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tv   Mad Money  CNBC  September 11, 2015 6:00pm-7:01pm EDT

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those cowboy boots. i love it. >> dan. >> apple. i prefer risk reversal. >> looks like our time has expired. i'm sara eisen. for more "options action" be sure to go to our website, optionsaction.cnbc.com. we'll see you next friday, 5-30 p.m. eastern time on cnbc. 5:30 eastern time on cnbc. 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." i'm just trying to make you money. my job is not just to entertain but to educate and teach you. call me at 1-800 high pressur 7 pressure -- tonight i'm letting you in on something real big, the method of my madness. come on, i know this is the craziest, most random and frankly bizarre thing not just
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on business tv but television in general. i mean, think about it. a one-man show about business. but i also know that you won't find investing advice this good anywhere else. you know that too or else you wouldn't be watching. unless you're one of those people who tunes in just to see if tonight's the night that i actually do go off the rail. after multiple years of airing is always a possibility any given night. sorry, guys, there's a tape delay. keep wishing. although i do my best so it doesn't. this show is all about the method or methods to break from strictly quoting the bar to my madness. how do i pick stocks? what gets on the show? you always ask me that. why do i tell you some stocks are worth buying now instead of on the dip. hey, tomorrow. that's the question everybody would like to know. so tonight i'm going to give you pieces of the answer. let's get rolling. one of the easiest ways i identify potential cramer names for "mad money," the stocks that could but won't necessarily always end up on the show is by watching my favorite list from
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when i was frankly a little boy in fifth grade. i look at the new high list, i thought it was the guys hitting better than .300 in baseball. the highest of the high obviously have something going for them. that's especially true when the market is in bad shape. 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 hits the new high? either that it's part of a ge genuine bull market or serious sells or momentum. or maybe sector dust. no matter how they get there many stocks on the new high list often keep going higher because it's really a list of a-students worth investing. the a-students tend to repeat themselves. just like the smart kids in school. in a great bull market like we've had from the bottom in 2009 and any market by the way that doubles from the bottom has to be considered a great bull market even as i know so many resist such labels. we saw this new high list
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phenomena over and over again. the same stock would hit new high after new high after new high. and 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. listen to the bears cause you to miss out on one of the greatest rallies in history. now, obviously the rally since the bottom is more like the exception than the rule over time and all the years i follow the market. but generally speaking things have work will continue to work because these stocks typically represent companies that are best of breed. always remember that phrase because it's integral to "mad money." i'm not saying that just so you can chase stocks hitting new highs. true bozo clown behavior when i used to have hair, i'm saying if you want to identify stocks unless there's been a big sea change in the market caused by a radical shift dramatically higher in interest rates, looking at the biggest winners of the present is a pretty good place to try to figure out the future. let this list do it for you.
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it's already been scrutinized and scrubbed. that's the thing about the market, it's not always that hard to play once you understand that there's often more continuity than change. things pretty much keep going the way they're going until something major shifts. and then you do have to alter course. those courses changes can be pretty radical though. that's why you always have to be reevaluating your ideas and never dig in your heels when the facts change. something we emphasize over and over here andalso infuses my columns. and also my book, confessions of a street addict, setting scores with myself of course. it isn't called "mad money" for nothing. but you know what, when you're looking for stocks to invest in, when you're hunting for the bull market like i always do here, looking at the new high list is a way to begin. i don't just pluck names off the high list because i think these stocks have gone up so i think they're going to keep going up, that's lazy and irresponsible.
