|
 |
|
Login to access the members site. |
|
 |
Saturday, 07.31.2010 |
|
| Mad Money: Watch TV, Get Rich |
|
|
|
Product Details
Notes
INTRODUCTION
there's no such thing as "the market"
it's really a very small group of large institutions
this includes hedge funds and mutual funds
they determine stock prices because they control so much of the money
CHAPTER 1 - KNOW YOURSELF AND YOUR GOALS
first you need to know yourself and your goals
younger people can take more risk
but they also have less experience in managing that risk
the two questions to ask are:
1) How old are you?
2) How much money do you have in the bank, and what's your income?
never put more than 20% of your discretionary income into speculative stocks
that means money that you're not saving for retirement
you should have at least $10,000 that you can afford to put into stocks
you also need to know your temperament
you have to keep yourself distanced from the bad days
also know your time horizon
don't just buy and hold, do at least one hour of homework per stock per week
the shorter your time horizon, the more time and effort is required
four types of stocks:
1) risky, speculative stocks
2) stocks with high growth
3) stocks with consistent growth
4) value stocks
high growth stocks are the riskiest of the nonspeculative stocks
the stock should be growing its earnings at 20% of more annually
these stocks will make more, but they can also crash
consistent growth stocks pay dividends
they don't make as much, but they are less risky
value stocks are inexpensive, they've been put on sale for the wrong reasons
these often pay high-yielding dividends
value investors have a longer time frame than growth investors
you must be able to explain why you think the stock will go higher
you can own all four types of stocks
but the amounts depend on your age, wealth, and personality
CHAPTER 2 - DO YOUR HOMEWORK
do not buy stocks in after-hours trading after watching the show
the only people who will sell to you are short sellers
do not use a market order, that lets your broker buy at any price
don't buy a stock within 24 hours after Cramer recommends it
this is the same as a market analyst, don't buy as soon as they upgrade
give it a week or two to find a good entry point for the stock
the first 24 hours is for you to do your homework on the stock
first, jot down notes on why Cramer recommends it
then look up the stock on the internet, Yahoo Finance, TheStreet.com, etc.
homework steps:
1) learn precisely how the company makes its money
2) list all the possible things that can affect the sector or industry
3) examine the recent performance of the stock and company
4) compare the stock to its competitors for any threats
5) look at the income statement, balance sheet, and cash flow statement
step 1 - how the company makes money
read the 10-K annual report in the SEC filings
read the 10-Q quarterly report for the last four quarters
an example is Boston Chicken
most of their money came from lending to franchisees and then gouging them
Lucent made half its profits from interest on its pension fund
IMAX made money by selling parts of the company and getting deposits back
step 2 - analyze the sector
half of what a stock does is totally dependent on its sector
there are two kinds of good and bad when it comes to sectors:
1) events that hurt or help actual companies
like higher interest rates or higher oil prices
2) stock-market-specific trading factors that help or hurt stocks
like fund managers moving money into defensive stocks
secular growth stocks are things like PepsiCo, J&J, P&G
step 3 - check out performance
go through newspaper articles and quarterly filings
see if this stock is consistently a bad performer
understand if it's a turnaround story and if so, why would it do better
step 4 - check the competition and do a valuation of the stock
there are a lot of monopolies in different industries
if you find a similar competitor, compare the two companies
this can help determine how much each company is really worth
earnings means profits, a stock's multiple is the P/E or price-to-earnings ratio
P/E is the price of the stock divided by the earnings per share
companies in the same business usually have similar P/E
don't pay more than twice growth for a company
if a company's earnings are growing at 10%
then don't pay more than 20 times earnings, or a P/E of 20
always look at the forward earnings estimate
Yahoo shows the trailing-twelve-month earnings, which isn't as useful
companies gives estimates, but you need to look at what the Street expects
this is determined by the analysts, not the companies
click on Analyst Estimates on the left side of Yahoo Finance
