Jim Cramer’s Real Money: Building A Ten Stock Portfolio

This week, The Simple Dollar takes a look at Jim Cramer’s Real Money. Cramer has made a huge name for himself in stock picking punditry and he claims to reveal his methodology in this book. Is it worth reading? Let’s find out.

Another interesting portion of the book was Jim’s recommendation of a ten stock portfolio. As I mentioned before, the book recommends that a beginning investor starts off with a five stock portfolio, so Jim suggests five stocks to begin with.

1. A company from your neighborhood. What companies employ many of your neighbors and friends? What companies are highly visible employers in your local area? You should own one of these and be aware of what’s going on with other ones. For me, I would probably own DuPont (DD), because I know a lot of people employed in multiple divisions there and I’m fairly confident about their long term future.

2. An oil stock. Jim sees the oil industry as always strong, so he suggests picking one of the big ones that’s comfortable to you. If you don’t know which one to pick, pick the one that you buy gas from. I would select BP (BP) for that reason alone.

3. A brand-name blue chip that sells at a 2.5% yield or greater. Jim views stocks that have a healthy yield as being ones with a pretty high bottom; they won’t fall very far if they start to go down. I would do this by trolling through the S&P 500 and find something you wouldn’t normally invest in, then research it a bit and see if it has such a yield. My winner was GlaxoSmithKline (GSK), which has a yield over 3% and satisfies my desire to own a pharmaceutical.

4. A financial. Jim is also a big believer in financial stocks and he somewhat recommends going local again by investing in your bank (if you like it; if you don’t, you should be switching to another one). Thus, I would buy ING Group (ING) as I have been tremendously happy with my ING Direct savings account.

5. Something very risky. Jim believes everyone wants to speculate, so he encourages people to buy something speculative with their fifth stock. For me, I’d jump into US BioEnergy (USBE), as I have a strong feeling that a major revolution is coming in biological sources of energy.

If you’ve bought those five and want to diversify even more, Jim recommends five more selections for a larger portfolio.

6. A soft-goods secular growth stock. Jim recommends waiting until they’re out of favor with the market to buy them (just when the market is really heating up, in other words). When I look through my medicine cabinet and my shower, I see a lot of products by Procter and Gamble (PG), so I’d go with them when they’re looking low.

7. A cyclical stock. On the other hand, you should buy a cyclical stock when the market is contracting, something like a chemical stock, construction stock, or an airplane maker. Since I already own a chemical stock, I’d want to jump into another cyclical area, so I would probably buy Boeing (BA). Whenever I fly, I generally prefer flying in Boeings rather than Airbuses and their numbers seem healthy.

8. A technology company. Everybody owns a tech stock, so fill one in here. My choice would still be Riverbed Technology (RVBD) because I’ve seen some of their products in a professional environment and have been extremely impressed.

9. A regional retailer that is looking towards going national. A good way to find one is to look at the top new franchise listings in Entrepreneur magazine, but many of these aren’t publicly held. Thus, I follow Jim’s recommendation and use a retailer I’m moderately familiar with: Cabela’s (CAB).

10. A “hope for the future” nontech stock, like a biotech. I happen to know quite a bit about biotechs, so with this slot, I would bet the farm on Curagen (CRGN) because their subsidiary, 454 Life Sciences, has been doing amazing work.

This process helps you to build a diversified portfolio; all of these stocks are in different sectors, so I’m not heavily weighted into one sector. It would be quite tempting to track this portfolio and see whether it would beat the S&P 500 over a year.

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

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7 thoughts on “Jim Cramer’s Real Money: Building A Ten Stock Portfolio

  1. Shane says:

    Hmmm… I wonder what you do if your neighborhood stock is also a Bluechip?

  2. Trent says:

    I don’t think multiple blue chips are a problem as long as they’re in different industries.

  3. Shane says:

    This sounds good. As I get a bit more money saved, I’ll be able to add with a sharebuilder plan. Right now I only have Anheuser-Busch (local AND bluechip) and Bank of Nova Scotia, which surprisingly he endorsed on his show last night.

  4. Outdoorgrrl says:

    Maybe it’s just me, but owning just 10 stocks still seems pretty risky to me. I prefer the “Coffehouse Investor” approch. Owning 7 different low-cost index funds seems a much sane approach, especially if you aren’t starting with a lot.

  5. Trent says:

    This book is about individual stock investing, not mutual fund investing. Individual investing takes much more work, but the rewards are far better.

  6. gmv says:

    I think there is a time and a place for mutual fund investing, and another for stock investing. Stick with mutual fund investing (esp. the low-cost index funds) where you either want a relative margin of safety or don’t have the knowledge/time to really pay attention to stocks.

    IMHO, the average person would be better served to hold the bulk of their retirement funds [401(k), IRA] in a handful of solid mutual funds — funds where you can really “set and forget”. This is your retirement — you want it to be invested well enough that it actually grows but you want to minimize risk of huge losses as well.

    Then with either a portion of retirement funds, or other funds outside of their retirement, they should indulge in stock picking if they want to. I agree that there is greater reward in stocks — but there’s also concentrated risk.

    Jim Cramer does seem to have a valuable contribution to make for stock picking (once you get past the theatrics!) I’ve read part of this book, though it was really a little more than I was prepared to take on at the time.

  7. jay says:

    for an investor with very little disposable income (college student) how beneficial in the short term (3-5 years) is buying 5 shares of a blue chip’s stock such as apple right now.

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