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i don't know anyone who sees my insane tweets at 5:04 @jimcramer knows, yes, someone else says is that someone else tweeting for you. who else would get up that early? and do you ever sleep? well, no. i mean, at least not for any long stretch. i play the same standards though of rigor to this show that i used in my old hedge fund. so i rarely recommend buying stocks trade off the new high list unless there's some special circumstances. i'll talk about those later tonight. what i do huntding for stocks and what you need to do is wait for the fable pullback. the pullback and i'm thinking something two or three, preferably 5%, that gives you a good lower price entry on something that's on that list. remember, i am not telling you to chase momentum. you should always be conscious of price and therefore try to buy on weakness just like you want to sell into strength. most people can't pull the
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trigger when the stock's going down because they think something wrong. i'm telling you if it's on the new high list coming down that'd be your man. i'm throwing these caveats in because i don't want you to look at your new high list as a shopping list. big mistake. it's a jumping off point. albeit a very important one for those trying to get started. pouring over the new high list is a fabulous way to identify o potential and i stress that word potential stocks to buy. you only buy stocks pulled back from the new high list if you're confident they'll make a comeback for substantive reasons having nothing to do with the market. you have to do all the same homework you ordinarily do before buying a stock. you don't get a pass there. you absolutely must have conviction even if it's a cynical conviction. and i do that for the ipos i go crazy about where cynically i know the buyers go crazy about it, me i accept that they're just pieces of paper. you know the big boys can't resist growth stocks, right? and they will always come to support on down days. biggest caveat at all for stocks pulling back make sure they
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haven't pulled back for a good reason, selloff extraneous. don't buy homeowner initially get hurt with the quarter. don't buy big independent oil stock when oil goes down for three straight days because that probably doesn't belong on the new high list anymore. i always like to say you're looking for a stock that has bristol myers like strength. momentarily damaged stock and not a troubled company going down, down and down. how do you tell the difference? another key part of my philosophy. if the fundamentals haven't changed, the stock probably hanlt falling from gas, it's pulled back largely for mechanical reasons, profit taking or panic in the market in general. now more than ever thanks to the fact stocks are traded like commodities by ultralevered hedge funds causing huge selloffs that make no sense in everything and etfs more powerful than the stocks themselves, you see stocks of good companies pull back from their highs for nothing that happened to do at the company. nothing to do with the company
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or the strength of the underlying businesses. those are the buys. but if the fundamental picture changes, if whatever made the stock attractive as it climbed its way up to the new high list goes away, then that stock is no longer a candidate. the story has to be in tact or this method will let you down. while it's not a hard and fast rule, i tend to like stocks pulled back just enough but not too much. all right. i have to tell you 8% is the historical optimal level of a pullback that i've really made a lot of money in. less than that you're going to be early for some of them. more than that maybe something is indeed wrong with the stock. you just don't know. three, five, eight, those are all important levels. that 8% level man i've made a killing when i buy them 8. bottom line that's the first method for cramer's madness. watch for stocks pulled back especially from a broad market selloff. some of my best picks come out of this process. it's my getting to workshoping list. hopefully some of yours can too. start with arzella in ohio.
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>> reporter: hi, jim. i'm trying to get a better insight on mutual funds. and i'd like to know are they a good way to diversify? >> well, you know what, i got to tell you, arzella, here's the problem, a lot of people have 401(k)s where you have to have mutual funds and you can't pick individual stocks. and for that they are. say 20% international, i'm a little bit older, 50% growth, the rest will be kind of a balance situation, maybe a fund that has some bonds. you have to depend on your outlook and age, but yes, mutual funds are fine. try to look at some of the performance records in morning star. that's what i use. stewart in florida. >> caller: what's the best time to use stop orders after you purchase a position? >> we're not going to do that because you see if we're going to trade actively we're going to have to pay attention to it. if we're not going to trade, we don't need stop orders market down 10% in a flash day, you'll
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have sold the stock and then bounces right back you'll say what the heck happened. we don't play it that way. we invest on "mad money." we're not traders. we invest. all right. there's a method to this madness and tonight i'm reviewing it all. the first method, look for stocks that have pulled back from new highs, especially because of a broader market selloff having nothing to do with the individual stock that you want to pull the trigger on. stay with cramer. have a question? tweet cramer #madtweets. send cramer an e-mail or give us a call at 1-800-743-cnbc. miss something in head to madmoney.cnbc.com.
