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 Craig Friends. I'm just trying to make you a little money. Now, my job is not just to entertain, but to teach you. And that's what we're doing tonight. So call me at 1-800-743-CNBC or tweet me at Jim Cramer.
Yes, tonight I'm letting you in on something big: the method to my madness. I believe that you can do everything I do at home if you're willing to put in the time and effort. Investing, specifically investing in individual stocks, but running your own portfolio rather than dumping your money in some buy-and-forget index fund, is something I am confident all of you can do by yourselves.
I always emphasize the homework, and I help you do the homework for my charitable trust stocks if you join the CNBC Investing Club. In the old days, my rule was that you need one hour per week per stock. These days, though, the research is so readily available online that I'm willing to count it as less than an hour a week for a portfolio of five stocks. Say a few hours if you own 10 stocks, unless you belong to the club itself, and you'll have a much easier time and cut down how much more homework you have to do because we do it with you.
Investing is more than just 10 stocks. Then I get worried because that can be difficult unless you're managing money full-time. Of course, if you don't have the time or the inclination to pick stocks, then you are better off parking your money in a low-cost index fund that mirrors the S&P 500. And I like those. They're good. I'm in some.
But if you're willing to put in the work, regular people can trounce the averages as long as you're disciplined and you follow the rules. Rules we constantly highlight as part of the CNBC Investing Club. How do you start? Well, that's what we're talking about tonight. Like I said, the show is all about the method or methods to break from strictly quoting the bard to my madness. How do I pick stocks? What gets on the show? How do I tell you some stocks are worth buying in a dip and some aren't? Those are the questions that people constantly ask me. Tonight, you're going to get a piece of the answers.
The truth is that I've got far too many methods, far too many ways of picking out great stocks to ever cover all in one show. But I want to give you some of the tools of my trade, enough so that you can start to pick stocks like me on your own. Remember, I want you to be a manager, a great manager of your own money, because you can focus on a smaller number of names while I have to follow practically everything for the lightning round.
At the end of the day, this show is about educating you, giving you the ultimate insider's perspective on how the market works and how it can help you try to make money. I'm not here just to dole out stock picks like the proverbial fish you give a man if you're too lazy to teach him to shop for fish at Whole Foods. What I'd really like to do is empower you. And that starts with me teaching you all the many tricks I use to pick out great stocks and invest in them like a pro.
Methods that have served me well for more than four decades and that allowed me to generate a 24% annual return after fees for 14 years at my old hedge fund. Not bad, three times better than the market. These skills are what refresh this show and guide me as I manage my charitable trust. Now, a learning exercise that you can follow, of course, by joining the club. Now, let's get rolling.
One of the easiest ways to identify potential Cramer names, the stocks that could possibly, I should possibly own but not necessarily end up on the show, is by watching a list that comes out every day. It's called the new high list. Stocks in that illustrious list, the highest of the high, obviously have something going for them. And that's especially true when the market's in bad shape, as only the best of the best can hit new highs when the averages are falling apart.
So what does it tell you when a stock's on the new high list? Either that it's part of a broader bull market because its sector is on fire, or the company itself has some serious earnings or sales momentum. No matter how they get there, many stocks on the new high list often keep going higher because it's a kind of a list of A students that are worth betting on. They tend to keep getting straight A's on every quarter, just like the real smart kids in school in a great bull market.
We see this over and over and over again. The same stocks would hit new high after new high after new high, and following them was a terrific way to make money, even as the bears claimed endlessly that the bull market was false and couldn't be trusted. Listening to the bears has caused you to miss out on some of the greatest rallies in history.
Of course, I'm not saying you can just chase any stock that's hitting new highs because they'll keep going higher. That would be the ultimate in foolishness, true bozo, the clown behavior. I am saying that if you want to identify potential winners, unless there's been a stunning sea change in the market caused by changing interest rates, possibly the political environment, then a good place to start, a wonderful place to start, is the new high list. Emphasis on start.
See that? That's the thing about the market. It's not always that hard to play once you understand that there's often more continuity than change. Things pretty much keep going the way they were going until something major shifts, and then you have to alter your course. Those course changes, they can be pretty radical, though, and that's why you always have to be re-evaluating your ideas. And you should never dig in your heels when the facts change.
Something I emphasize over and over again when I send out these investing club bullets. Now, I rarely recommend buying stocks straight off the new high list unless there's some special circumstances. Circumstances I'm going to talk about later tonight. What I like to do when I'm hunting for stocks, and what you should do, is wait for something to pull back from the new high list, because that is the best place to start buying.
The new high list is not a shopping list. It's an inspiration list. You keep an eye on those names, then wait for them to come down so that you can pull the trigger.
The pullback, ideally 5 to 8%, 5 to 8%, gives you a good lower price entry point in a stock that likely has a lot of positives going for it, that maybe has been pulled down by an overall move in the stock market. That's been the optimal level I found. Less than 5%, you're probably too early. More than 8%, and it's more likely that something's gone wrong, very wrong, maybe even with the underlying company.
Pouring over the new high list is a fabulous way to identify potential, and I stress that, potential stocks to buy. You only buy stocks that have pulled back from the new high list if you're confident they'll make a comeback for substantive reasons unrelated to the broader market. Okay? Unrelated to the broader market, but related to your stock. You need to do all the same homework you ordinarily do before buying a stock. You absolutely must have conviction.
Even if it's a cynical conviction, stocks going higher, that it deserves to go higher. And the biggest caveat of all: when you're shopping for stocks that have pulled back from their highs, make sure they haven't pulled back for a good reason. The selloff needs to be extraneous to their business. Don't go buying a home builder that's down because interest rates flew up, because that could genuinely hurt the numbers.
But if a big pharma stock gets hurt by higher rates, there's nothing to do with their earnings. So maybe it's worth buying. Be certain you're dealing with a momentarily damaged stock and not a troubled company that's going down, down, down. How can you tell the difference between a damaged company and a damaged stock? The fundamentals haven't changed. The stock probably hasn't fallen from grace. It's pulled back for mechanical reasons, profit taking, or some panic in the market in general.
Now more than ever, stocks are traded like commodities by ultra-leveraged hedge funds, frequently causing huge sell-offs that make no sense whatsoever. So you'll see high-quality stocks pull back off their highs for unrelated reasons to their core business. But if the fundamental picture changes, if whatever made that stock attractive as it climbed its way up to the new high list goes away, then that stock is no longer a candidate for your portfolio. The story has to be intact, or this method won't work.
Here's the bottom line. That's the first method to Cramer's madness: watch for stocks that have pulled back from a pre-selected list, the new high list, especially because a broad market selloff is sometimes a great opportunity. Some of my best picks for the club have come out of the process, and hopefully some of yours can too. Let's take some calls. Let's go to Andrew in Georgia. Andrew.
