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tv   Mad Money  CNBC  July 27, 2013 4:00am-5:01am EDT

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my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. >> hey, i'm cramer! welcome to "mad money." welcome to cramerica. i'm trying to save you a little money and my job is not to us entertain you, but to educate and teach you. so call me at 1-800-743-cnbc. tonight, i'm letting you in on something big! the method to my madness. i know this show is the craziest, most random, frankly bizarre thing on television, but
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i know you won't find investing advice this good anywhere else. unless you're one who tunes in just to see if tonight is the night the show really does go off the rails. which after multiple years of airing is possible any given i'm not. sorry, guys. there's a tape delay. but you keep watching. for those of you immersed in trying to make money, than rather watch me traipse around like some say i am, i believe you can do everything i do at home. specifically investing in stocks, running your open portfolio rather than dumping your money with a buy and forget about it fund. particularly when we had record low interest rates, remember those days? something anyone can do as long as you can spend five hours a week during the homework.
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researching the stocks. although i'm condoning a couple hours a week these days. because the research is so readily available if you have a pc. on cnbc.com, yahoo finance or from the plain old websites from the actual companies you are thinking of buying or keeping up on. in fact, i think actively managing your own portfolio is essential especially in the wake of 2008 which proved the uselessness of index funds that merely try to mimic the market. mimicking the market returns is not enough. especially not if you're trying to get back to even. you have to do better. the only way to do that is by picking your own stocks and actively managing your own portfolios for your own tax consequences. how do you start? that's what we're talking about tonight. like i said, this show is ab the method or methods to my madness. how do i pick stocks? that's the question everybody would love to know the answer to. tonight you get a piece of that answer. the truth is that i've got far too many methods, far too many
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ways of picking up great stocks that ever cover all of them in one single show. but i want to give you some of the tools of my trade enough so that you can start to pick stocks like yours truly on your own or do better than i am. because you don't have to follow as many stocks as i do to be successful. i do follow a lot of stocks which is something that was recently tested at the barry inn which i co-own in summit. i serve the eggs on sunday and i do the dishes there. at the bottom of the show, we'll give you the ultimate insider's perspective on how the market works and how it can make you money. i'm not here to give you the proverbs like give a man a fish rather than have him go to whole foods, i'm here to empower you. methods that have served me more than 30 years of investing and at a 24% annual return. these skills are what refreshes the show. and they guide me as i manage my own charitable trust which you can follow along, another ten
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year labor of love. i gave away $1.5 million in winnings. something i'm proud of. even though the product is difficult to put out every day as i do. one of the easiest way to identify the stocks that could but won't necessarily always end up on the show is by watching -- i can't believe this, the new high list. stocks on that illustrious list, obviously they have something going for them. and that's especially true in the market is whipped in shape as only the best of the best can hit new highs when the market is falling apart. so what's it tell you when a stock is on the new high list? id's -- it's part of a genuine bull market or the company has serious momentum. many stocks on the new high list often keep going higher. in a great bull market like we had from the bottom of 2009, any market that more than doubles
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from the bottom has to consider a great bull market even as we resist such labels. we saw that over and over again. the same stocks would hit new high after new high after new high. following them was a great way to make money. even as the bears claimed endlessly that the bull market was false and couldn't be trusted and we were playing momentum. listening to the bears caused you to miss out on one of the greatest rallies of history. but generally speaking, things have worked out, and will continue to work. i'm not saying that you can chase stocks that are hitting the highs because they'll keep going higher. that would be the ultimate in foolishness. true bozo the clown behavior. i'm saying if you want to identify stocks where do you start? you identify them with what will be winners in the future with winners already. unless there's been a big sea change in the market caused by a big political shift or a shift in higher interest rates. looking at the biggest winners of the present is a terrific way to start looking what could be the winners of the future. that's the thing about the market. not always that hard to play