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mi'm a lineman here in oakland. day in, day out, a large part of what we do is about providing reliable power to our customers. pg&e is dedicated to the community. i love working here because this is my home. oakland is my home. this is where i'm raising my children so it's important to me to make sure my family and friends have the power and energy that we provide. this is very personal to me. it makes me work a lot harder knowing that
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this is my community. together, we're building a better california. welcome back to tonight's methods to madness special where i'm revealing some of my best tricks truly timeless investing wisdom for the ages, i hope. next up, how do you 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 have a cheaper entry point in a stock that's been a proven winner. you didn't want to buy names right off the high list because you're paying too much for them. you can usually get a better deal and wait for some weakness. given how volatile and downright crazy the market's become there are very few occasions when buying a stock off the high list or that close to it is justified. but sometimes a stock is so hot that you just got to buy it
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whenever you can as soon as you can because it may not be going lower any time soon. you won't find these often, but when you find them you have to remember not to buy all at once. if you want to buy a hundred shares of stock think it's got so much mojo it won't get a pullback from the high, go ahead and buy 25 shares. worst happens you go higher and don't buy more and grab a quick profit. find another stock. believe me, there's always another stock to find. i've got an exception where it's okay to buy a stock right around its high. if you see insiders buying the stock when stock's up a lot already, i'm going to give you a total green light. now, it is a rare thing to see happen, but in my experience it's rare still that this method of picking stocks doesn't work out. see, i love it when insiders buy after a decent run. because that's a great sign of confidence that they think the run's just beginning or there's a big runway ahead. and they are sure it's long lasting. remember, you can't flip a stock immediately if you're an insider
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buyer. you have to wait six months. government takes away the gains otherwise. it's the law. these people are seeing things they like that aren't going to disappear in six months time. if anything they haven't appeared yet. normally insider buying ranges from being meaningless to a small but on its own insufficient reason to buy a stock. a lot of times you're going to catch insiders buying your stock. they want to give the impression of confidence, create an illusion they're doing better than they really are. insiders aren't stupid. they know if they're seen buying their own stocks even small amounts in the market will smile upon them. so they play the system. hey, that's fair. but it means we ignore most tiny insider buying because, well, could be kind of flimflam. we use also called painting the tape, kind of makes it look better than it is. that said when you get truly colossal insider buying, even if it's not at the high, you might want to take another look at the stock in question because it's pretty powerful endorsement when the insiders buy a whole lot of stock. it's really the volume of the insider buying that declares its necessity. but we're only focusing on one sort of insider buying, stocks
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that have been running and aren't perceived as historically cheap or low dollar amount plays. there's nothing more arrogant and telling when an inside backs up the truck for his own stock when it's been rolling along at a good clip. they're saying, yeah, we know we rock. our stock's been hot and we're so darn confident it will keep going higher that we're going to buy some shares. we're not waiting for a pullback. no, we're buying right here. arrogant, sure. but this is bankable. i've seen it time and again, corporate insiders aren't fools with notable exceptions. if their stock's on a tear let's assume they do know something. not everyone deserves the benefit of the doubt in this business and after the financial crisis at the end of the 2008, i know a lot of people think all ceos and executives for that matter are a bunch of crooks, frauds, and now banks especially those who got burned say the old
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fannie mae or lehman brothers. healthy skepticism is one thing. a total unwillingness to believe in anything positive is something else entirely. if you're going to own stocks, you need to be willing to extend some measure of the trust. we've had a massive amount of consolidation in host industries. airlines, rental cars, foods, telecommunications, entertainment, perhaps these executives are buying stock because they hear the footsteps. maybe they've been contacted by some other company and turned that company down. spurt overtures happen all the time. if executives expect they may be next, could be a healthy and honest reason to buy. of course they have to disclose anything that's a serious bid, but a lot of times just get a phone call and say, no, bye. well, they do that because the company's worth more than they thought. maybe they think the company can be broken up like the old tyco or fortune brands gannett. maybe the stock's run just a bit but they don't think the run is over because they recognize how
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much better the company will be when it's divvied up. well, for us buying after big runs can be a bit reckless and lazy. most investors are smart enough to wait for pullback before they pull the trigger. insider buying after decent runs tells me these guys don't think there will be a pullback. and there's nothing more bullish than that. sure i want to wait for a pullback after they bought, but that's the best of all possible worlds and you don't usually get that scenario. bottom line, one more method of cramer's madness, when you see inside buying on a stock that's already had a run, you probably want to buy too. bob in new york. >> caller: steeler to you. >> steelers from new york, all right, what's up? >> caller: jim, i have a question about interest rates. when the fed raises interest rates, good companies with attractive dividend yields and growth prospects suddenly rapidly go out of favor. can you add clarity to why? >> people extrapolate. when they see rates go up, they fear they're going to go up for
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a while. if that's the case they want to get out of what they perceive as a risky yield and go into a certainty, which is a bond yield. it's all relative basis. rick in california. rick. >> caller: booya, jim. how do i add to a position if my stock hasn't gone down to the average list price? >> you can't. i'd say the vast majority, not just a few times, not just the majority but the vast majority of times we pay up above our basis. well, i got to tell you, you got the picture. remember, here's another method to my madness. when you see insider buying on a stock that's already had a big run, think to yourself i might want to be buying here too. after the break i'll try to make even more money.