remember that the stock price itself is less important than the P/E
PEG is P/E divided by company's growth rate
compare PEG of different companies to see which one is really cheaper
if the PEG is more than 2, the stock is too expensive for most fund managers
compare companies with similar growth rates and measure the PEG
use next year's growth and next year's earnings estimates
since this is what the big fund managers do
step 5 - check the balance sheet and cash flow statement
make sure the company has no debt, or the cash to pay off debt in time
look at the debt on the balance sheet
compare the total assets and liabilities to see if it's positive
then look at the cash flow statement and see if debt is being paid off
if money is being borrowed, make sure the company can afford it
CHAPTER 3 - USE LIMIT ORDERS AND BUY INCREMENTALLY
you must own at least 5 stocks to be diversified
no more than 20% of our portfolio should be in any one sector
so that means out of $10k, you invest at most $2k into a single stock
generally, you want to buy $500 at a time, not $2k all at once
also watch the stock for the next week or so and buy on a dip
if it keeps going up, don't wait forever, just buy it if you've done your homework
don't do a market order, that could end up costing you 1-2% more
generally don't set your limit more than 15 cents above the last bid
always set your limit order to expire at the end of the trading day
keep watching it and buy another $500 whenever you see weakness
now once you own a stock, you need to one hour a week of homework on it
check the stock price once a day
the main goal is to make sure that all the things you liked are still true
step 1 - make sure earnings are okay
see if the company revises its own earnings forecasts
or if analysts change their forecasts
step 2 - make sure your reason for owning the stock is still true
read relevant newspaper articles and verify your thesis about trends
step 3 - see if there are any changes in the sector
news about other companies, or macroeconomic factors
the price of wealth is eternal vigilance
CHAPTER 4 - SELLING STOCKS THE RIGHT WAY
selling is a personal decision, it depends somewhat on your goals
you sell stock to either take profits or cut losses
if a company's fundamentals have gone down, you can't just hold on
you need to do an objective analysis and not sell based on emotion
in the same way, if the stock price goes up, don't get attached to owning it
if you have a 50% gain, sell at least 1/3 of your stock
even if you think that stock is going higher
guideline 1 - try to keep the monetary value of your position the same
so if you bought $2k and it goes up to $2500, you can sell off $500
guideline 2 - set a target price for where you think a stock is going
this is not the same as the top, it should be below the top
take your profits while the stock is going up
compare P/E and PEG multiples with competitors
if the company is undervalued, calculate the target based on its peers
or if you think earnings estimates will go up, calculate the target from that
note that "the market" (fund managers) will value growth differently over time
depending on the economy and other big trends, things will change
so compare a stock to not just its sector, but to other growth companies
that will help you set a target price based on the overall market
guideline 3 - when the price hits your target, don't think it's going higher
unless you have a reason to revise your target price, be ready to sell
guideline 4 - when you stop thinking a stock will go higher, sell it
don't dump it all at once, sell it incrementally
if you think it's going to drop, sell faster but still in increments
guideline 5 - sell at least some stock if you gain 10%
sell a sizable portion if you gain 20%
sell half of your position if you gain 100% (if the stock doubles in price)
guideline 6 - you should always be eager to take profits
don't be greedy, don't be a pig and try to ride it to the top
if the reason you had for buying a stock stops being true, get out
you have to be able to explain to someone else why you like the stock
if a company lowers its guidance or earnings forecast, that's bad
it can cause a wave of downgrades from analysts
you want to sell before that wave hits
other warnings are when big executives leave a company for no reason
you should be eager to cut your losses
there are always lots of good opportunities in the market
everyone tends to want to hold on to both winning and losing stocks
but you have to be disciplined about selling
replace bad stocks with good ones constantly
try to sell into strength when you can, but don't wait forever for a rally
CHAPTER 5 - THE "LIGHTNING ROUND"
first thought is always, what sector is the stock in?
