Watch TV, Get Rich – Book Review

Watch TV, Get Rich

Want to know the best way to invest your money? Me too. So let’s learn from the experts. Tips for picking stocks, buying stocks, selling stocks and general investing are offered by Jim Cramer (from the TV show Mad Money) in his book ‘Jim Cramer’s Mad Money: Watch TV, Get Rich.

I’ve compiled investing notes from his book that I thought were helpful. I’ll be trying out some of these tips later on so I’ll do a follow up post on how things go. But for now, let me share with you what I’ve learned!

**Note: Some links may be affiliate links, meaning, at no additional cost to you, I may earn a commission.

Types of Stocks

  • Risky (speculative) Stocks – Do not put more than 20% of your discretionary income in risky stocks.  – Makes sense, you don’t want to lose that amount of money right up front.
  • High Growth Stocks – Will make or lose you more money
  • Consistent Growth Stocks – Like Pepsi Co, General Mills – upward growth, pay out consistent dividends and buy back stock to help keep supply in check
  • Value Stocks – Usually pay dividends; make sure they will go up and know why you think they will, discrepancy of value and value of assets

When Investing

  • Decide what you want to invest in based on age, wealth, personality
  • Expect to do one hour of homework per week per stock you own
  • Never buy stocks after hours at a market order – I like this one, actually put in the price you’re willing to pay for the stock; the stock price could jump at any time

5 Steps for Picking Stocks

  1. Learn in precise terms how a company makes its money.
    1. Look at the annual report, the 10-K. Should be making money how you would think. For example, Boston Chicken should be making money selling goods, but it was lending to franchises.
  2. List and understand all possible things that could affect the sector.
    1. Half of what a stock does depends on it sector. Read up on newspaper reports, Wall Street journal and trade papers. Understand the forces on a stock or don’t buy it. For example, interest rates go up, home builder stocks go down because people can’t afford a mortgage so they don’t build.
    2. You can get defensive stocks – those in food, beverage, drug – that stay the same in a bad or good economy, like Pepsi Co or Proctor and Gamble.
  3. Examine recent performance and behavior of both the stock and the company it represents.
    1. Look at newspaper articles and quarterly filings. See if it pleases the market, lets the market down, or neither. Don’t do bad performers (most of the time).
  4. Compare the stock to its competitors and make sure that its competitors don’t represent a serious threat to its business.
    1. If there’s competitors, what threat do they have?
    2. More importantly, find out what a company is worth by stacking it up against another company doing the same thing. P/E = stock price divided by earnings per share.
    3. The competition should be trading at about the same P/E.
    4. Look at the growth rate, even more important, don’t pay more than twice the growth for a company. If company is growing at 10%, then don’t pay more than 20 times earnings for it – a 20 multiple.
    5. Find forward earning estimates not previous, but not from the company, look at Analyst Estimates link on the left side of yahoo finance.
    6. Example: Google expected to earn $9.42 per share in 2006. $12.55 in 2007. Current stock price $400. So divide 400/9.42=42. 42 multiple which is it’s real earnings. Dirt cheap . Compare to Microsoft, price $22.86, EPS $1.26 = 18 multiple.
      1. Look at PEG= Price to earnings multiple divided by the company’s growth rate. Microsoft 12% growth, 18 multiple, peg=18/12%= trades at 1.5 times growth. Google, 31% growth, 42 multiple. 42/31=Trades at just 1.35 times growth. Google is actually cheaper than Microsoft. If stock is trading at 2 times it’s growth or above then it’s too expensive, sell it. Most fund managers won’t pay more than two times the growth, so don’t you.
  5. Look at the company’s income statement, balance sheet and cash flow statement but mostly the last two. Can the stock survive its balance sheet?
    1. No debt or cash to pay off the debt on time.
    2. Balance sheet – All in thousands and () are negative amounts.
    3. Balance sheet- Make sure total assets are greater than total liabilities.
    4. Cash Flow Statement – Look under ‘financing activities’ and see if they have net borrowings (their borrowing money) or if they are paying debt. It’s not bad if they are borrowing if they have enough to pay it off and they are also growing the business.
    5. Look at their cash flow to see if they have enough to pay short/current long term debt (debt that’s coming due).

Making Money Investing

Buying stocks

  • $10,000 is a good amount to start with
  • Keep no more than 20% of your portfolio in the same sector
  • Start with $2,000 in each
  • Don’t buy all $2,000 worth at once, do maybe 4 increments of $500 each
  • USE LIMIT ORDERS AND SET TO EXPIRE AT END OF DAY – I ‘CAPS’ this one because it’s a good reminder to make sure you’re not paying whatever price comes up, but a reasonable price
  • Don’t set your limit more than .15 percentage points ($0.15) above last bid (the last offer someone made for the stock)
  • Now keep waiting for a weakness in the company to buy the rest of your shares, not forever though
  • Homework on your bought stocks: check price once a day.
  • 1. Watch for revised earnings forecasts.
  • 2. Make sure your thesis for buying the stock is still true (Boeing – everyone’s replacing their jets).
  • 3. Catch all – watching the news to see if anything pops up regrading your sector, stock, etc

Selling Stocks the Right Way

  • Sell because you’ve made money or you’re going to lose money.
  • If you have a 50% gain, sell a minimum of a third of your stock (don’t get greedy).

