Attractive and Single - Cramer's Mad Money 8/22/08)

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

Never turn an investment into a trade

Investors need to be able to differentiate between a trade and an investment. A trade is a short-term buy specifically to profit from the bump that comes with a strong quarter, new product or something similar. An investment is a stock you want to hold for much longer, usually about 18 months, Cramer said. Investments pass up the quick gains for even bigger returns down the road. A lot of times investors will catch a jump in share price on a catalyst and then exit the stock. Even Cramer did it once when he bought Apple at $26 back in 2004 on the strength of the iPod. He caught five quick points and cashed out.  After that, the stock soared toward $200, and he missed the whole trip. Don’t do that. Trust your thesis, and stick with your stock for the long term, especially when you’ve done your homework. Why settle for $5 when you could have $50?

Attractive and Single – Charter Communications (CHTR)

Stocks under $10 can be attractive, maybe too attractive. For those of us with less money to invest, we think we can buy more, thus increasing returns. There’s also the notion that a stock that cheap can’t decline much more, thus decreasing our losses. But both of these ideas are dead wrong, Cramer said. After all, stocks don’t drop below $10 for no reason. Most likely, the company is in some sort of trouble. Remember this before you buy a name you think you’re getting attractive with a single digit price tag. Cramer once overlooked Charter Communications massive debt because the stock was trading at only $4. He bought a position, and Charter soon dropped to $2. To avoid this problem, Cramer recommended applying the “multiply by 10” test.  If Charter were $40 and had all the same problems that it did at $4, would he still have wanted it? The answer is probably not. Use this same type of reasoning before you buy your next stock that is attractive and single.

Don’t Buy Emotions - Citrix (CTXS)

Cramer explained that back when he had his radio show, in 2006, he fell in love with a Citrix Systems product called “Go to My PC.” He couldn’t stand the producers talking in his ear about which caller was next. The program allowed him to see exactly what the telephone operators saw, thus eliminating the need for an update. Cramer loved it so much he did some homework and bought Citrix hcp pbt  the stock. But apparently he did not do enough homework. Go to My PC had already been on the market for three years. Cramer wasn’t catching the beginning of the product cycle, he was buying in at its peak. Once that happens, it’s all downhill for the stock unless the company releases something new to drive the share price higher. Try to keep that in mind when you think you’ve found the next big thing.  Being late to the game can cost you money.

How to Avoid Taxes on Dividends - HCP (HCP), Permian Basin (PBT)

Cramer loves a good dividend yield. The problem is that some of the best dividends are taxed at the regular income rate of 35%. How do you get around that? Buy these stocks for your 401(k) or IRA. If you’re looking for an incredibly high and, most often, safe yield, go with a real estate investment trust like HCP or royalty trust like Permian Basin  Cramer said. Sometimes these royalty trusts can pay out as much as 15%. But you don’t want to lose that steady income to taxes. That’s why it’s better to put them in your retirement account, Cramer said. By keeping these stocks in you’re a 401(k) or IRA, you won’t pay a dime’s worth of taxes on them.  Your earnings will stay – tax free – and compound in your account until you’re ready to withdraw your money for that Winnebago you have had your eye on.

Mutual Funds

Cramer claims he gets more questions about mutual funds than stocks. Instead of a recommendation on Exxon Mobil people want to know which fund is worth buying. Today Cramer taught viewers how to pick their own. The fund manager is the most important factor. Potential investors want to review the manager’s career performance. And not just during the good years. Anyone can make money in a bull market, Cramer said. You want someone who can help you sidestep the declines. Find out how he did after the dot-com bubble burst. There are alternatives to mutual funds, though. Cramer has always been a proponent of buying individual stocks – as long as you have the time to do the right research. On Mad Money, that means one hour per week per stock. If you can’t commit to that, there are always cheap, low-fee index funds, such as those that mirror the S&P 500. Most years, these index funds will beat most actively managed funds, Cramer said.

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Comments

[Richard Col...:]

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Daniel Kowkabany

2008 Aug 24 11:49 AM