Review: Jim Cramer’s Real Money

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In the past, I concluded that Jim Cramer’s success was due to the entertainment factor. I had never heard of him before tuning into his show on CNBC, where his … enthusiasm for picking stocks seems to know no bounds. I generally concluded that he was a cartoon figure and left it at that, but several readers of The Simple Dollar said that he says a lot of things about individual stock investing that are well worth paying attention to.

Thus, I’m reading Real Money this week. The book promotes itself as a guide to sane investing in an insane world, which feels like an ironic title if you’ve ever seen Cramer’s show. In fact, the book is written at an incredibly frenetic pace. The information is thrown at such a rapid pace that, as I was taking notes on the book, I found myself filling a lot of pages with information.

This book is a big success if you take one fundamental point away from it and let the rest just build upon that point. What’s the fundamental point? Don’t buy and hold, buy and homework. Cramer doesn’t expect you to spend five minutes a week on your portfolio; instead, you should spend an hour a week per stock investment. If you can’t commit to that, go buy a mutual fund and don’t lose your money in individual stock investing.

To tell the truth, to really analyze all of the stuff he says in this book, you have to spend a lot of time actually doing the homework to really understand all of the principles. For instance, he spends about eight pages discussing the cyclical nature of the stock market and a general logic underlying when you should invest in certain sectors and when you should sell stocks in these sectors. You can read it in about ten minutes, but it would take hours of analysis to really understand it.

It is this “compressed” feeling that really makes the book feel frenetic. There is a lot of information jammed into these pages, enough that you could easily analyze the teachings of the book for months. Thus, if you actually follow the fundamental principle – buy and homework – then you can’t just blindly follow the rest of the book.

Advice to Beginning Investors

Much of the early part of the book is focused on advice for beginning individual stock investors, a group that I would include myself in. The advice throughout the book comes at you at a frenetic pace, so here are ten specific pointers that I was able to extract for anyone who is thinking about investing in individual stocks.

Do your homework. Cramer advocates spending one hour per week researching every single individual holding you have. At first, that seems like a lot, but once you start doing it, you find that it’s pretty easy to burn an hour a week reading articles, reading annual reports, reading SEC filings, and listening to conference calls. After a while, you start to get a really good feel for a company and that feel is the most accurate tool you have for where a company is going. If it starts to feel bad, it’s time to sell, but if the stock is dropping and you can’t conceive of a reason, then you should ride it out.

Be willing to speculate. Cramer advocates taking a small portion of your money and using it for pure speculation, something that most pundits consider abhorrent. Basically, Cramer’s logic is that you’ll be tempted to speculate and you’ll punch yourself and do stupid things if you see yourself skipping out on a speculation, so you should use a small fraction of your investment budget on highly speculative investments.

Be conservative with your retirement. At the same time, the book gets very conservative when it comes to retirement savings. This is not where speculation should be happening. Your retirement money is not your “get rich quick” money – it should be invested in mutual funds and bonds, not in individual small cap stocks.

Diversify! Your top five individual holdings should never be in the same industry, or else you’re opening yourself up to a good deal of extra risk. In the 1980s, there was a food stock bubble. In the 1990s, there was a tech stock bubble. There could be another bubble forming right now. If you get greedy and start throwing everything into one sector that seems great, you could take the same ride the NASDAQ took in 2001 – straight to the basement.

Don’t blindly follow analysts. Most analysts are not directly involved in the business of investing in individual stocks. Instead, they’re quite often people at various investment houses who have the time to write articles for public consumption. In other words, be aware of what analysts are saying, but don’t follow what they’re saying blindly.

Never trade at market value, use limit orders instead. If you see a stock at a price you like, don’t merely buy that stock or else you’re going to find yourself buying high. Issue a limit order instead. For example, if you see WHR at a hair over 86, instead of just saying that you want to buy 50 shares of Whirlpool, instead issue a limit order for 50 shares of Whirlpool at 86. If you don’t do this, you’ll get a price that you probably won’t like for the sale.

Every company and industry has a key metric. For example, most clothing producers have a key metric of warehouse inventory; it’s good to have some warehouse inventory, but if it keeps going up period over period, there’s something wrong with the company. It takes research to figure out what this metric is and it can take even more to find that metric for a lot of companies in the industry, but it is invaluable at helping you figure out how things are going in the industry.

When comparing stock prices within the same sector, ignore the actual price and compare the price-to-earnings ratio. For example, I love Lowe’s (LOW) and their most obvious competitor is Home Depot (HD). LOW currently has a P/E of 16.44, while HD has a P/E of 13.70, even though the share price of Home Depot is higher. If the other numbers of the two companies are comparable, then HD is a much better buy than LOW.

Use earnings growth as a second comparison between two stocks in the same sector. If one company has a very low P/E ratio compared to the competition, yet their earnings growth looks good, you should start studying that company, because the market is probably undervaluing the company. On the other hand, a high P/E ratio without much earnings growth indicates a stock that’s not going to be leaping (unless there’s something unhealthy going on).

You only need $2,500 to start. Cramer says that all you need to get started is $2,500 – a portfolio of five diverse stocks with $500 in each stock. What stocks? Let’s keep going…

Building A Ten Stock Portfolio

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.

General Trading Advice

As I mentioned earlier, the frenetic writing style of this book makes it hard to really break the book down and march through it piece by piece in a review. Instead, I mostly just took pages of notes as I read it and attempted to organize them into some sort of cohesive order. By this, I don’t mean that the book is unreadable, just that the pace is very fast and much of the content is interconnected.