6 Tips for selling stock when you think the price is going to go up

  1. Keep your position the same size as when you started (trim it – if you bought $2,000 and you have $2,200, sell $200). But don’t sell a tiny bit, be realistic.
  2. Set a target price – where you think the stock is going. Based on P/E, PEG with a company’s peer group. Look at companies not just in that sector but those with similar growth rates (one up and one down), see what their P/E multiples are.
  3. When a stock reaches your target, unless you’ve received new info, don’t think that it will go much higher.
  4. When you stop thinking (not believing) a stock will go higher, sell it incrementally.
  5. Catch all – it tells you when you’re being a pig. Trim it and play with the profits if you must. But trim it.
  6. Be eager to take profits. If you can’t decide, sell and take the profits.

Tip for selling stock with losses

  1. If the reason you had for buying a stock stops being true, get out.

General Tips

  1. A stock’s sector determines 50% of its movement.
  2. Stay out of stagnant sectors, like supermarkets.
  3. Get in growth sectors, like the internet.
  4. If the sector is growing more than the stock in the sector, don’t buy.
  5. If the stock is growing faster than the competitors but has a lower P/E, then buy lots.
  6. Switch out the mediocre for the best of breed.
  7. Make sure the sector isn’t hurting.
  8. Chemical companies use lots of natural gas, so sell them when natural gas is expensive.
  9. Know if your sector is tied to the American Federal Reserve or to BRIC (Brazil, Russia, India, China). Because if your sector is tied to the Federal Reserve, when the Fed raises interest rates, your financial stocks, like banks, will go down. If you go the the SEC’s website, you can find the 10-q (quarterly report) and 10-k (annual report). These reports break down sales by region so you can see who they are tied to.

3 Steps to Help Determine if a Stock is Good (if you have extra time to do these)

  1. Know all the sectors and make a list of subsectors.
  2. Form opinions about each sector and subsector. Update your opinions frequently because the sectors change often.
  3. Rank the stocks in each subsector. At minimum, form an opinion of the best breed of stocks in each subsector. You could also find what the best breed is in the industry, the best takeover, and the best speculative stock. You can start with at least stocks on the sectors you like. Once you’ve chosen your favs, reevaluate at least weekly.

List of Sectors

Aerospace (aerospace cycle, usually 7 good years then 7 bad years, 2009 started the 7 bad years)

Automobiles

Consumer goods

Defense contractors

Financial (i.e., banks, investment banks, discount online brokerages, savings and loans, credit card companies)

Food and beverage

Healthcare

Housing

Industrials

Metals and minerals

Oil and gas

Paper and chemicals

Retail

Services

Technology

Transports (trucking companies, railroads, airlines, any company that services those businesses)

Utilities

– Knowing the subsectors can help you stay diversified. If you know exactly what a business does, and not just which sector it is in, it will help keep you diversified.

– Start with what you know. Don’t make a list of S&Ps 146 sectors. You can rely on your intuition. Know about 40.

– Virtually every sector is levered to some kind of cycle, except technology. Check the photo below on when to buy what, during the cycle for the business cycle. Not everything is linked to the business cycle, see list in photo.

Investing Cycle

-Tips: Peter Lynch says to invest in what you know (your local bank, etc), but Jim Cramer says it’s numbers that matter, don’t be deceived by your own perceptions.

10 Lessons Learned From Making Bad Calls

  1. Resisting the business cycle is futile. It doesn’t matter how much you like a stock based on the fundamentals. Just sell it when the business cycle tells you to.
  2. There’s a market for everything. Pay attention to it. If the market gets flooded with a certain type of stock, like internet stocks, the value of all those stocks will go down. That’s what happened in 2000. Too many dot com IPOs. The fund managers only want so many of those types of stocks in their funds.
  3. It’s not enough to do the homework, you have to do the right kind of homework.

If you want to make money in a year, research how it will perform over the longer term (number of stores they will be building, etc).

If you’re looking to make money within a month, then look for that specific catalyst to drive the stock up and the company’s relationship to it (like betting on company’s earnings – they go down, stock will drop, or they go up, stock will rise; only look at 3 months reportings – Will revenues, sales and earnings beat expectations? You just need to know the facts about the quarter).

