watching Mad Money every day. And thanks to your 10:00 a.m. conference calls and your intraday alerts, he sees gains of anywhere from 60 to 200% on some of my stocks. Now, my grandson, he wants to be an investor, too. I hope. So, here are my questions. Okay, three-fold. When do I start to trim? How much should I trim? And more importantly, because I like these stocks so much and I believe in them, when can I get back in?
Okay, these are really great questions. They're fundamental because what happens is that we believe in discipline and we believe in conviction. Discipline must always trump conviction. That means that we like to start trimming 20% up, we'll trim between 5 and 10%, another 20%, same thing. If we really want to be able to be in shape to buy some back, we must do that. And that's how we play it. Otherwise, we let it run if we got our cash out. Holy cow. Ned in Ohio. Ned, booyah.
Five-star Professor Cramer, it's good to talk to you today, sir. How are you?
I am good, Ned. Thank you for calling in. How can I help you?
Yes, sir. Well, a couple months ago, I was listening to Warren Buffett and he talked about high-growth-rate companies that eventually forge their own anchor. He said the company keeps expanding and its shares keep rising. Would you explain that to me? And is Nvidia an example of that?
