Jim Cramer’s Mad Money: Other Investing Advice

This week, The Simple Dollar takes a look at the new investing book from Jim Cramer, Mad Money. This book is surprisingly different from its predecessor, Real Money, in a number of ways. I quite enjoyed the first one; will I enjoy this one, too? Let’s find out!

Most of the latter two thirds of the book is divided pretty evenly between specific tips on individual stock investing and information related to Cramer’s television show, Mad Money. Today, we’ll focus on the tips; tomorrow, the madness.

One large section that I found particularly enlightening was Cramer’s advice on when and how to sell an individual stock. He broke this down into six distinct guidelines:

Keep your position the same size as a stock goes up. Let’s say you have 100 shares when a stock is at 60. If it goes to 100, you should sell 40 shares and have 60 shares at 100. In both cases, your position is the same ($600), but you’ve taken $400 in profit off of the table. By doing this, you protect yourself against the stock hitting its peak before you expect it.

Set a target price. Don’t keep riding a stock until it goes over the peak and crashes. Instead, set a target price at which you will sell, and when the stock reaches that price, actually sell it. This is a check against greed.

Unless you learn something new, sell it at the target price. Of course, if you do learn a new, important fact about the stock, you might want to re-set the target price, but still, if the stock hits the target and you have no reason to change the target, sell.

When you stop thinking a stock will go up (even if you haven’t hit the target yet), sell. Listen to what your heart and mind are telling you – if they’re not in agreement anymore, something’s not right (even if you don’t consciously realize it) and it’s time to get out.

If you double, sell half of your initial position. Why? You’ve taken your investment off of the table and now you’re playing with the house’s money. This is a great thing to do if you still are convinced the stock is going to grow and you want to keep riding it a bit longer, as you’ve essentially removed your investment from the equation and it’s all gravy now.

Always be eager to take profits. If you have a chance to take a profit, you should want to take it. Don’t convince yourself that there’s more all the time or else you’ll be eaten alive. Your disposition should always be to sell, not to hold or buy more.

Cramer also spends a couple chapters reviewing some of the tips from his last book and drawing a few different conclusions. For example, he now loudly says you shouldn’t invest based on borrowed convictions, meaning that following analysts blindly (including himself) is a fool’s game. He also goes into detail about doing the “right” homework – reading a message board about the Playstation 3 is not necessarily a good indicator about the health and future of Sony as a company.

Tomorrow, we’ll look at some of the tips he leaves about watching his show.

Jim Cramer’s Mad Money is the fifteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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  1. Dave says:

    Let’s say you have 100 shares when a stock is at 60. If it goes to 100, you should sell 40 shares and have 60 shares at 100.

    Heh, just don’t forget that the change of stock price from 60 to 100 might take abit of time and isn’t something that can happen instantaneously.

    Just out of curiosity, since I haven’t read the book yet (btw thanks for the cliff notes version), how much… I don’t want to say pocket cash, but more liquidity is he starting with to be able to move into positions of that size?

  2. Trent Hamm Trent says:

    Typically, Cramer doesn’t speak about specific dollar amounts too much. His only real guideline is that your portfolio should be a minimum of $2,500, with $500 in each of five holdings.

  3. John says:

    This isn’t advice for an investor, it’s advice for a trader. Using this guide you’ll be making a lot of transactions, generating a lot of commissions for a broker (which comes directly out of your profits), and leaving yourself very open to impulse plays rather than careful, reasoned study.

    Buy and hold/dollar-cost averaging doesn’t sell a lot of books because it’s not sexy, or mysterious. But it’s a lot better (and easier!) way to amass a small fortune without paying giant broker commissions.

    -J, ex-trader, now investor – and doing MUCH better.

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