you're looking for a growth sector where the entire industry is expanding
the ideal stock is growing faster than its competitors, but with a lower P/E
generally, you want to sell a mediocre stock and buy the best of breed
look for the top performing company in the sector, even if it has a high P/E
BRIC = Brazil, Russia, India, China
some sectors respond to international factors and the Federal Reserve
some industrial stocks are tied to BRIC
some stocks are cyclical and you have to know where you are in the cycle
in general, companies that do business in the BRIC will go better
that's because every BRIC country has a fast-growing economy
high economic growth is good for cyclical, industrial stocks
read the 10-Q or 10-K to see a breakdown of sales by region or country
if a bunch of IPOs are happening, a sector may drop due to higher supply
also if one company has an earnings shortfall, similar stocks may drop
so if you see these kinds of events, wait for the drop before buying
small, speculative stocks are sometimes heavily shorted
this can result in a "short squeeze" if any good news comes
then all the shorts will have to cover their positions and send the price higher
so buy a heavily shorted stock if you think it will go up
also buy a stock that you think will get an upgrade from an analyst
similarly, sell any stocks that you think are getting a downgrade
if an analyst had a sell rating on a stock and it went up, they'll upgrade it
same thing if they're positive on the stock and it drops, they'll downgrade it
a company may report good earnings, but the upgrade might come later
so you can sometimes buy in between those two events
the last thing to consider is the management of the company
if it's good management, you can buy the stock if it also has growth
remember that half of a stock's movement comes from its sector
obscure stocks tend not to be best of breed
so they probably won't stand out if the whole sector is going down
sector analysis is the key method to learn
CHAPTER 6 - THE LIGHTNING ROUND HOME GAME
step 1 - know what all the sectors are
an example of a sector is technology
subsectors include internet, semiconductor, PC, software, devices
step 2 - form an opinion about each sector and its subsectors
you must update your opinions frequently since the market keeps changing
step 3 - rank the stocks in each subsector
at a minimum, form an opinion about which stocks are best of breed
remember that best of breed can change day to day
know what's best of breed in each industry
then find a stock in the sector that you think is a takeover target
and find one that might be the best speculative stock in the sector
do you regular weekly homework first
learning all the sectors will take a lot more time
the main goal is to own 5-10 stocks in a diversified portfolio
the Lightning Round is more to become an expert
sectors:
aerospace, automobiles, consumer goods, defense contractors,
financial, food and beverage, health care, housing, industrials,
metals and minerals, oil and gas, paper and chemicals, retail,
services, technology, transports, utilities
these are very broad categories, so you must break them into subsectors
like internet is really different from semiconductors
so you really want to know the best of breed in each specific industry
Standard & Poor's uses 147 different subgroups for industries
you should know about 50-60 different industries
start with what you know and focus on those areas
note that the tech sector is constantly changing so it's harder to predict
most sectors follow some sort of business cycle
you can follow trends and cycles, but you must learn to be flexible
aerospace has a cycle of roughly 7 good years and 7 bad years
this is because it's a cycle of airplane replacement
know the reasons behind each business cycle
government spending can also affect various industries
practicing your own Lightning Round means knowing lots of sectors
you have to constantly update your information and opinions
this gives you experience and makes you a better investor overall
now for the sectors you like, you need to pick the best of breed
you may also want to look at the best of breed in sectors you hate
because one of those sectors may turn around quickly
you'll get practice in comparing stocks and understanding the whole sector
CHAPTER 7 - WHY AND HOW YOU SHOULD WATCH CEO INTERVIEWS
publicly traded companies can't say anything other than press releases
so CEOs aren't allowed to disclose any information or news
but most CEOs get paid by the performance of the company stock
so they're always going to be pretty optimistic in an interview
they're like politicians, they'll always try to sell their company to the public
sometimes a CEO has something to lose by coming on the show
in that case, he might really have a great stock
if a CEO says he's planning to buy back stock, that's a great sign
you also want a CEO who will refute criticism point by point
some CEOs will have tempered enthusiasm, you need to hold long term
so look for these if you're a long term value investor, not a growth investor
remember that not losing money is at least half of investing well