With that being said, I wanted to highlight some of the more interesting specific points that Jim brings up in the book, so here are a list of five of the interesting details that popped out at me while reading Real Money, along with some commentary.

When the economy is going crazy, buy sturdy stocks like Procter and Gamble, General Mills, and Colgate. Why? When the economy is going wild, these stocks seem like boring investments because they are steady earners, and during an economic boom, steady earners look very boring compared to the cash that’s elsewhere. So many people abandon the food and toiletry stocks and jump on board the big growers, leaving these great companies often seeing a stock loss for no reason connected to the underlying company. Thus, economic booms are the time to buy steady earners, especially right near the top. When things start to sour, people return to the safety of these steady stocks and their price rebounds – and you can ride that elevator up as the overall market is going down.

When the economy is weak, buy cyclical stocks like tech stocks, retailers, and automotive companies. This is almost the reverse of the logic above. When the economy is down, cyclical stocks start reporting somewhat shaky earnings numbers, people get scared, and they jump back to safety. Thus, this is the moment to buy those cyclicals with a long, strong pedigree. Buy your Toyotas and your Apple Computers when the market is low and their numbers look soft so you can ride the elevator upwards when they inevitably rebound.

Follow the supply chain. Whenever you hear about Boeing getting a big new order, don’t invest in Boeing; that’s what lots of people will do immediately and you won’t get a great return. Instead, follow their supply chain backwards. If Boeing has a big new order, they’re going to need a lot of parts, right? Who will they buy those parts from? Companies like Honeywell. Thus, invest in Honeywell early, before they report sales numbers, and enjoy the bump when the market “discovers” that Honeywell is doing really well.

Follow the great CEOs. Look for ones that are visionary and create a big following. Why? They’re the ones doing really interesting things, and they’re the ones that can turn companies around and cause them to blast off to amazing heights. My favorite example of this is Steve Jobs’ return to Apple when the company was showing signs of being in the death throes after Gil Amelio’s disastrous run at the top. Jobs managed to take a tech company that looked dead in the water and completely revitalize it, turning ho-hum product rollouts into major events. He was very clear that design rules the roost and he let that lead the company. What happened? Jobs’ vision made a lot of people a lot of money.

The P/E ratio usually tracks with the Federal Reserve’s actions. If you’re looking at a stock, note that for most stocks the P/E goes up when the Fed raises interest rates and the P/E goes down when the Fed lowers interest rates. How can you benefit from this? If you expect rates to drop, move into stocks with more long term stability! Basically, this is a rewrite of the first two items above, but this makes the idea more clear.

Buy or Don’t Buy?

I won’t be shy about it: I really enjoyed this book. If I were to rank the books I’ve read so far in this series, this one would be a strong #2. Not only was it enjoyable reading, it was also informative and it didn’t talk down to me as a reader, even though I’m not an individual stock investor (yet).

Yet I can’t wholeheartedly recommend this book to everyone. Why? Let me quote a comment left by a reader recently when discussing individual stock picks:

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.

Simply put, individual stock investing isn’t for everyone. Cramer himself says as much when he basically tells people to invest an hour per week per stock in research. If you don’t have the time to put into individual stock investing or you are uncomfortable with the risk, individual stock investing isn’t for you.

That said, buy this book if you’re interested in individual stock investing; otherwise, skip it. Cramer has written a book laden with interesting and worthwhile information. It’s readable, yet it goes at such a frenetic pace that you can open to any random page, start reading, and feel as though you learned something useful. Most books as information dense as this one border on unreadable, but Cramer keeps everything quite lively by mixing together anecdotes with the actual informative points.

But there’s one reason above all that this book succeeds: Cramer’s passion for the stock market almost oozes out of every paragraph. His raw enthusiasm for picking stocks comes through loud and clear in this book, much as it does in his personal appearances, and it’s enough to make me really interested in individual stock investing.

I originally reviewed Jim Cramer’s Real Money in five parts, which you can find here, here, here, here, and here if you would like to read the original comments.

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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3 thoughts on “Review: Jim Cramer’s Real Money

  1. For a site that was so eager to ridicule Mr. Kiyosaki, we have to ask what your doing reviewing Jim Cramer in such decidedly positive fashion ??

    If you watched Jim Cramer’s show through 2008, you will have seen him call the bottom of the market on at least four seperate occasions, only for the Dow Jones to plummet a further 2-3000 points within days to weeks, while his individual stock picks would have sent most to the sidelines in very short order.
    We wont mention his frequent contradictions of his own advice, or his permabull stance on markets, through one of the worst recession/depressions in a century.

    Apart from the entertainment value as he pounds the table and plays with his sound effects, treat this charachter and his book as one of the greatest rip off merchants of our time.

    Whatever about Kiyosaki, you really have to ask if this Cramer is making so much money,(not following his own picks apparently) what he is doing as a puppet on CNBC reading the script which is put before him at the behest of the parent company GE no doubt.

  2. Wait, this statement is not correct.

    “If you’re looking at a stock, note that for most stocks the P/E goes up when the Fed raises interest rates and the P/E goes down when the Fed lowers interest rates.”

    When interest rates rise from 1% to 6%, people expect a similar yield on their stocks. Price of stocks will drop even if their earnings remain constant till their yield matches the new market interest rate. P/E will drop when interest rates increase.

    http://old.swivel.com/graphs/show/10406853

  3. What a great review, I’ve read this book myself several times over. If anyone doubts Jim Cramer just research his career as a successful hedge fund manager before his CNBC position.

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