Cramer's Mad Money - Timing Is Everything (4/15/11)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday April 15.

Timing is Everything

Ordinary people can be just as successful at investing as big money managers, it is just a question of picking the solid stocks and getting the timing right. "When the pressure is on, that is when people mess up," and tend to sell everything on a hideous down day. More often than not, a sell-off is a time to wait or to buy. He urged viewers to sort stocks they are watching into categories of stocks they think are at the right price, stocks to buy if there is a pullback, stocks to sell if they rise, and stocks to sell at their current price. Having a list will help guide investments and prevent panic selling or impulsive buying.

Cramer urged viewers to learn from a mistake he made at his hedge fund. He held American Stores for a long time and waited for the stock to go up so he could sell it. One day, the stock got hammered, and he gave up and sold the entire holding. Two weeks later, American Stores got taken over at a premium. "That stock would have made my year," he confessed. It pays to hang on to a stock or to sell just a bit, but never to sell an entire position.

Some might say it is too difficult to time investing effectively and to just put money in an index fund. However, people who put money in an index fund late in 2007 would have lost half their money in six months. Since even these investments need to be timed, it pays to buy stocks, which generate greater returns.

The only time dumping stocks wholesale was a good tactic was in the 2008 crisis. The Dow had already fallen and was headed straight down. Cramer appeared on the Today Show and recommended that investors sell their positions to generate cash. While he was criticized for that call, those who held on lost a lot of money. However, in his 30 years of investing, Cramer said only the 2008 crisis, because it involved a systemic failure, was a time to just sell. Almost every other crash, correction or sell-off has been a time to buy good stocks.

Find an Exit Strategy: Skyworks Solutions (NASDAQ:SWKS), Pepsico (NYSE:PEP), Hershey (NYSE:HSY)

Not every stock can be owned forever, and there are very few stocks that should be owned on a very long-term basis. "If you don't know what makes you want to sell a stock, you shouldn't own it," said Cramer. Investors constantly think about why they want to buy certain stocks, but they should also find an exit strategy, what would compel them to sell, so when that event happens, they will be prepared to take the disciplined approach and reduce or get rid of a position.

It also pays to understand what stocks are trading vehicles and what stocks are investments, what are growth stocks and what are value stocks. Tech stocks can be high-flyers and can generate spectacular returns in a short space of time, but at the first hint of a change in the cycle, they should be sold. Defensive stocks have more slow, steady growth and tend to do well even when the market is bad. "Skyworks (SWKS) is not Pepsi (PEP)," said Cramer. When tech is having an off-season, the component maker Skyworks tends to fall in price. When the tech season heats up again, starting in the back-to-school season, Skyworks is usually a buy. While hot tech stocks can fall 10-30% in a matter of days, it is unlikely that Pepsi will be similarly hammered. Defensive stocks do not have cycles; "There is no Hershey (HSY) cycle," or there isn't a time when people tend to eat more or less chocolate.

"You have to change your view when the facts change," Cramer said. People who lost money when the dot.coms fell off the roof weren't thinking of an exit strategy. Don't be afraid to sell when a stock is headed lower. "Your first loss is your best loss," he added. Then again, it doesn't pay to panic and unload a stock all at once.

It's Not the End of the World

There have been plenty of disasters in the past year, but none were so terrible that they annihilated the market. In 2010, the failure of PIIGS, or the weak European economies, threatened to destroy the banking system. Yet, the euro is now strong, thanks to the IMF's bailout of the failing economies. In late January 2011, hedge fund managers were shorting and selling frantically as it seemed that the Egyptian government was going to fall. However, news from Egypt and Libya couldn't trump strong earnings, and the bull market continued. The S&P 500 was pummeled on the news of Japan's earthquake and fears of a nuclear meltdown. The S&P 500 recovered a few weeks later and was back at its pre-earthquake levels. The bottom line: there will never be a shortage of disasters. Investors need to be honest about whether a crisis will affect the earnings of their actual stocks. Think about how to profit from disaster. In the case of Japan, the country will need lumber, copper and other materials to rebuild, and stocks in these industries may benefit.

Know What You Own: Bristol-Myers Squibb (NYSE:BMY), Kinder Morgan Partners (NYSE:KMP), ConocoPhillips (NYSE:COP)

You can't time your investing moves correctly unless you know what you own. This means taking an hour per week for every holding in your portfolio to research the stock. If investors know their holdings, they won't panic sell on bad news or buy heedlessly. When Cramer was a hedge fund manager and there was a fresh disaster, like the Chernobyl meltdown or Iraq's invasion of Kuwait, he would ask, "What does this have to do with the earnings of Bristol Myers (BMY)?" Bristol-Myers was a stock with very consistent earnings that usually doesn't get hit on bad macro news. Cramer urged investors to come up with a list of stocks, such as ConocoPhillips (COP), Kinder Morgan Partners (KMP), that are similarly impervious to macro disasters, and to buy them in a sell-off.


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