in general, you need to be right about 60% of the time to do well
if a CEO doesn't match the enthusiasm you'd expect, watch out
a CFO will sometimes admit the stock is bad because they know the numbers
a CEO who is too cocky in an interview isn't preparing for any downturn
also watch out if a CEO dodges a tough question, that can be a bad sign
if a CEO criticizes a competitor, that other company may really have problems
CHAPTER 8 - NEW MISTAKES, NEW RULES
the secret now is looking at the big institutions that make up "the market"
rule 1 - resisting the business cycle is futile
institutional investors sell secular growth stocks when the economy is strong
and they sell cyclicals when the economy is weak
if the institutional investors think a stock is cyclical, that's all that matters
even if it really isn't cyclical, they'll sell it like it is, and that will affect the stock
rule 2 - there's a market for everything, pay attention to it
don't think of stocks as representing shares of a company
stocks are traded in a market and valued differently by different people
for example, too many dot com IPOs met limited demand from buyers
the big investors will only have a certain percentage of shares in a sector
so if lots of companies in a sector go private, prices will go up
if too many companies go public in a sector, prices will drop
when there are too many IPOs, the later IPOs may have less demand
you can't trust companies that are coming out of a leveraged buyout
rule 3 - it's not enough to do the homework, you have to do the right homework
different kinds of trades and investments require different kinds of homework
if you're investing for 18 months, look at the company's fundamentals
if you're investing for a month, look at the specific catalyst to drive the price
an earnings report will often affect a stock, so study that quarter in detail
rule 4 - Latin America is always a trade
the institutional buyers will trade this region, but they won't do long term
so it's not a long term investment, because they think it's too unstable
Latin American stocks also trade as if they are levered to the U.S. economy
this is different from investing in Brazil, Russia, India or China (BRIC)
you want to buy American or European companies that sell to Brazil
but don't buy Brazilian stocks as a long term investment
when you have a big gain in a Latin American stock, sell all of it, not just some
rule 5 - don't be afraid to say it's too hard
some things like restaurant same-store sales are too difficult to game
there are hundreds of ways to make money in the market
but not everything is worth betting on
hedge funds will bet on anything, but that adds volatility to the whole market
rule 6 - not all companies that product commodities are interchangeable
you might think oil producers, or copper or nickel are all the same
each individual company could be poorly run or have other problems
rule 7 - past performance is not an indicator of future success
when you make money in sector, you tend to try to push it more
remember that every trade and every investment is different
don't assume if you make money with one stock, similar ones will also work
it's natural to want to try to have a streak of wins, but that can lose you money
evaluate each stock on its own merits, not just by the sector it's in
rule 8 - never borrow based on borrowed convictions
don't buy just because of a CEO's belief in his company
and don't follow an analyst of group of analysts blindly
do your own research and make sure you know why you are buying
don't get caught up in the emotions of others, analyze it logically
rule 9 - when you're playing a big rally, make sure your stocks fit the bill
sectorwide rallies rarely ever happen unless they're part of a sector rotation
if you hear about a "tech rally" you still need to find the specific stock to buy
figure out why there is a rally and which companies are driving it
rule 10 - don't try to smash iconic truths, try to make money
the conventional wisdom is conventional for a reason
institutional investors may sell stuff out of cautious fear
that's different from panicked selling, and there might be a good reason
CHAPTER 9 - TEN LESSONS FROM SUCCESS
there are no talented investors, just people with the right disciplines
a trade means you know your exit strategy ahead of time
an investment just means you will figure out when to exit as you go
today there are few stocks worth owning more than 18 months
things are more volatile, so even a good company can get hit at times
rule 1 - follow the street's lead, most of the time it works
when a stock goes up or down without significant news, people are acting
the institutional investors are buying or selling, and you can follow them
you still have to do your homework, but this gives you more information
look at the new-high list for the NYSE or NASDAQ
remember that the big money managers are creatures of habit
if a type of stock has been doing well for them, they'll look for similar stocks
rule 2 - how to be contrarian and still make money
you must have a reason why you think people will change their mind
if the institutional investors hate a stock now, why will they love it later?