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at ally bank no branches equals great rates. it's a fact. kind of like mute buttons equal danger. ...that sound good? not being on this phone call sounds good. it's not muted. was that you jason? it was geoffrey! it was jason. it could've been brenda.
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good. very good. you see something moving off the shelves and your first thought is to investigate the company. you are type e*. yes, investment opportunities can be anywhere... or not. but you know the difference. e*trade's bar code scanner. shorten the distance between intuition and action. e*trade opportunity is everywhere.
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at ally bank no branches equals great rates. it's a fact. kind of like shopping hungry equals overshopping.
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you're in luck because you called cramer on a good night. i'm not going home to sip that cheap scotch on my dirty linoleum floor. by the way, i've got to apologize -- it's actually pretty good stuff, especially the boutique 18-year-old. have you had any of the 18-year-old jamison's? never mind, don't waste that on the dirty linoleum floor. no, tonight obviously i'm in a great mood. me at my absolute best. i'm pretty darn productive when i'm in high gear. so that i'm revealing many of my secrets, methods to my madness. start jotting some things down because i got to tell you something that could be incredibly useful. better than give me some stock picks. i'm giving you some of the best ways i know to pick stocks. i'm teaching you how to invest and trade like cramer. if not to be like me, because i got some kind of like emotional things cooking here, but at least emulate me. i mean, you know. so far i've given away two of my
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precious secrets. i play with an open hand allowing subscribers to see all my trades before they happen. i look for stocks that have pulled back from the new high list. that's not a reason to buy in in hits, but it's a great place to look for potential buys. and i like to buy stocks that have had big runs and yet still have substantial insider buying. because it says the people running the company really believe their stock has legs and that they believe there could be a good reason for us to believe too. but again, this alone not enough to recommend a stock. still need to do the homework to check the fundamentals to make sure you like the story behind the company before you dive in and buy. what i'm teaching you tonight are really what i call tells. that's right, they're tells. they're signals that a stock might be worth owning, that it's worth your time and effort to go through the often boring process of reading through the conference call transcripts and quarterly filings. there are thousands of stocks out there and any method we can use to narrow down the ones that might be attractive is a method worth having. we've talked about insider
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buying at the high. while i don't usually use insider buying as the only way to determine whether or not a stock has got it going or not, there's one other scenario where insider buying makes for incredibly bullish tell. and that's when a stock has a heavy short position. meaning a lot of people out there borrowed shares, sold those shares and now waiting for the stock to go lower before they buy back the shares, return them to the bank they borrowed them from and collect the difference between the price they sold at first and the price they bought the stock back later, hopefully they sold high and bought low. you can think of shorting like regular investing but in reverse. we try to buy low and sell high, shorts turn that around. they sell high and try to buy low. when a stock has a lot of shorts in it that means people have serious convictions, convictions the stock is only going lower. in fact it takes more than to go long. when you're short potential downside is infinite. when you're long a stock stops losing money at zero. shorts lose money when stocks go higher and higher and higher. there's no lid. the other important note is that if there's a lot of them and a
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stock all of a sudden gets some good news, we get what's called a short squeeze. and it sounds exactly what it is. in order to bail or close out positions the shorts have to buy. this is what's called covering. when a lot of shorts cover at the same time in a panic, the stock will surge because what you really have is a lot of people desperate to buy the stock. a lot of demand. they have to buy unless they want their years wiped awe e out as so many short sellers had in the last few swoons when the market refused to quit and went right back up and shorts hadn't covered or bought the shorts. they hpt brought them in. where does short side buying fit in? you have a short with a high interest, then some of the people who run the company start buying shares for themselves. or an outsider like coca-cola, takes more than a 10% stake in a case and wants more, those were three situations where the shorts just kept shorting and they got crushed. they should have done buying not shorting.