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once you understand that there's often more continuity than change. things pretty much going the way they were going until something major shifts. then you have to alter your course. those tectonic course changes can be pretty radical though. that's why you have to be re-evaluating your ideas and never dig in your heels when the facts change. two important disciplines that i stress in the best selling books, getting back to even, it's a book about methodology not just individual stocks that were working at time. it's pretty indispensable even as we only got back to even and then some. when you're looking for stocks to invest and hunting for the bull markets at 6:00 p.m. and 1:00 p.m., you have to look at the bull list. a terrific way to begin. now, don't just pluck names off the new high list, they'll keep going up. that circular reasoning. why don't i recommend them on the show, well, it would be lazy and irresponsible. on many thing, a lot of them negative. no, no, anyone who sees my
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insane 4:15 a.m. tweets, i apply the same rigors, so i rarely claim not to buy off the high list unless there are circumstances which i'll talk about later in the show. what i like to do when hunting the stocks, wait for something to pull back from the new high list. see, that's the best place to start. i like new high list pull backs. the pull back preferably at least 5% down gives you a good lower priced entry point in the stock that's probably got a lot of positives going for i. remember, i'm not telling you to chase momentum. you should be conscious of price. buy on weakness, like you want to sell on the strength. i'm throwing in the caveats. i don't want you to look at it at a shopping list. it's an important one. it's fabulous way to identify potential. i stress that word, potential stocks to buy. you only buy stocks that will pull back if you're confident they'll make a come back not
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having to do with the market. you have to do all the same homework you do before buying a stock. you must have conviction. even if it's a cynical convict then that the stock is going higher, meaning you know the growth funds can't resist stocks of high growth companies and they always come in and support their stocks after a few down days. they really do do that. i know the guys. they do do that. the biggest caveat of all when you're shopping for stocks that have pulled back from the highs, make sure they haven't pulled back for a good reason. make sure that the sell-off is extraneous to the business. don't go buying a home builder that's down if interest rates flew up, because that could hurt the next quarter. it would have nothing to do with the stock. be certain you're dealing with a momentary damaged stock and not a troubled company that's going down down down down. how you tell the difference? if the fundamentals haven't changed the stock probably hasn't fallen from grace. it's pulled back for mechanical reasons. profit taking or pulling back in the market in general. those are the two main reasons.
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thanks to the fact that stocks have traded like commodities causing huge sell-offs that make no sense in everything or double, triple, like etfs that are more powerful than the stocks itself, you'll see them pull back from the highs that have nothing to do with the strength of the underlying businesses. those are the ones i want you to buy buy buy. but if the fundamental picture changes, whatever it made it attractive is a climb up to the new high list goes away, then that stock is no longer a sell sell sell. buy buy buy, no. don't buy. the story has to be intact or this method will not help you one bit. while it isn't a hard and fast rule, i tend to like the stocks pulling back from 5 to 8% from the high. less than that you're probably too early. more than that and maybe something is indeed very wrong with the stock and you don't know it. here's the bottom line. as billy joel said, you may be right, i may be crazy, but watch for stocks that have pulled back
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in the new high list especially because of a broad market sell-off. some of the best picks have come out of the process and hopefully some of yours can too. i need to go to robin in new york. >> caller: hi, jim. >> hi. >> caller: i'm a blonde who said on your family show that if you're single, i'm interested and i want you to know that i still am. >> well, hey, you know, you never know. you always kind of like put it out there. >> caller: i'm putting it out there. i'm going to put out my question. >> okay. >> caller: my question is about purchasing more shares of stock. i have a number of stocks that i purchased at low prices like eog resources at 30, lions gate at 11 and i would like more shares of these excellent companies. given that the prices are now exponentially higher than what i originally paid, but i want more shares and the larger positions in these companies do i buy more or do i wait for another bargain to come around?