maybe because you think the earnings will blow away expectations
the big investors might be hesitant on a stock because of bad similar stocks
you have to guess if they'll change their minds after the company does well
rule 3 - the street is never bullish enough on good stocks
similarly, it's never bearish enough on bad stocks
analysts are generally too conservative on their recommendations
the reason is that they are assigned to cover one specific sector
but they aren't allowed to have buy ratings on all the stocks they cover
they have to have some sells and some holds no matter what
so even if they are totally bullish, they have to look more conservative
rule 4 - don't be a snob
a lot of analysts and money managers are rich, so they miss some trends
they don't know about the cheaper products or smaller companies
look at local restaurants and stores that you think are doing well
these might be missed by the rich people in Manhattan
rule 5 - pay attention to politics, because the street is too focused on money
some companies can make a lot of money just through government funds
the street tends to focus on how the companies make money from products
but government spending can have a huge impact on big business
rule 6 - there's a rhythm to investing in small-cap momentum stocks
look for these early, then sell as the analysts all jump on board later
once it's trading at twice its growth rate (PEG > 2), get out
when there are four analysts praising a stock, it's too well publicized
rule 7 - use tips as a contraindicator
tips are for waiters, they are usually old news and can't make you money
if you get a hot tip about a stock, you might need to sell it
do your homework and see if too many casual investors are buying
rule 8 - hype plus massive short interest equals sell
any stock that's heavily hyped and heavily shorted should be sold
hype comes from analyst recommendations and other useless promo
internet stocks traded off hype in the news without real value
go to Yahoo Finance and click on Key Statistics to find short interest
look under Share Statistics for the short percentage of the float
the float are the shares that are listed and publicly traded
anything over 10% is a high percentage, and 20% is astronomical
a short squeeze is when a stock goes up and the shorts cut their losses
if the shorts are right, the stock price will fall
the shorts are right about as often as they are wrong
but if all the analysts love a stock the shorts hate, the shorts are usually right
rule 9 - know how to spot downturns in cycles other than the business cycle
it can take 3 months for the street to recognize that a cycle has gone bad
follow the money, if orders decline in a sector, the cycle might be turning
the stock price may have already come down, but get out if it's still dropping
rule 10 - look out for multiple contraction
growth stocks with higher P/E can get lower multiples during a slowdown
a high P/E is 30, and anything above 40 is astronomical
but make sure you compare this to the growth rate for the PEG
when a stock gets a lower P/E multiple, it gets cheaper
multiple contraction is when the P/E drops for a stock
if can be caused by the Fed raising rates, if people are afraid of inflation
also, during a slowdown, the big investors don't like to hold high P/E stocks
most high-multiple stocks don't get hurt until they report their earnings
they are priced for perfection, so when they aren't perfect, they get crushed
CHAPTER 10 - HOW DO I PICK STOCKS FOR THE SHOW?
read the Wall Street Journal, New York Times, Financial Times
USA Today, Investor's Business Daily, TheStreet.com
read the Economist, trade publications, and pay attention to Oprah
watch the 52-week high list and find stocks that had a recent pullback
if it's fallen 5-7% without a good reason, that may be a good buy
make sure it's in a good sector, and that it has momentum
another way to see Cramer's picks is to pay for ActionAlertsPLUS.com
not all the stocks will match up with the TV show, but some will
watch the show and notice the sectors he likes over time
also pay attention to which stocks he considers best of breed
CHAPTER 11 - EVERYTHING YOU WANTED TO KNOW ABOUT MAD MONEY
booyah came from a caller on his radio show, Real Money
in late-stage capitalism, commerce is driven by vanity
people want to buy things that make them look good or give them social status
bulls make money, bears make money, pigs get slaughtered
Vonage is a dog, it's the worst-performing IPO of 2006
APPENDIX A - STOCK WORKSHEET
step 1 - find out how the company makes its money
How did it make its money last year?
How did it make money last quarter?
Are these high or low quality earnings?
step 2 - what sector does the company belong to and how has it performed
What sector is this stock in?
What's the sector performance over the last 3, 6, and 12 months?
What forces tend to move stocks in this sector?
step 3 - how has the stock performed
How did the stock do last year?
Last 6 months?
Last 3 months?
Last month?
Last week?
step 4 - what do the comparisons tell you
Does this company face any threatening competition?
What is the P/E of this stock?
What is the average P/E of its competitors?
What is the PEG rate of this stock?
What is the average PEG rate of its competitors?
How much cheaper or more expensive is this stock compared to its peers?
How does it compare based on P/E?
How does it compare based on PEG?
step 5 - can the stock survive its balance sheet
How much debt does this company have?
How much debt does it have due this year?
How much free cash flow did the company have last year?
How much free cash flow will it have this year based on analyst estimates?
Will this company generate enough cash flow to pay its debts this year?
Can it pay its debts next year?
Will it have to sell assets to pay its debts in the near future?
step 6 - does this stock look like a good investment in light of your homework
Review all the previous steps and make a decision!
|
|
|
