On Speculation - Cramer's Mad Money (5/22/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Thursday May 22.

Note: Thursday's show was a rebroadcast of a program that first aired on December 29, 2006.

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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Comments

[taojaxx]

Why comment on Cramer on this website? I thought SeekingAlpha was about investing...

[taojaxx]

Didn't know SeekingAlpha wold comment about Cramer, I thought it was all about investing...

[PESSIMISTIBULL]

why doesnt cramers site work guess he got greedyand doesnt furnish the info for free he still does on tv of course he gets BIG BUCKS for that

[johndough110]

Cramer is a self-serving puppet for his hedge fund buddies. Check out his stock "picks" over the past 2 years. I could name 20+ that are down over 50% each.

Cramer is a joke. I'd take stock advice from Kramer with a K before this bald jackass.

[Cindy Reed]

Quote: When speculating on an industry, it is a good idea to pick one that has been unfairly "beaten up."

Note: At this time, E*Trade (ETFC) is a great place to put money. Price is still "beaten up" from last November and yet the "Turn Around Plan" for cash strength of $1 billion has been executed, and the brokerage metrics are beating competitors. A depressed price trending upward since April and primed for a big upward pop.