Mad Money w/ Jim Cramer Play-by-Play Recap (8/6/12): Diversification By Strategy (Not By Sector)
Today on Mad Money, Jim Cramer talks about where bulls make money, bears make money, and hogs get slaughtered. Repeat after Cramer: “Sometimes I’m going to be wrong. Sometimes I’m going to be surprised. Sometimes my stock picks – just – won’t – work – out.” It’s a tough slice of humble pie to swallow, but it’s true. Some things are out of our control, some things are in our control, and regardless, there’s still a chance you will lose money. But despite the madness that is Europe, and many other things, Cramer doesn’t recommend being pessimistic all the time.
Cramer talks bout your “worldview” where you have to assume and expect something will go wrong somewhere, but that doesn’t mean being negative ALL the time will lead to prosperity. “There might be more risk involved when you invest in stocks, but there could also be more rewards. He cites APPLE as an example. Back in 2009 when it bottomed out, if you had given up on it then, you would have lost out on the AAPL’s +500% gains today in 2012.
So as an investor, how do you expect the unexpected? Regular viewers will immediately know the one-word answer to this question: DIVERSIFICATION.
As Cramer has preached many, many time before, no one sector should make up more than 20% of your portfolio. If you own five stocks, only one can be a tech stock, only can be an industrial, only can be a financial, only one can be a food & beverage, and only one can be a health care. But being diversified by sector alone is no longer enough.
Tonight, Cramer introduces a NEW diversifiction method to protect investors during these MAD market times. You’ll need to cover these five areas for “maximum protection, and maximum upside”:
2. High yielders
The most important category of these five? Yield. In fact, “owning multiple high-yielders can actually be a good thing.” Cramer recognizes these kind of stocks aren’t “sexy” but these make the money. Buying high-yielders and reinvesting the dividends will give you “compound in returns”. In other words, more money over time as the capital appreciates. AHY’s, or Accidental High Yielders, is one of Jim’s faves. These are stocks that yield over 4%, and are “fabulous bargains in the long term.” Sometimes, however, a very high-yielding stock could be a warning sign that the dividend is unstable. Case(s) in point: RadioShack and SuperValu. In these cases, the payouts were cut. So how do you tell if a dividend is secure? 1. Look at a stock’s earnings per share. If a company has twice the earnings of it’s dividend payout, then it can sustain it’s divident and should be secure. 2. Look at the cash flow, it’s a good sign of the health of a stock’s dividend. 3. Look at the balance sheet. Make sure there isn’t a lot of debt that has to be paid out that will decrease the dividend. 4. Look at how to collect the dividend. Watch out for the “must own date”, the last day you have to buy the stock before you can claim it’s next dividend payout. The bottomline: Make sure to keep at least one high-yielding stock in your portfolio.
Mary in MI on the “Dividend Bubble”: Cramer says it’s not something he thinks really exists.
Ron in TX on knowing when to get out of owning a stock: Cramer says if there’s a sudden decline in cash flow, or a CFO leaves, then that’s a sign to get out.
Let’s get to the growth stocks, especially a secular growth stock. A stock that will keep growing higher and higher independent of the economy because “they’ve got something special going for them” like Apple or WholeFoods. How do you analyze a growth stock? Take a look at the stock’s EXPECTED FUTURE EARNINGs: (P)rice = (E)arnings X (M)ultiple. In other words, E times M equals P. Solve for M (“what investors are willing to pay out for a company’s future earnings”). But if a growth name loses it’s mojo (just like Chipotle) it could last for years, and the “M” just sinks. Sell, and then catch it later instead.
Logan in TX on a stock’s negative PEG Ratio: Cramer says he likes it for traditional earners but not for one’s who don’t have earnings.
Frank in PN on “risk on risk off” stock: Cramer says this is just an offensive term for him as it vaguely relates to some hedge fund gibberish. It’s just confusing, and not used in “Cramerica.”
Cramer’s next tip: SPECULATE. Despite and against graybeards’ wisdom, Cramer sees speculation as something of a necessity. The so-called experts want you to stick with index funds and the like because, as Cramer says, they think you’re “brain dead” and can’t even “pick your own nose.” Cramer says their advice (against speculation) is all BOGUS and lacks the HUMAN ELEMENT of investing. Cramer wants you to pick some stocks too because by now, you should know how to do it right. Boring stocks will lead to boring investing. Then you won’t do your homework, you’ll lose your fire for the game, and eventually, you’ll drop out. That’s where speculation comes in. With high risk and high rewards stocks, you won’t be bored and your head will always be definitely in the game. That’s what ultimately makes you a better investor – when you’re always in the game.
Try out a single digit stock since many of the big boys won’t touch them. This provides an awesome opportunity for you to benefit from what Cramer calls “classic mispricing.” Take for example stocks like Ford, Sally Mae, or Sprint which all either started or sank below to the single digits are now back up double or triple. In short, if you went down under dumpster diving, you came back up with doubles or triples. When you speculate, you’re not looking for buy-and-hold. The bottom line: own something speculative that “captures your fancy” and “potentially all you to rack up gains.”
Let’s talk stocks that are geographically safe. Sometimes that means investing in a homegrown, dometic stock (like right now with the troubles in Europe) and sometimes that means a foreign, international stock (when things here at home aren’t going so well). As Cramer sees it now, however, he advises investing in the U.S.A. “all the way.” Some of his picks: AT&T, Verizon, Dollar General, Dunkin, or even the IYR.
The last area of Cramer’s new diversificiation plan is investing in gold. When things go to hell, gold rises up to the heavens where the streets are said to be laid in gold. Stick with gold to guard your investents when they fail. Gold helps to minimize your risk on the down side. So how should we own gold? Cramer says the easiest and least riskiest way is through SPDR Gold Shares (GLD). But the best way? If you’ve got the money, invest in bullion itself, and Cramer really likes it. Cramer isn’t too positive on the gold miners, however. Stay away from them. The bottomline: own gold as it’ll act your portfolio’s insurance policy.
Check out Jim Cramer’s past advice and stock picks on Nerdles’ Mad Money archives HERE.
Image credit: Mad Money