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>> robin, this is really difficult. i talk about this all the time with stephanie, it's called violating your basis. i don't like to violate your basis, but let's overlay that with the discipline if the stock is down 5 to 8% you can start a new position mentally even though it would be part of the old position physically and buy some of the high quality stocks. let's go to joe in ohio. joe? >> caller: a big browns burg bulldog boo-yah to you. >> of course. >> caller: a question for you here. i have some older friends that were given proctor & gamble stock when they were very young and they've kept that stock for 60, 70 years. >> wow. >> caller: it's split many times and they have become quite wealthy. my question is, how do you pick a company with the idea that you're going to hold the stock and watch it grow as it increases in value and splits? >> well, i mean, the main thing obviously -- we're interested in fundamentals. as long as the stock has good
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fundamentals and you're not too greedy, meaning you have -- once you have sold off enough to be able to recoup your initial money, let it run. that's always been my philosophy. that's how you really, really win big as your friends have. methods to the madness of the market, number one. i want you to check the new high list for pull backs. and as billy joel said, you may be right, i may be crazy. "mad money" will be right back. tphoe or don't miss a second of "mad money." follow @jim cramer on twitter. have a question? tweet cramer #mad tweets. send jim an e-mail or give us a call at 1-800-743-cnbc. miss something? head to madmoney@cnbc.com.
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most importantly, 9 out of 10 people got their hoveround for little or no cost. call now for your free dvd and information kit. you don't really have to give up living, because you don't have your legs. hoveround replaced the legs. and now every hoveround comes with this handy tote bag and cup holder for access to your favorite items. and right now, get this limited edition hoveround america travel mug free with your hoveround delivery. [singing] hoveround takes me where i wanna go. call or log on to hoveround.com to find out where a hoveround can take you!
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a wise man once said in a mad world, only the mad are sane. and nothing is more mad than the market. and yours truly is just crazy enough to know the landscape like the back of my hand. so tonight i'll reveal some of
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the best tricks for buying and selling stocks, truly timeless investing methods to the madness. think of me as maybe the -- how about the penn and teller of the stock market. i want to pull back the curtain and show you how professionals know what to buy and what to sell. there's no magic. disciplines can make you mad money. don't have to be a genius. you don't need to be that smart to be completely honest. you need to know what you're doing and put in the homework that's where cramer the sad but wise clown comes in. now, let's move on to more important things like how to find stocks that are great buys. earlier i was talking about picking off stocks that have pulled back from the new high list because you get a cheaper entry point from the stock. you don't want to buy names right off the new high list because you're paying too much for them. you can get a better deal if you're patient and wait for some weakness. given how volatile the market is, there are very few occasions when buying a stock is justified but sometimes the justify is so hot and sizzling that you just got to buy it.
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wherever you can. as soon as you can. because it's not going lower any time soon. you won't find these often, but you have to remember not to buy all at once. if you want to buy a hundred shares of a stock and you think it has so much mojo you won't get a pull back from the buy, buy 25. see what happens it goes higher and you don't get to buy more and you grab a quick product on the 25 then find another stock. there's stock to find and another train coming into the station and leaving. >> all aboard. >> i have one exception where it is indeed okay to buy a stock on the new high list. the only time but i thought i had to give it to you. all right. if you see insiders buying the stock when it's at a 52-week high that's a clear sign you want in. it's a rare thing to see happen. but my experience rare still of picking the stocks doesn't work. it's a great sign of their confidence in the business.
