Jim Cramer’s Real Money: General Trading Advice

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.

As I mentioned earlier in the week, 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.

Tomorrow, I’ll give my usual “buy or don’t buy” recommendation to this book.

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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