Cramer's Mad Money - 5 Mistakes Amateur Investors Make (7/31/09)

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday July 31.

5 Mistakes Amateur Investors Make

Cramer says people who invest at home in their spare time can make as much money as professional investors, provided that they avoid the 5 biggest mistakes amateur investors make.

1. Being Fully Invested in Stocks. A lot of novice investors think that it is important to have all their money in stocks, but professionals know that having cash handy is important for buying stocks which have been unfairly beaten down. Every portfolio should contain at least 10% cash, and if that amount drops to 5%, something should be sold, unless the market is down so low that the only thing to do is to buy.

2. Concentrating Too Much on the Bullish Story. Almost everyone knows of a great stock with a huge upside potential. Amateurs think mainly of upside, but professionals think of the downside; "If you take care of the downside then the upside takes care of itself." Cramer likes buybacks and strong dividends, but mainly because these limit the downside in a stock and act as a buffer against declines.

3. Buying Hard-to-Understand stocks. New investors often think it is impressive to invest in a stock that is on the cutting edge of its field, but unless the potential buyer can explain what the company does in plain English, he should hold off and buy something easier to understand.

4. Being too Giddy about Gains: Most people who are new to investing may start to despair if they see losses, but huge gains in a short period of time can be more worrisome; "Any schmo can make a ton of money all at once," Cramer said. "All you have to do is take on way too much risk, and that's the heart of the problem." He added that if gains keep coming with no breather it is a sign that one's "portfolio is out of whack," and it is essential to start selling off the top and balance risk.

5. Being Obsessed with Earnings. Amateurs try to bet on a company's earnings, while professionals "learn to start living and stop worrying about the quarterly report." In fact, Cramer advises avoiding trading so much during earnings season, because trying to guess at gains or losses is "too hard." He urged viewers not to get lured into trying to game earnings results "because that is gambling, and when you gamble, the house always wins."

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Comments

[Egg:]

He forgot mistake # 6:

"Amateurs listen to my Mad Money show. A big no, no, no. Turn me off. Do it. NOW. Never take advice from a man who blows a horn while picking momentum stocks."

Aug 02 05:23 AM

[ECONOMICS 101:]

Good solid advice notwithstanding Egg comments.

By Johnathan Vrozos
johnathanvrozos.ca

Aug 02 08:45 AM

[Big Lou:]

Excellent insight

Aug 02 12:13 PM

[h2oworks:]

Nothing wrong with these five tips.

Aug 02 12:49 PM

[George /Mis...:]

We have been listening to to many analyists telling us to be careful, watch out for the faslse start, don't get caught in a ficticious rally. Guess what we missed it. Look at Ford, Palm, BAC, CITI, Teck Stocks, GE, and the list goes on. Now surely the market will stall and work itself sideways for months to come until the businesses show some real gain. Till now they gone up to some respectable level from their very bottoms. To late now.

Aug 02 04:03 PM

[FloridaBoy2:]

Cramer is a trader with a lot of experience and the 5 points above are good advice. You don't have to love him but he puts out more market wisdom in a month than Wall Street Week did in years. His picks? You don't have to swing at every pitch so do your own DD.

Aug 03 06:57 AM

[chap08:]

Interesting that SA posters agree with these tips, but at the same time seem to spend most of their lives obsessing about short term earnings.

Aug 03 07:00 AM

[TCK:]

Amusing that Cramer breaks most all of these rules on a nightly basis !

Aug 03 07:53 AM

[ilovesum:]

1) should be due diligence
2) don't listen to the pro's
the reason there are "amateur" investors out there is cause the pro's SOMEHOW missed this massive correction and cost the amateurs money , meanwhile they took full commissions and bonuses. Market goes up they win , market goes down they don't win as big, the investor meanwhile has lost huge.
So we followed the pro's and got burnt , time for a new strategy , ditch the pro's. Once again the pro's are trying to "help" us or is that try make money off us.
Cramer , like a lot of these clowns , with or without a TV show talk a lot and only a small amount is worthwhile , maybe 5%. It is a con to get you to buy the crap that he can trade on and you will lose again.
The advice is free cause it aint worth anything.

Aug 03 11:36 AM

[Brian27:]

Number one reminds me of the Mayor of a small town who complained that there was never a cab at the train station late at night when he arrived into town. So he legislated that there be at least one cab at the train station at night.

When he arrived the next night he hopped in the cab and exclaimed take me home. To which the cab driver said, I can't there has to be at least one cab at the train station.

Moral: A cash cushion constraint of 10% is silly if you have to sell to remain at 10%. If the constraint is 0% or 30% it makes no difference because you still have to sell to maintain your cash position.

Aug 03 12:28 PM

[ManAboutDallas:]

The biggest mistake amateur investors make is listening to pixilated leprechauns such as Cramer!

Aug 03 01:17 PM

[yetanothert...:]

6.) They watch Jim Cramer Mad Money Program

Aug 03 02:45 PM

[ilovesum:]

cramer is a boob on the boob tube .....

Aug 03 05:43 PM

[ilovesum:]

Cramer says people who invest at home in their spare time can make as much money as professional investors

hmmm , i cant learn 5 rules and become a doctor in my spare time, but i can learn five rules and become a "professional investor"?

please dude , do you ever listen to what comes out of your mouth?

Aug 03 05:46 PM

[Maxe Paul:]

I'm with you mate. Especially given rule number 1?

"A lot of novice investors think that it is important to have all their money in stocks, but professionals know that having cash handy is important for buying stocks which have been unfairly beaten down. Every portfolio should contain at least 10% cash, and if that amount drops to 5%, something should be sold, unless the market is down so low that the only thing to do is to buy."

SOOO, rule number 1 is break the rule?

CRAMER you are such a laugh!




On Aug 02 05:23 AM Egg wrote:

> He forgot mistake # 6:
>
> "Amateurs listen to my Mad Money show. A big no, no, no. Turn me
> off. Do it. NOW. Never take advice from a man who blows a horn while
> picking momentum stocks."

Aug 04 09:57 AM

[WhoisJohnGalt:]

I am a victim of #5, which leads to me propose #6: don't get caught up in the euphoric trendy headlines of the media. The best ideas come from your own homework.

Aug 04 03:39 PM