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who knows the businesses better, doing well than the people running it, right? normally insider buying ranges from meaningless to a small -- its own insufficient reason to buy a stock. a lot of times insiders will buy the stock to create an illusion they're doing better than they are. insiders aren't stupid. they know if they're seen buying their own stocks then the market will smile upon them. we ignore most insider buying because it can be flim-flam and window dressing, that kind of thing. that said, when you truly get colossal insider buying, even if it's not a at the high you might want to look at the stock in question. it's a pretty powerful endorsement when they buy a
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whole lot of stock. it's really the volume of the insider buying that declares the sincerity. it's the volume. we are only focusing on one one, buying at the high. there's nothing more arrogant when they back up the truck at the 52-week high. we know we flock and we're so confident that it will keep going higher, we'll buy some shares hand over fist right now. we're not waiting for a pull back, arrogance driven, this is bankable hubris. some notable exceptions, occupy and of course the "mad money" wall of shame. let's assume they probably know what they're doing. but not everyone deserves the benefit of the doubt in the business. after the financial crisis melt down in 2008, i know people think all ceos are a bunch of frauds and crooks, especially those who got burn owning the old fanny mae and lee man brothers. if you're going to own stocks you need to extend some measure
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of trust to those who run the companies or you shouldn't buy stocks at all to be frank. getting it to the 52-week high list is a pretty darn good reason to give the ceo the benefit of the doubt. they won't buy unless they have an unshakable conviction of their companies or perhaps they have been contacted by others to buy the business. most investors aren't smart enough to wait for a pull back. insider buy at the high don't think they will be a pull back and there's nothing more than bullish than that. sure i want to wait for a pull back, but it doesn't happen that often. when you see insider buying in a stock that's at a 52 week high, you might want to be buying too. let's go to karen in ohio. karen? >> caller: hey, jim, my husband and i got a letter from a company that we have stock with that wants to purchase back 350
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million in shares. they'd say they would pay $22.50 a share which is approximately 14% of the stock that they own. when is a good idea to do this? >> if you need to raise cash, but otherwise, i want to stay. i want to own. i probably even want to buy to be honest. i probably want to buy along with them. let's go to russell in florida. russell? >> caller: hi, jim. i was wondering could you tell me the advantages and disadvantages of stocks versus mutual funds and which one you would recommend for someone who's nearing retirement for a steady stream of income? >> for steady stream of income there are a number of mutual funds that actually are income oriented funds. you have to look at them and look at the three and five year records that's what i like to do. individual stocks i like because i can control my tax destiny, control my basis destiny. mutual funds i'm along for the ride. i don't know what they own or what price they buy at which is
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why i'm hesitant to recommend mutual funds. the great conundrum, how to find stocks that are great buys. one is to follow me and the next -- the next is mad method number two. i want you tow look for insider buying at 52-week highs. something is going on when you see that. after the break i'll try to make you more money.
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you're in luck because you caught cramer on a good night. i'm not going home to sip that cheap scotch on my dirty linoleum floor. i apologize to dewar, it's pretty good stuff. no, i'm going in a great mood. maybe a manic mood. well, let's just see i'm pretty darn productive when i'm in high gear. i'm revealing the methods to my madness. pull out a pencil and paper.
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start jotting things down. because what i'm about to tell you could be incredibly useful. i'm giving you some of the best ways i know to pick stocks. i'm teaching you to invest like cramer. not to be like me, because i have emotional issues, you'd probably prefer not to emulate. off track. so far i have been giving away two of the precious secrets, two of them i use at charitable trust and unlike lady gaga i play with an open hand, not a poker face. i would never mind raising a glass except when i'm stock picking. i look for stocks that have pulled back from the new high list. that's not a reason to buy in and of itself, but a great place to start. a launching pad. i like them that are around the new highs and that's a verification. it's as the people running the
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company really believe the stock has legs. if they believe there could be good reason for us to believe, but again, this alone, not enough to recommend the stock. these are just places to start. you still need to do the home work, check the fundamentals, make sure you like the story behind the company and dive in before you buy. what i'm teaching you tonight are tells. that's the term i used in my hedge fund. it's a signal that the stock is worth the time and effort of reading through the conference calls, the transcripts and the quarterly filings. of course the research reports. there are thousands of stocks out there. any method we can use to narrow down the ones that are attractive are methods worth having. that's what tonight's show is. we talked about insider buying at the high. i don't use insider buying to term if a stock has it going or not, there's one other scenario where insider buying makes me let's say really react. makes for an incredibly bullish tell. that's when the stock has a