  1. Latin America is always a trade. It’s a trade, never an investment. It’s too unstable. Don’t be confused, you can buy stocks that sell to Brazil, but not Brazilian stocks. Don’t only take your profit on these stocks, sell the whole thing.
  2. Don’t be afraid to say it’s too hard. Some metrics are too hard to predict, don’t try to invest based on them. Avoid same store sales in the food service business (Dominos, Starbucks, etc). When companies are reporting their earnings the same for the next quarter, it’s too hard to say if will really go up or really go down.
  3. Not all companies that produce commodities are as interchangeable as their products. Companies producing the same commodities are not equal. If a stock is cheap, it’s usually cheap for a reason. Acquisitions usually drive stocks down.
  4. Past performance is not an indicator of future success. Investing based on your precious success in a sector is wrong and expensive. Don’t believe in lucky streaks.
  5. Never invest based on borrowed convictions. Research it out yourself, go with your gut.
  6. When you’re playing a big rally, make sure your stocks actually fit the bill. When there’s a rally, but it’s defined by the sector rather than industries (subsectors), don’t blindly buy. Figure out why there is a rally and which companies are actually driving it. You can make good money in a rally, just make sure you know what specifically the rally is about and buy those directly related to it.
  7. Don’t try to smash iconic truths; try to make money. Panic loses money, but a healthy fear of unnecessary risk will only save you money.

10 Rules for Buying and Selling

Buy Calls

  1. Follow the Street’s lead – most of the time it works. How do you know when they (those on Wall Street) are buying? When a stock price goes up significantly and there hasn’t been a bid takeover. The same is true when a stock goes down significantly. This may be more true with stocks than with its sectors. A casual glance at the new high loss for the New York Stock Exchange, or Nasdaq speaks loudly about what’s working. They don’t get on that list for nothing. The big moneymakers are creatures of habit: If a stock or type of stock has been earning them money, they’ll throw more capital into similar stocks.

For example, fund managers invested in a titanium company that was making them money, so they found another company to invest in that was expanding into more titanium.

  1. How to be a contrarian and still make money. Understand what will make a stock move to ‘in favor.’ If all earnings are low and you think the company will blow the earnings away, it’s a good thesis. You just have to know what catalyst will change their minds.
  2. The Street is never bullish enough on good stocks and it’s never bearish enough on bad stocks. If the analysts like a stock you like, like it more than them. Either buy more or don’t buy any.
  3. Don’t be a snob. Some of the best trends are hidden from Wall Street because they don’t shop there or see it. If you can recognize the limitations of moneymakers, you can make a lot of money.
  4. Pay attention to politics because the street is too focused on money. Pay attention to government spending. When people are afraid of inflation they buy gold.
  5. There’s rhythm to investing in small cap stocks with momentum and not much analyst coverage. If a stock has 2 analysts, you’re still in the safe zone. If a small cap has 4 analysts, it’s too much coverage. Don’t forget about getting out when PEG is more than 2.

Sell Calls

  1. Use tips as a contra-indicator. Tips are a great indicator to sell. It’s either insider info, which is illegal, or tips are based on public info. If it’s old news, it can’t make you money.
  2. Hype plus massive short interest means sell. Click on key statistics, look under share statistics for the short percentage of the float (the shares that are listed and publicly traded) that has been sold short. If it’s high, anything over 10% (anything over 20% is astronomical), you could be set up for a short squeeze (expected to decline, but goes up because they have to buy back their shorts) or a decline. Get out.
  3. Know how to spot downturns in cycles other than the business cycle. It can take 3 months for a good cycle to turn bad. If you learn new orders are declining, the stock will have dropped a bit, but you can still get out. (Ex, companies buying companies out or mergers.)
  4. Look out for multiple contraction. When growth stocks with high P/E multiples (30 is high, above 40 is astronomical) get lower multiples during a slowdown, even if they deliver on their earnings and growth estimates, get out before they report their earnings. Watch for interest rates rising, that’s the main indicator.

Finding Stocks

Read Wall Street Journal, thestreet.com, or Investors Business Daily.

Tricks:

  1. Keep your eyes on the fifty-two-week-high list. Look for stocks that had a recent pullback from this list. If there isn’t a bad reason it’s off, the stock could be good.
  2. Check Jim Cramer’s charitable trust stocks (actionalertsplus.com). This is not a free site, however.

Stock Worksheet

Step One

How did it make its money last year?

Last quarter?

Are these high or low quality earnings?

Step Two

Sector?

Sector performance over the last 3, 6, 12 months?

What forces tend to move stocks in this sector?

Step Three

Last year

Last 6 months

Last 3 months

Last month

Last week

Step Four

Does this company face any threatening competition?

What is the p/e of this stock?

What is the average p/e of its competitors?

What is the PEG rate of this stock?

What is the average PEG rate of Ira competitors?

How much cheaper or more expensive is this stock compared to its peers?

-Based on PE

-based on PEG

Step Five

How much debt does this company have?

How much debt does it have due this year?

How much free cash flow did the company have last year?

How much free cash flow should it have this year, according to analyst estimates?

Will this company generate enough cash flow to pay its debts this year?

Can it pay its debts next year?

Will it have to sell assets to pay its debts in the near future?

Step Six

Does it look like a good investment in light of your homework?

The worksheet makes it simple to choose your stocks and remember why you chose them.

There’s lots of great investing information in the book and I only listed out some highlights I thought were most helpful. To fully understand Jim Cramer’s investing strategies, I’d recommend reading the book in its entirety.  But now that we do know some of the great tips for picking stocks, buying stocks, selling stocks and general investing, let’s get to it! What tips do you have to offer? Share with us below.

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