The following episode of Mad Money is a rebroadcast of a show that first aired on December 29, 2007
Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Thursday February 21. Click on a stock ticker for more analysis:
Cramer on Speculation
Although some might consider speculating to be form of gambling, Cramer says he has made a lot of money with "high risk, high reward" investments which can generate cash in not much time; "I'm telling you it's OK to speculate and make those risky investments that most of the talking heads frown on," he said. "And not only is it OK -- it's entirely necessary. It's prudent and responsible." In fact, he says that a portfolio that lacks speculative stocks is not really diversified. First, Cramer says not to invest retirement funds or more than 20% of one's investment money in speculative stocks. On the other hand, he urges the most conservative investors to devote at least 1% to 2% for speculative stocks in order to "stay interested."
He explains that a speculative stock is a small-cap stock, with a market cap from $250 million to $2 billion. Although Cramer is wary about companies with no revenue, he would consider buying a stock with accelerated revenue growth and no current profits if it is a good company. One can either speculate with one stock or with an entire sector with a basket of speculative plays by "casting a wide net" to distribute risk. When speculating on an industry, it is a good idea to pick one that has been unfairly "beaten up." Since small caps fluctuate dramatically, Cramer says that it's important to buy with an exit strategy to avoid losing profits.
He tells investors not to give up, even after a major loss. He also warns that the market has corrections occasionally, which can be scary, but it is essential to be patient and wait for the next upturn. Also, Cramer urges his viewers to watch out for multiple contraction, when the market will pay less for the same amount of earnings. When there is a "market nosedive" or a "big, ugly downturn" investors should sell high multiple stocks, since they are the most vulnerable to contraction. Also, he suggests selling high multiple stocks before they report earnings to avoid " a world of pain." Finally, Cramer urges investors to use limit orders instead of market orders: "Limit orders keep you in the driver's seat, they keep you from being totally ripped off, and they're really easy to execute," he said. "Please, if you listen to nothing else I say, use limit orders instead of market orders."
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