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heavy shore position, a lot of people have bought and sold the shares and are waiting for it to go lower, return it to the bank they borrowed from and collect the difference they first sold it at and then the price they bought it at later. think of as a regular investor, only in reverse. we try to buy low, sell high. shorts is try to turn that around. they want to sell high and later buy low. when a stock has a lot of shorts in it that means there are a lot of people who have serious conviction, conviction that the stock going lower. in fact, as i always try to tell people, it takes much more conviction to short a stock than to go long. that's wall street speak for buying a stock. when you short the potential downside, it's infinite. the stock can go up up up and when you're long, the stock stops losing you money when it hits money. shorts lose money when the stocks go higher. and the other important note about short sellers if there's a lot of them and the stock all of a sudden gets some great news, we get a short squeeze. it sounds like what it is. in order to bail or close out the position, they have to cover. when a lots of short cover it in a panic, the stock will surge. because what you really have a
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lot of people desperate to buy the stock, a lot of demand. they have to buy unless they want their years wiped out. so many short sellers have in the last few swoons, well, they didn't cover. they didn't know when to quit and they got hurt. so where does insider buying fit into the short selling equation? okay, you have a short with a high -- you have a stock with a high short interest. you can look that up in all the different websites. then some of the people who run the company start buying shares. buy buy buy buy. it's almost like drawing a line in the sand for the shorts saying, aha, our stock goes this low and no lower. and this often leads to the short squeeze. shorts are smart. in fact, a lot of the i'm they tend to be smarter than regular, you know, -- they tend to be -- but they don't know about the business than the insiders who run it. management is buying the stock and buying it in sizable amounts and in real -- you know, maybe even a million dollars worth. you should start doing some
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homework and usually you want to side with management. then you can ride it higher and higher true jackie wilson style. as the shorts panic and push the shares higher in the desperation to cover their positions or close out their shorts. similar to a heavily shorted stock, that's another line in the sand situation. companies often repurchase their own shares. while not all buy backs are bullish, some can be an outright waste of money. and i issue them multiple times each day, a substantial new buy back in the face of the shorts is a good reason to take a closer look at a stock. now, a note of caution here. you have to be very careful in dealing with the company in the cross hairs of the hairs especially when the people are nervous and the market is in bad shape. they can wreck the stock. even if the fundamentals of the company is fantastic. these days they have much more firepower than ever. i talk about all the time on the floor of the stock exchange.
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the old brokers, they believe it. that's because the s.e.c. under both the democrats and the republicans looks the other way when shorts raid stocks with bogus stories about accounting issues and management blunders. put them on sites that are unedited and people read them. and it's easy to do. it used to make it hard to create bear raids. that was a good rule, but somehow the government got talked into abolishing in order to make trading more quicker and more fair for the shorts. more fair for the brokers. a lot of good that did for us. right? it's a reason why so many home gamers left the building. we establish the rules in order to stop the fomenting of panic. something that happened during the great depression, but the government seems to think that panics are no longer possible. human nature has changed. we have to be more careful than ever not to succumb to that and
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those who plant stories on the web sides that people do not check before hand. they just read it. oh, it's on a website. without those predictions without those protections the shorts were able to run wild and assassinate the stocks of many companies during the crash of 2008. until 2009, that put the bulls back in control. but they came back with aggressive negativity in 2011 and this time you have seen double and triple etfs. well, we have learned you have to tread carefully. you can still find great opportunities with the shorts who have overreached, but i have to warn you that the balance of power has shifted in recent years in gave over the shorts and against you the regular individual investor.
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that means even if the short sellers are wrong about the company's prospects they can demolish the stock. don't underestimate the amount of damage they can do. the best protection is offer for stocks that pay good solid dividends. short sellers have to borrow stock to short. that means they have to pay the dividends to the real owners. that's people who are pernicious in the shorting. heavy short interest can equal raging buy, as long as you avoid situations where the shorts are determined to crush the stock at any cost. stay with cramer. we used to live with a bear.
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[growl] we'd always have to go everywhere with it. get in the front. we drive. it was so embarrasing that we just wanted to say, well, go away. shoo bear. but we can't really tell bears what to do. moooooommmmmm!!! then one day, it was just gone.
