Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Friday October 19. Click on a stock ticker for more analysis:
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Cash on Hand
One of the biggest mistakes amateurs make is to be fully invested, or to have all available money invested in stocks and no cash in a portfolio. "Nonprofessionals think its right to be fully invested. I'm a champion of stocks, but that's totally, 100% wrong," said Cramer. Investors need a portfolio of at least 10% cash to buy desired stocks during a decline and to take advantage of low prices. If an investor has only 5% cash, it is only smart to buy if there is a decline "of at least 10% from the peak before the decline to the trough."
What Can You Lose?
When non-professionals look at a stock, they think about how much they could gain. However, professionals think about how much money they could lose on the reasoning that,"if you take care of the downside then the upside takes care of itself," said Cramer. He suggested looking at buybacks and dividends which are not only inherently beneficial but are also good protection against a downside. Cramer urges investors not to be too obsessed with the bullish case for a stock; "Plenty of stocks have great upside potential, but far fewer have great downside protection."
Know Your Limits
Cramer quoted Clint Eastwood in the 70's action film Magnum Force: "A man's got to know his own limitations." One mistake many novice investors make is they tend to be attracted to stocks they don't really understand. "If you can't explain what a company does and how it makes its money without quoting some jargon that only an information technology expert would understand, then you shouldn't buy it," he said. Similarly it is important to understand conference calls to evaluate a stock properly. "There will be plenty of businesses and plenty of stocks that you do understand. Buy them," Cramer urged.
Too Much of a Good Thing
While amateur investors worry about not making enough money, professionals worry if they are making too much money. "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." If someone is going too far too fast, their investments could fall apart suddenly. Those making money beyond their wildest dreams are doing something "seriously wrong" and Cramer advises, "You need to take profits immediately, start selling like there's no tomorrow, otherwise you're setting yourself up for a huge fall."
Skip the Quick Quarterly Fix
While amateurs try to make fast money from earnings reports, professionals learn "to start living and stop worrying about the quarterly report," Cramer said. He compared buying in anticipation of what is going to happen after the earnings report to gambling and said it is "too hard" to buy during earnings season. "You shouldn't be making snap decisions about stocks," said Cramer, "You should be making well-considered decisions that take a lot longer because that's how you make the mad money."
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