Why you should always keep an eye on the prices of stocks you own or might want to own. From Jim Cramer’s Getting Back to Even by bestselling author James J. Cramer
Pay Attention to Price
When I talk about buy-and-homework, I mean a whole lot more than just doing the research to identify some stocks that are worth owning, and then following that up every week to make sure the thesis behind each of those stocks, the reason you liked it in the first place, is still intact. Most people, and most professionals, will then tell you to take a hands-off approach once you’ve made your purchase. As long as a stock’s long-term prospects are still sound, then, according to them, you don’t have to worry about any short-term gyrations in the market that propel your stocks higher or lower. In fact, and this is the part that makes absolutely no sense to me, they say that the way to make the most money is precisely by ignoring any short-term fluctuations in stock prices. These “seers” are willing to let you take any amount of pain, any beating the market can deliver, even if it means no gain. They are terrible dentists who don’t use Novocaine; they drill and drill and accomplish nothing, then tell you that you deserve your punishment. We would never tolerate their logic in any other endeavor save investing, and in Cramerica we don’t tolerate it at all.
This pain-but-no-realized-gain strategy seems insane to me because my investing philosophy is all about taking advantage of those short-term fluctuations to buy the stocks I like at cheaper prices than I should have any right to be able to get, and to sell them when they are driven quickly to unrealistically higher prices than I expect or deserve to get. It’s one of the basic strategies that allowed me to make fortunes for myself and my already rich clients at my old hedge fund, but somehow it, too, is heretical, as if the bank you put your winnings in knows the difference between short-and long-term gains and only lets you deposit those taken over years, not months or days. I am constantly berated by critics of my television show and readers of my numerous daily postings on TheStreet.com for telling people to ring the register on a stock, meaning sell some of it, that I had previously recommended or said positive things about. What these bizarrely angry critics don’t understand, along with most of the people who are trying to give you investment advice, is the notion that price matters. If I like Visa (V) at $50, and then it goes to $65, should I still feel the same way about it? How does that make any sense? My hate mail correspondents truly do not understand that the risk profile of an investment in Visa changes when its stock jumps 15 points. They are only seeing Visa the well-run, well-oiled machine of a company, not a stock that just spiked too high too quickly to be sustainable, and they’re not alone in making this kind of mistake. The Internet is practically filled to bursting with countless websites that exist solely to tell the world how I am a terrible person who gives criminally bad financial advice. I have to believe, if only to preserve my sanity, that a lot of the hate springs from the fact that I often do things like praise Visa’s fundamentals and recommend its stock at $50, only to tell people to sell shortly thereafter when the stock hits $65. That leads too many people to think I’m turning my back on Visa the company when I say to sell the stock, but the stock and the company are not the same thing. (Some viewers despise that register-ringing button I have, third in on the top row of my soundboard next to the bull and the bear on Mad Money. I keep it third from the left, in the most prominent position on my board, because I want to remind myself to hit it as often as we have big profits together, so as never to get greedy. That’s why the pig-squeal button is right below it and the guillotine sound right below that. The sequence must be obeyed at all times!)
Stocks are no different from any other kind of merchandise, yet somehow the expectation is that once you like a stock, you should like it regardless of price. I’m always prepared to get off the bandwagon when a stock has become too expensive for my taste, particularly if it’s been carried away by a moment of reckless market enthusiasm.
Instead of thinking of Visa as a stock, let’s think of it as a nice sweater that catches your eye at the mall. You go to the store, look at the $50 price tag, decide that’s a fair price to pay, and take it home with you. But what if you went back the next day, and all of a sudden that same sweater was selling for $65? Would you still pay for it?
Maybe, but you would have to think about it, because no one likes paying more money for the same piece of merchandise. That’s the logic we apply to clothing, houses, cars, television sets, widgets, but stocks we’re supposed to like the same at any price? Wrong. There is one big difference between shopping for shares of Visa in the stock market and shopping for a sweater in the mall: in the market you get a different price every day, allowing you to buy Visa when it’s a bargain and sell it much higher, as long as you’re patient and you pay attention. The market is Macy’s on steroids; sale today, regular price tomorrow, basement price the day after, and then severe markup the day after that. At Macy’s we would know to stay away from the markup days and buy on the basement days, saving tens of dollars. Why shouldn’t we do the same thing with stocks?
There are two ways you can approach your portfolio. You can listen to the experts who tell you to ignore short-term changes in price, or you can listen to me. Before the crash, I would have told you that the first strategy, while nowhere near as good as the second, would still allow you to make money, although you might have trouble beating the market. But now? If you’re struggling to get back to even, I don’t see how you can justify holding a stock through a short-term swing lower that you saw coming after a huge and unjustified leap up. When you desperately need to preserve every penny of capital you have left, any loss that can be avoided should and must be avoided, even if we’re only talking about sidestepping a relatively minor 5–7 percent decline. Then you can buy back the stock at a lower price. Making quick trades in and out of some of a stock that you consider a long-term investment may not feel like it’s your style, but style shouldn’t matter when you’re at the financial equivalent of DEFCON 2, if not DEFCON 1.
In practical terms this means that you always have to keep an eye on the prices of stocks you own or might want to own so that you can actively buy and sell them as they become cheaper or more expensive. You don’t have to be some sort of furious day-trader, or any kind of trader at all, even though many supposed experts who don’t truly understand the market would call this rapid-fire trading. I see this as active, intelligent investing. What’s the point of keeping your money in stocks if you aren’t trying to take advantage of the regular opportunities the market always throws your way? Standing pat through a beating that takes you from big gains to big losses is simply no longer a tolerable regime. You can’t do it and get back to even, regardless of the taxman or the possibility of momentarily higher prices.
I am simply talking about the level of personal investment you need to make your stock market investments pay off. I will show you how to put together what we can call your “getting back to even” portfolio. How to find the right stocks, how to know when to hold ’em and know when to fold ’em, how to understand the many things that have changed about the market, and how to recognize those things that have stayed the same. And believe me, it is a vastly changed market from the days before the crash.
ABOUT THE AUTHOR
James J. Cramer, author of Jim Cramer’s Getting Back to Even (Copyright © 2009 by J. J. Cramer & Co.), is host of CNBC’s Mad Money; cofounder of TheStreet.com, where he is also an online columnist; and “Bottom Line” columnist for New York magazine.
MORE ARTICLES BY THE AUTHOR
- How Stocks Are Meant to Be Traded
- The Basics of Building a Portfolio
- Spotting Bottoms in the Stock Market
- Why You Should Ignore the Three Golden Rules of Investing
- Read Chapter 1 of Jim Cramer’s Getting Back to Even
- Browse more books by bestselling author Jim Cramer