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mom! [announcer] you are how you sleep. tempur-pedic. welcome back to this method to my madness episode, the craziest most enlightening show on television. if i'm an ego maniacal person to say so myself and i am. we're talking about the sell sell sell, and i can help to try to make you money. today, i want to teach you how to do it for yourself. so far we have focused on some of the methods i use to pick stocks and now i want to teach you about a way to trade them. this is a discipline that's incredibly useful and difficult, but terrific in volatile, crazy markets. it is called trading around a
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core position. i have used this term, people constantly ask many what does it mean, here we go. my critics say i'm all about trading, i don't have advice for regular investors i'm all about the short term. that's entirely untrue. the show is about longer term investing. however, to put aside whatever humility i have left, i will admit i have a darn good trader and i can only trade on the charitable trust. and i am not allowed to short sell or use options. two weapons i advocate you use when you think it's right. it pays to put trading disciplines in practice. you can buy more shares of the stocks you like at lower prices and sell more when they're flying high. that's the essence of trading around a core position. trading is about profiting from short term fluctuations in the stock's price. sometimes they're caused by a catalyst. sometimes they're the result of
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the topsy-turvy market driven by etfs and macro data. knowing how to trade makes you a better investor. trading around core position is one of the most useful disciplines out there. especially like the markets in 2011. 2012 because of the european banks. the fiscal cliff. even in the bond swoon in the spring of 2013. what does it mean to trade and a core position? why don't we do this step by step. first, you need a stock. one you have an opinion on. find a stock you believe will be going higher over the longer term. what you're looking for here is a great company where the stock could get toss around by market volatility. but should go higher if you have patience. even with trading you have to
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have conviction. if you were just investing and set up buying in increments because we know that buying all at once is arrogance that would be it. let's use google as an example because i like the stock very much. only over the long term, for investing. because it's very volatile and given to quick pit falls and declines. if you want to own 100 shares of google over time, then the way to set that up is buying 25 shares four times over a period of months or months and that's your core position as an investor. buy at a discount each time. i know many of you want to buy it all at once, but you feel discouraged because remember the amateur day that traders got blown out. the key word is amateur. you home gamers can make money trading if you do it right like a professional in the old days. when commissions were higher that wasn't true. the commissions would eat into the. pros. but that has not been the case for ages. so i'm in favor of people who are disciplined traders. come back to the core position.
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we own a hundred shares of google. let's say it's trading at $1,000. every time it jumps 15 points you sell some shares. you keep scaling out the same way up, then wait until something happens to knock the stock down, as long as the reason why it's down isn't because the company has had real prospect damage. it shouldn't be unreasonable given we're in a world that stocks can get crushed by the fundamentals not to do with google. then you buy it back in the same increments. let's keep using increments of 25 to buy it back. if google comes back to 1,000 -- say from 1100, you buy 25 shares, then another 25 down 5%. that's if you sold 50, so on. you can take your winnings this way, help buy 25 more if it keeps going lower. you have to sell 25 before the swoon. i know it's small potatoes, 25 here and there. but no, this is all about adding up gains. up 5%, sell 25, down where you started, repeat the process on the way up. over time your profits do add up. that's what trading about the
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core position is all about. a lot of people think trading is exciting it can be. but if you're trading around the core position it's not exciting. quite boring, very methodical. all you're doing is watching the stock move and trimming and adding. the image of trading is reckless and irresponsible, trading around the core position is the height of prudent portfolio adjustment. particularly if it went up very big. that's why you have to trim some. then you'll be ready when it comes back down. you can scale in or out of positions in whatever size that makes you comfortable. avoid putting yourself in the spot where you have too much on the table in case the stock gets swatted down or too little to take advantage of any upside that comes your way. trading on the core position is important. it's basic and everyone can use it. i even those who you find the notion of trading as opposed to investing as abhorrent. if you want to go to the ultimate level, i did two chapters on this, very hard. i have to admit. it's in getting back to even. this is how i used options. i used to think about before options action, that some of the material is too sophisticated for tv.