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it's almost like drawing a line in the sand for the shorts. our stock goes this low and no lower. this is an explosive combination of that kind of insider buying and a stock that is heavily shorted, one that often leads to a short squeeze that sends the stocks much higher. shorts are smart. in fact, a lot of them a lot of the time they tend to be real smart, much smarter for the most part i have found than what we call long side investors. but they usually don't know more about a business than the insiders who run it. if a lot of people are shorting a stock and management is buying it in sizable amounts, not just in hundred shares worth, then you should start doing some homework and usually you're going to want to side with management. and then you can ride it higher and higher and higher into a jackie wilson style. and i regard the santa fee and coca-cola buys and keurig of monster as being inside like buys. the shorts panic that push shares higher in desperation to cover positions and you make money. similarly when come to the heavily shorted stock announces buyback bigger than any previous one. that's another line in the sand
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where management is contradicting shorts. companies often repurchase shares. while all buybacks are not bullish, some are a waste of money. i teach you how to identify the buybacks that i issue multiple times each day. a substantial new buyback in the face of shorts is often a good reason to take a closer look at the stock. now, a note of caution here. you have to be very careful when dealing with a company in the crosshairs of the shorts, especially when people are nervous and the market is in bad shape, shorts have ability to wreck a stock even if fundamentals of the underlying company are fantastic. these days shorts have more power than ever i believe thanks in part to s.e.c. that under democrats and republicans looks the other way when shorts raid stocks with bogus stories about accounting issue and management blunders. plus, it's pretty easy to do as a stock owners no longer have the ben fiefit of rules that sld short selling down. rules like an uptick or higher price before you can sell short
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stock. that was a good rule that somehow the government got talked into abolishing in order to make trading quicker and more fair for the shorts. a lot of good that did for us. it's a leading reason why so many home gamers have left the building. we established these rules in order to stop the foe meanting of panic. but the government in all its wisdom seems to think panics are no longer possible. so we have to be more careful than ever not to succumb to panic. that's been orchestrated by short sellers wlo need prices to go lower. without those protections the shorts were able to run wild and practically assassinate stocks of many financial companies during the crash of 2008 until the generational bottom in march of 2009 pult the bulls back in control. but the shorts came back with aggressive negativity. this time using weapons of mass destruction like double and triple etfs. so when you're dealing with a heavily shorted stock that's in one of those etfs like the financials, you have to learn to tread carefully. you can still find great opportunities in stocks with the shorts overreached and insiders
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are buying, but before going into one of these situations i have to warn you that the balance of power has shifted in recent years in favor of the shorts against regular individual investors. that means even if the short sellers are wrong short-term about a company's prospects or even long-term, they can still demolish the stock especially if they announce campaigns against the stock like with herbalife. the hedge fund manager taking on the company buying back stock and smart managers on the other side just don't underestimate the amount of damage shorts can do. although remember the best protection against these raids is offered from stocks that pay good solid dividends. short sellers have to borrow stock to short the stock. and that means they have to pay the dividends to the real owners. that's a terrific deter raent from those who are pernicious the way they go about shorting. when you see attacked by shorts and dividend is going higher, what a terrific place to be especially in insiders are snapping up stocks too.
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bottom line insider buying plus 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. think herbalife. let's go to herb in florida. herb. >> caller: jim, great to talk to you. i'm an action alerts follower for the past few years, wish i'd gotten on board sooner. >> you're very kind. tough days. i like that you support us. thank you. what's going on? >> caller: well, i'm recently retired. i've saved up well over my lifetime and i've looked at what the longevity of my savings and as long as i manage things well i'm in good shape. >> good. >> caller: my concern right now is in allocation. i have about 65% right now allocated in stocks split about halfway between what i follow you with and the other half in index funds. >> okay. >> caller: and then the
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remainder is split between bond funds and cash. and, you know, the cash fluctuates up and down. >> sure. you're doing exactly right. just like we teach in action alerts. >> caller: well, i've been paying attention then. >> thank you. >> caller: thank you. >> well, you've got it dead right. you're doing exactly what i like. i have no criticisms of anything i just totally endorsed that. trying to spot a raging buy? here's a tip, when you see insider buying plus heavy short interest and a buyback and a divide dividend, you got something. just be careful to avoid situations where the shorts are simply determined no matter what to crush not just the stock but the business itself. stick with cramer.
