Alert - Cramer

Cramer is actually doing a show on something really important and one of our primary goals with The Trade Coach Investing and Trading Educational Service.

How NOT to lose money and playing defense.  The first thing all professionals evaluate first.

Coach BD

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We will offer comments and opinions where we may disagree or may be able to add something extra to the rule and point he is making.

Coach BD

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Cramer’s Rules…

1)  Diversification

• Just not the one-size-fits-all diversification that most Brokers and Money Managers promote.

2)  Lock-in Gains on Winners on the way up.  Buy & Sell at appropriate times and spread them out.

• Translation = Have both a Buying and Selling Plan / Strategy.

3)  Your First Loss is your Best Loss (i.e. Story or Fundamentals change)

• What I believe he is saying here is that once you have made a good decision to sell a loser when your thesis changed, it will be much easier to do it quickly and more efficiently in the future.

4)  Dividends Limit Losses, however, not all dividend paying stocks are necessarily good so Due Diligence is paramount.

5)  Always have CASH on hand.

• Professional Investors and Traders ALWAYS have cash on hand.

6)  Don’t own too many volatile stocks.

• RMBS, ELN & USNA would all fall into this category.  We have noted many times that high volatility and speculation trades should be limited to ~10% of your portfolio, up to 20% for those more experienced traders who are adept at trading and managing volatile positions.  Volatile positions can provide excellent opportunities for ST Income capture, risk reduction, and profit enhancement.  But you need a good understanding of how, and when, to manage these high volatility stocks.

7)  Don’t Buy companies you don’t understand.

• This should be obvious, though with shorter term trades, a full understanding of the business may not be necessary since the goal is to trade the ST trend, story (earnings) or swing (reversals, etc…)

8)  Limit Low priced Stocks.  The majority of the time they are priced low for a reason, especially if they have moved from higher prices.

9)  Accounting Problems = SELL 

• This is almost ALWAYS true.  Some examples… CFO resigns, SEC investigation, Company announces restatement of past earnings, etc…

10)  After an Earnings miss, wait at least two quarters before considering re-entry.

• This is a good general rule but as we have seen many times, small misses by excellent companies can cause unwarranted punishment to the stock price.  We need to be aware of these situations where relatively insignificant short-falls result in huge over-reactions.

11)  When your Broker stops talking to you about a stock, especially a stock he promoted, that translates to SELL. 

12)  After a nice run-up, get defensive.  This is much like Rule #2.

• This is a rule I have discussed with many of you.  When you have a big move up or a big profit, your first thought should be how to protect that profit, not on adding to the position.

13)  If you are receiving a dividend that reaches twice the rate of U.S. Treasuries, SELL them.  MLP’s and other types of Trusts (i.e. Royalty Trusts), may not be subject to this rule.

14)  Stay away from Companies with New CEO’s until they prove themselves.

15)  In a Trade, if you BUY a stock based on a specific catalyst, once the catalyst occurs, good or bad, it’s time to SELL.  Never turn a trade into an investment.

16)  Don’t SELL Calls or Puts.

• Ridiculous… Obviously, we strongly disagrees with this rule, but he is preaching to his viewership, which are largely inexperienced investors.  Options, when used correctly and efficiently, offer tremendous opportunities and advantages over simply using long stock purchases and sales.

17)  Never use Margin.

• Another good general rule, but in certain circumstances, margin can provide a huge advantage if the trade is well hedged.

18)  Do NOT Buy stocks at all-time highs.

• This is especially true during Bear markets, like now.  IBD’s CANSLIM works great in Bull markets, not so much in bad markets.

19)  Whenever possible, play with the house’s money. 

• Always be looking for opportunities to reduce risk, thereby providing great opportunities to ride huge winners for long runs and big winners.

20)  If you have too many Losing positions, it may be time to exit all and re-evaluate your strategy, rather than spend valuable time trying to recoup those losses.

• This is an excellent rule.  If your strategy, or strategies just aren’t working, it may be time to take a break and take a hard look at your execution and strategies.  

21)  Don’t use retirement allocations in bulk, spread them out over time.

22)  Don’t allocate in too many Mutual Funds.  

• Less is More, especially with Mutual Funds.

23)  Stop waiting for losing stocks to get back to Breakeven, especially in a tough market.  Sell them and move on to new opportunities.

24)  Pick stocks with Big Buybacks.  This is almost always a good sign.

25)  Don’t STOP looking at your Statements.  You need to evaluate your losses.

• There is important info within all of your losses that can be summarized in this old adage… “Your future gains can be found inside your current losses… crack them open and discover what went wrong.”   

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There are a lot of good rules in there, and a few not so good, but in general his strategy for playing defense is solid and fundamental.

Coach BD