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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