Cramer's Mad Money - Who Needs Mutual Funds? (7/17/09)

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday July 17.

Going Solo

Cramer warned viewers against "professionals" who might try to tell them that the market is too hard and they don't have the expertise to choose individual stocks. While index and mutual funds seem to be a flight to safety for novice investors, they have at least as many drawbacks as advantages. Those who invest only in index funds will have a hard time matching the market and will probably never beat it. Mutual funds tend to be overinvested, and this makes funds vulnerable to the ups and downs of the market. Anyone can choose individual stocks; the trick is knowing what to buy and when to sell.

Investments versus Trades

When it comes to choosing stocks and when to buy or sell, discipline matters more than conviction, says Cramer who admits he's gained more by playing by the rules than following his gut instinct. One of the most important rules is not to turn a trade into an investment, and to get out of a stock if the catalyst is over and the move has been made. Similarly, it is important not to turn an investment into a trade and to avoid the temptation to unload all of a stock that has made a big move if it has a good long-term story.

Single Digit Danger: Citigroup (C)

While many investors might not see danger in cheap stocks, a false feeling of safety about individual stocks is one of the biggest dangers. Those who thought Citigroup was cheap at $10 saw their "safe" investment evaporate as the stock continued to slide down. The key to determining whether or not a stock is cheap is to do homework on the company. Investors who find out about single-digit stocks and are aware of their risks can afford to gamble on these speculative trades.

Love the Product, not the Stock: Citrix (CTXS)

While a company might have a fantastic product, its stock may not necessarily a buy, said Cramer. He admitted he made a mistake buying Citrix because he loved the company's software, but he failed to realize that the story was stale and everyone who wanted the product had already bought it.

Dividends and Retirement: BP Prudhoe Bay (BPT), Permian Basin Royalty (PBT)

The key to investing for retirement is choosing stocks with generous yields, said Cramer, especially since earnings from dividends are only taxed at 15%. He recommended REITs and master-limited partnerships, which pay out their earnings in the form of big dividends. BPT and PBT pay from 10% to 15% yields. Cramer says these companies are ideal investments but warned viewers to look at the balance sheets.

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round and his Stop Trading! Picks.

Get Cramer's Picks by email-- it's free and takes only a few seconds to sign up.

Seeking Alpha is not affiliated with Jim Cramer, CNBC or TheStreet.com

Comments

[M_S_B:]

"The key to investing for retirement is choosing stocks with generous yields, said Cramer, especially since earnings from dividends are only taxed at 15%. He recommended REITs"<p>

I don't invest in REIT for dividends because I believe that REIT Dividends are not taxed at 15%, but at your regular Income Tax rate.

Cramer missing something here?

Jul 20 12:33 PM

[Larry House:]

If people use mutual funds, they don't need advice from Cramer. The fact is, many very respected investing professionals think individuals holding only five stocks (Cramer's recommended minimum) are simply rolling dice. Cramer's advice on investing (individuals holding only a few stocks) is very high risk. He always stresses that you won't make as much with a mutual fund, but he seldom says that you also stand to lose less with a good mutual fund.

Jul 20 01:52 PM

[Helene:]

I agree that being diversified with only five stocks is risky. After 20 years of investing and at first mutual funds, I wish I never saw one. The best way to invest in the market is to buy right from a good sound company and reinvest the dividend. This is not Cramers way. The average person cannot afford to buy 100 shares of 20 companies, but to buy direct from the companies, you can buy 20 shares of 20 good companies and be much better diversified with less risk. Call up the company or go to their website. That how you find out whether you can buy direct. Advice to the beginners from an 80 year old retired lady who has done this and even with the market down, I am ok. Investing 101

Jul 20 10:16 PM

[OneRichOne:]

I started w/mutuals but then thought "why not build my own mutual fund?". I sold all mutuals and invested in over 30 stocks that all pay good dividends. I invested all my divs. back into more stocks. Since 2004, my fund has tripled in value even after the "crash".

Jul 21 03:17 PM

[Trevose_Lion:]

BPT and PBT are both yielding less than 10%, not 10 to 15%. Where is Cramer getting his information? Also, he should have mentioned that MLP's are not best for IRA accounts, due to tax concerns if dividends are over $1,000. On the other hand, AGNC is yielding 25% and definitely worth considering for any portfolio.

Jul 31 09:24 PM