Cramer's advice

[Biggus Piggus]

Ironic that Cramer's teaching people how to preserve capital when last week he "called" the bottom of the market.

Today, Cramer gave his tips on how to keep from getting killed in the market while not simply getting out.  I'm going to comment on each.  I grabbed the summary from a Web site, so the numbered points are their wording.

1. Stay diversified- He advocated not having more than 20% of your portfolio in any sector and avoiding having "two-of-a-kind" at all costs.

It's hard for retail investors to know what two of a kind might be.  I run mathematical formulas to find unusual relationships, where two seemingly unrelated stocks tend to behave the same in response to external factors.  For you, just know this diversify thing is especially important the fewer the number of stocks you have.

2. Buy and sell slowly.

If you don't buy it all at once, your chance of wrongfooting yourself is less.  I'll add that you should be careful about buying on Friday rallies, or selling on Monday dumpers.  Or selling on Friday dumpers, buying on Monday rallies.

3. Your first loss is your best loss.

His idea is that you don't want a stock to wither away from you after the initial disappointment.  Don't be afraid of taking a loss when you obviously judged wrong.  The bigger the downdraft, the more people will be waiting to sell, the longer it will take the stock price to settle down.  I've been tolerant, very tolerant when I knew I was right about a stock, but usually if I buy then am down 10% real quick, exit just to be safe.

4. Dividends limit losses.

Historically true in general, not necessarily good in practice, as many of the riskiest stocks in recent times are/were dividend payers.

5. It's always good to have some cash.

Not if the market takes off on you.  Cash is a big drag on investment performance.  But here it's hard semantically to separate "cash in your stock portfolio" from "the cash you should have set aside prior to investing in anything risky."

6. Don't own too many volatile stocks.

Can be a load of crap.  Portfolio effect can take advantage of that, if the stocks are uncorrelated.  Volatility isn't bad IF you buy the stocks right.  One way to look at volatility that helps me--look at the spread between intraday highs and lows for the stock.  Look at a coupla weeks of daily high-low-close.  If that tends to be greater than 5% of the stock price, you may be taking on risk that you won't get rewarded for.

7. Know what you own.

Another way to say this is don't buy anything you can't understand.  If a company makes microchips, you need to know whether one customer is 40% of sales, and if that customer makes a product that might be faddish.  Great management and products are meaningless if customer-specific risk is scary.  A lot of this stuff is hard to learn, so don't bother.  Buy simpler stories.

8. Don't own low-dollar stocks.

Among the 600 largest stocks (by market cap) in the US market, the average intraday spread, high minus low, is about 2.5% of the previous day's stock price.  That dollar range averages about $1.20.

Among the 600 smallest stocks in the Russell 3000, the average intraday range is almost 5% of the previous day's stock price.  That dollar range averages about $0.50.

For small company stocks, the normal daily fluctuation in dollar terms doesn't change as much as you'd want, as the stock price goes down.  Seems like there's a minimum price of admission.  This is another way of Cramer saying to avoid volatile stocks.  Pffft.  Avoid bad stocks by knowing what you own and not buying anything that is in a downward spiral.  Volatility is coincident.  You can, though, manage risk/reward by avoiding stocks that move a lot intraday.

9. Accounting irregularities equals sell.

Can be the opportunity of a lifetime, but usually he's right.  Have to avoid risk of catastrophic loss.

10. Stay away for two good quarters following an earnings shortfall.

Not always.  Again, have to know the story.  If the shortfall was illusory, ignore Cramer's advice.  If mgmt got caught by surprise, he's right.

11. When your broker stops talking about a stock, it's time to sell.

I buy, typically, what they're not talking about.  How does that fit, Cramer?

12. After a big run, get defensive.

Squishy.  Squishy.  Squishy.  What's big?  I say have an idea up front of what you're trying to earn in a stock, and don't re-evaluate your holding period ad infinitum just because the stock's still working.

13. If a stock's dividend yield is twice that of Treasuries, sell it.

Right, means the Street believes the dividend's in serious jeopardy.

14. If a company has a new CEO, stay away.

Garbage.  Oftentimes it's the real catalyst. 

15. Never turn a trade into an investment.

How about, never trade, Cramer?  That's more pertinent to me.  Don't try to capture little moves.  If the stock works, you'll fall in love with it.  That's what he's talking about, but better you spend your time on identifying great companies.

16. Never sell call or put options.

Don't want limitless risk.  You can use options intelligently.  Not this way.

17. Never use margin.

Borrowing to lever up your stock positions is really risky.

18. Never buy a stock at its all-time high; wait for a 5% to 8% pullback before pulling the trigger.

Stocks within 85% of their six-month highs tend to outperform the rest of the market.

19. Play with the house's money.

Not sure what he meant here, maybe someone can remind me.

20. Keep your head clear.

When you're taking a bath, it's hard to stay objective.

21. Contribute to retirement accounts throughout the year.

More "don't buy all at once" stuff.  You could buy all at once and make the wisdom bad wrong.  You're not that good.  You're not.

22. Mutual funds should be diversified, too.

YES.  Amazing how many 401(k) plans offer a bunch of highly interrelated funds.

23. Playing defense is crucial in volatile markets.

Short leash, try to buy stocks that have had their down times and are trying to rally.  Sell at the first sign that a strong story might be feeling the economy.

24. Invest in stocks with buyback programs.

Handy, I used them to build positions in GE and several other stocks way back in the day.

25. Don't stop looking at your monthly statement - you won't know how bad things really are.

No crap.  You need to feel this pain.

[The Marmot]

GREAT info Biggus. Much appreciated.

As far as "play with the houses money", I think he means if/when you make your original investment back in gains i.e. double (or more) your initial position, then take your investment off the table and play with the gains. My grandfather gave me the same advice.

[Biggus Piggus]

GREAT info Biggus. Much appreciated.

As far as "play with the houses money", I think he means if/when you make your original investment back in gains i.e. double (or more) your initial position, then take your investment off the table and play with the gains. My grandfather gave me the same advice.

I believe you have that right.  That's another maxim I don't believe in per se, but I do believe in managing the size of positions and keeping them similar.