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but that show was before me. look, i have to tell you, on that show, the strategies that i'm using are -- they're not child's play but they're very easy. i know you think that i can't share these with you and you have to be willing to put in the homework to do them. but the time and inclination is worth it to look at the options strategy in the book. the stock i use to demonstrate happens to be google. what i do is i do what's known as stock replacement. okay? i use calls to replace the stock and with a very high dollar stock it is worth it. it's a cheaper and less risky way to what i call creating a google. at a more reasonable dollar amount price than it sells. a if you have watched options action you will not have no problem understanding my theory of creating common stock with options. here's the bottom line. now you know the basics of how to trade around the core
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position. one that allows you to generate lots of small gains and i can tell you from my old hedge fund they sure do add up over time. stick with cramer. [singing] hoveround takes me where i wanna go...
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where will it send me... one call to hoveround and you'll be singing too! pick up the phone and call hoveround, the premier power chair. hoveround makes it easier than any other power chair. hoveround is more maneuverable to get you through the tightest doors and hallways. more reliable. hoveround employees build your chair, deliver your chair, and will service your chair for as long as you own your chair. most importantly, 9 out of 10 people got their hoveround for little or no cost. call now for your free dvd and information kit. you don't really have to give up living, because you don't have your legs. hoveround replaced the legs. and now every hoveround comes with this handy tote bag and cup holder for access to your favorite items. and right now, get this limited edition hoveround america travel mug free with your hoveround delivery. [singing] hoveround takes me where i wanna go. call or log on to hoveround.com to find out where a hoveround can take you!
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crazy? crazy for you. that that's right. i'm crazy for you the home gamer. for you, cramerica. because the markets is a crazy place. you may need a mad man like me to get you through it. here's one more method to my madness and this time i want to talk about selling. when to sell. some reasons to sell, along with when you buy. it may be the most important and undervalued tool in your home arsenal. selling is considered verboten. how do you know when to sell a hot stock? how do get you out before the party ends so you're not one of the last people around who gets stuck cleaning up the mess?
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this needs answered because there's a lot of money to be owned when owning hot stocks but you have to know when it's time to leave the table. there are always naysayers. sooner or later, virtually all really, really steaming hot stocks that get overvalued do implode. this happen big in recent years with chipotle, and wow, i mean -- you had to get out. and it can happen sooner rather than later. all the negative talking heads you kept out of the stock with the recklessness disguised as prudence cost you a great opportunity to make money and it tice a too late. they don't know where they're going to top out. i'd be afraid to buy them too if i didn't have a discipline that tells me when you should get out. lucky for you, i got it. and you're about to learn it.
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first, when i'm talking about hot stocks i really mean the hot speculative stocks. stocks of companies with low market capitalizations when they start. it begins with little research coverage, they're subs. they can go up for a long time. they can catch fire and then stay on fire for years. the key to figure out when interest is peaked and knowing when it's time to sell is by watching -- yes, i have learned this, the analyst coverage. you have to use your own judgment here. but a good rule of thumb is once one of the hot, relatively obscure stocks has at least a half dozen analysts covering it, the run is going to peter out. it will be too big and too well known. it's the rare stock that doesn't behave this way. you can find out how many own a stock by looking it on the internet. this isn't hard information to find.
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this formula has worked for me as long as i could remember, frankly. as far as i could tell, it work because the number of analysts on the stock is a good gauge of how much awareness there is in the name and whether it's saturated with buyers or not. and when all the people who would be interested in buying that particular stock have already bought it, that's why i gauge it through the interest through analysts. they come out of nowhere, attracting more and more attention, more and more backers. everyone wants a piece of the stock. they have a piece of the stock. then indeed the run is over. time to go home. one of my best examples of how this process plays out is still a monster beverage. it was formerly known as hanson natural. it was the hottest stock in 2004 and then in 2005 and 2006. it went from $18 and change at the beginning of 2005 to $200 and people were telling you hanson, a beverage company that it was a fad and it would have to dry out and crash. well, it did do that ultimately, but took years for them to run out. that's often the case. how did i know to tell you to get out of hanson? well, i called the top in hanson. because back then because i know how the stocks were. it peaked in 2006. this was in part deux to the fact that the company did a five for one split.
