Jim Cramer, best known as the host of the CNBC show Mad Money, has made a career out of offering investment advice and stock picks. In this guide, we’ll take a look at 10 of Jim Cramer’s top pieces of investment advice that you can use to improve your performance in the market. Let’s get started!
Jim Cramer Investment History
Jim Cramer started his career as a stockbroker at Goldman Sachs in 1984. He went on to found his own hedge fund in 1987 and, over 15 years, claimed an average annual return of 24%.
However, Cramer is best known for his TV appearances, and particularly for the CNBC show Mad Money that he launched in 2005. The show offers a chance for Cramer to give specific stock tips and recommendations, as well as to offer advice for DIY investors. Cramer also runs TheStreet.com, a top online stock research and picking service.
Today, Cramer has an estimated net worth of around $150 million.
Jim Cramer Investment Advice
Cramer has offered a lot of investment advice over his more than 15 years hosting Mad Money and more than 20 years running TheStreet.com. Let’s take a look at some of his top 10 investing “rules” that he suggests for everyday investors.
1. Use Dollar Cost Averaging
Cramer is a big proponent of dollar cost averaging, in which you move into and out of trades in small increments over time rather than in one big trade. In the age of commission-free trading, adding to positions over time helps you manage risk and has relatively few costs.
As Cramer says, “Never buy all at once. Never sell all at once. Stage your buys. Work your orders. Try to get the best price over time.”
2. Invest in Companies with a Bright Future
Cramer believes in searching for value in the market. But, he says, it’s important to “buy damaged stocks, not damaged companies.”
By that, Cramer means that it’s important to look carefully at why a stock might be trading at a bargain price. Is it because of a short-term, fixable problem that the market overreacted to? Or is it because of a more fundamental issue that could take years to fix? Being able to tell the difference is key to making smart value investments.
3. Buy the Top Companies in Any Sector
Cramer advises investors to use a “best-of-breed” strategy, meaning that you should buy the leading company in any market sector rather than chase beaten-down companies. Leading stocks might be expensive from a price-to-earnings standpoint, but they’re worth it, according to Cramer, “because you get peace of mind.”
4. Stay Away from Margin
Cramer doesn’t warn traders against margin as a hard-and-fast rule, but he does think that borrowing money from your broker should be reserved for experienced investors. Margin dramatically increases the risk and stakes of investing, and it makes you more likely to panic when the market starts to move against you.
5. In Tough Times, Let Weak Stocks Go
When the market is in trouble, Cramer suggests that it’s important to pick and choose which positions you want to defend. If you try to keep all of your positions open, “you simply will run out of capital or go on margin before the bottom,” he says. “You will lose your reserve and not be ready if the market doesn’t turn in your direction.”
It can be hard to let stocks go in the moment. So, Cramer suggests rating your positions on a weekly or monthly basis. That way, when you have to choose which are worth keeping, you already have the answer in front of you.
6. Watch the Executive Team
Cramer believes that when a high-level company executive like the CFO or CEO leaves “for personal reasons,” it’s time to sell. “CEOs don’t quit for personal reasons,” he says. They “leave because something’s wrong at the company.”
While there are exceptions to this rule, there’s a lot to be said about its simplicity. If you hear about a C-suite executive leaving, you should at the least take a closer look at the company and rethink whether it’s an investment you want to be in.
7. Share Your Investment Thesis
When you’re buying stocks on your own, it’s easy to justify an investment to yourself. But if you never have to explain your investment thesis to someone else, your assumptions will never be questioned and you’re more likely to miss something important.
Cramer suggests that you should always “be able to explain your stock picks to someone else” – and do it. That way, there’s a second set of eyes on your trading decisions and you may find something you initially missed.
8. Diversification is Key
Cramer thinks that every trader should develop a portfolio that’s diversified across market sectors. That’s because, according to Cramer, “the biggest risk out there is sector risk. I don’t care how great a tech stock was in 2000…if you had all your eggs in that sector, you got scrambled.”
While Cramer recommends not spreading your portfolio too thin, he suggests only owning one or two stocks in each market sector and owning stocks across a wide range of sectors. Even if you miss out on huge returns from a hot market sector in the short-term, you’re more likely to be protected against losses in the long run.
9. Know When to Hold Cash
Cramer believes that “cash is for winners.” If you can’t find an investment that you like or think a market correction is coming, it’s never a bad choice to sell your positions and hold cash instead.
With cash, you’re protected from losses if the market does take a turn for the worse. If it doesn’t, you have a stockpile of money ready to invest when you find an investment you like.
10. Don’t Hope That Bad Companies Will Get Better
While Cramer tries to keep emotion out of investing, he recognizes that it’s easy to hold onto bad stocks that just keep losing. When that happens, you end up missing out on good investment opportunities or even sell off winning investments to keep your portfolio afloat.
His advice is to “Sell the losers and wait a day. If you really want them, go buy them back the next day.” He’s pretty certain that you won’t buy them back because the emotional bond you have to that bad company is broken the minute you sell.
Conclusion: Jim Cramer Investment Advice
Jim Cramer is one of the best-known stock pickers and market commentators in the US thanks to his leading role in CNBC’s Mad Money.
Much of Cramer’s investing style is built on evaluating whether or not companies represent a good value, even if an investment is intended to be short-term. Importantly, he encourages investors to keep emotion out of investing as much as possible.