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even though splits aren't supposed to do anything, this encouraged people to take something off the table that's clue one. but there was another reason i believed it would peak. that was that it picked up its fourth analyst. a very visible one or may 10, 2006, when the big firm of goldman sachs started to cover the stock. it's become an institutional name when goldman sells it. you had two months to sell. there was still some good upside left after goldman started the coverage. but prudence dictated that we sell once the stock had all the analysts covering it. hanson pretty much all other small hot stocks started to cool off once it hit the critical mass of analyst coverage, especially a big-time analyst like goldman sachs. once it's following something, believe me it is no longer undiscovered. incredibly after they fell off the radar screen, it had gotten on to -- people stopped talking about it. and the analyst coverage dwindled. that's right.
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people forgot about it again. you know what happened? after it was forgotten people stopped writing about it, the stock recharged and powered higher again like nothing ever happened. it was an amazing renaissance. again, a testament when analysts stop following a company, but the company's earnings start percolating again you have a stock that can get its act together. hanson came back as the named monster beverage company and it powered back to the all-time high in the spring of 2012 when it was no longer the focus. the bottom line, small speculative, steamy hot momentum stocks are worth owning but you must know when to sell. that comes when you see too many analysts jumping on the bandwagon. hey, you know, letting you know when you've got to got scaling out. stick with cramer. does the market have you stumped? no fear, cramer is here. just e-mail at madmoney@cnbc.com.
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are you ready, let's take some tweets. first one, this comes from bison boy underscore 51. jim, are stock splits a thing of the past? these are tricky, after stock splits on the four for one basis you get a lot of selling. i wish a lot of companies would split because we have a lot of companies would split because we
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have a lot of people who want to own stocks. and as soon as they hear about that big dollar amount, even though it's not in the market yet, they don't want to be in it. and i can't keep trying to do missionary work in saying, listen, it doesn't matter if the stock is at $300. if you want individual investors, split your stock. maybe you don't want individual investors. the next tweet say, hi, jim, can you explain when an analyst upgrades it goes downgrades? that's too cynical. that is not the case. often is the case that a stock gaps up when a major firm recommends it. i know there's a belief that wait a second all they're doing is taking out their friends. you can get in a lot of trouble if you leak your buy recommendations. so often if the stock doesn't go up, it's because maybe they have no power. okay? meaning people don't respect them enough. here's another tweet. this is from yahoo k. words cannot describe my love and respect for you. you inspired me when i was down, you picked me up with your
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knowledge. thank you. okay, look i need to do for you. it's amazing. when i read something like this it does matter. i leave for the office a lot, man, that show was hard. regina, the executive producer often has to bear the brunt, man that show was hard. but when i get tweets like this it makes it worthwhile, so thank you very much. this tweeter says has the bull market ever ended without the fed raising interest rates? yes. a calamity can change everything. the fed may have no control over whatsoever. brad, let's take our next tweet from brad, which says, what's your opinion on computerized trading? does it hurt the street? not only does it hurt the average investor but if i were the head of the s.e.c. i would call in meetings around the country, town halls and i would say what make you want not to be in? they'll get high frequency trading which should be
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re-examined and in many cases stopped because i believe it's actually trading on inside information. stick with cramer.
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stick with cramer. see, there are methods to my madness. i like to tell you, there's always a bull market somewhere, and i promise to help you find it right here on "mad money." i'm jim cramer, and i will see you next time. money on shoes and eating out and some video games. and you ask me, "can i afford it?" when you said you received financial aid, how much is this pre-school for a year to go to, really? >> $20,000. >> oh, god.

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