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at least among my critics it said i'm all about trading. i don't have any advice worthwhile for regular investors that i'm all short-term. that's entirely untrue. this show has adjusted over time. it's morphed so to speak. it's about longer term investing and not trading. if you watch any time in the last five years you know that. however, knowing how to trade certainly can make you a better investor. and trading around the core position is one of the most basic and useful disciplines out there, many people have asked me jim cramer about twitter, what do i mean about it. in periodic swoons after big runs like we've had since generation bottom 2009 it does help to trade around. what does it mean? let's go through it step by step. first you need a stock, pick one you like one you have an opinion, one you really want to buy as it goes down.
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finding a stock that you believe will be going higher over the long-term matters even as you accept the fact it could go down in the near term. what you're really looking for is a great company with a stock that could get tossed around with market volatility but only get higher if you're patient. if you're just investing you'd set up a position in the stock. buy in increments because we all know buying at once is arrogance and that's not going to be allowed on "mad money." why don't we use google as an example? i like that stock very much. have since it came public. only over the long-term will i tell you that i like it because it's very volatile short-term. and given quick pitfalls in decline. say you went a hundred shares of google over time. way to set that up is 25 shares four times over a period of weeks, or even months. that would be a core position as an investor. say you want to trade. i know many of you want to, but you feel discouraged because you remember how all that amateur day traders, remember all those day traders got blown out when the tech bubble burst? the keyword was amateur.
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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 at your profits and wasn't worthwhile to trade. that hasn't been the case for ages. let's come back to our core long-term position strategy. we own a hundred shares of google and own it long-term. let's say it's trading at $500 a share for the purposes of this show. every time the stock jumps 25 points, or 5%, if you want to trade around position to preserve capital, you might want to sell 25 shares. you shave a little off to bring in some profits. so once google reaches 525 you would own 75 shares. you keep scaling out the same way although always i love the stock, i would like to keep that last 25 shares. then you wait until something happens to knock the stock down to where you bought it as long as the news isn't specific to google thereby damaging google's prospects. it shouldn't be unreasonable given that we're in a world where stocks can get crushed by all kinds of factors that have nothing to do with the fundamentals, right? as the stock comes down you buy it back in increments.
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since we started with a hundred shares keep using increments of 25 shares to buy it back. if google comes back from 500 to 575, you buy 25 shares and another 25 down if you sold the 50 and not just 25 on the way up. you can even take your winnings this way and help buy 25 more if it keeps going lower and only got to sell 25 before the swoon, this might appear to be small potatoes up 25% to sell and repeat the process up on the way back, but over time your profits can add up. remember, you don't have to do anything. you don't have to do anything. you can just hold it. that is fine with me. but people ask me trading around the core position is and that's what it's about. a lot of people think trading is incredibly exciting and it can be. but if you're good at trading around a core position, it's right to be bored. there's nothing exciting about the plan i just laid out. all you're doing is watching stock move, trimming up or adding to your position. conjure the image of trading and reckless and irresponsible, trading around a core position is height of prudent portfolio adjustment.
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boring by the way is good, exciting save it for the stadium. of course this whole trading around core position works best stocks at low prices and buy more stock and more room to buy. but i wanted to show you it can work even with google with a $500 stock. if you own a stock and like it, you don't need to do anything. this is in response twitter and my career about how i used to trade bhen i was at my hedge fund, trading around a core. you can scale these depending on how big your position is. basic idea is where you have too much on the table in case a stock gets swatted down. trading around a core position is an important basic trading strategy that you can use even those of you who find the notion of trading as opposed to investing. to be abhorrent. now, if you want to take your trading to the next level, the ultimate level, i recommend there's two chapters on options and getting back to even for the strategy i used in my old hedge fund. i used to think before options action the tv program that some of this material was too sophisticated for tv.
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i no longer think that. you have to be willing to put in some extra homework. but if you have the time and inclination, it's more than worth the effort. the stock i used to demonstrate happens to be google. and you can see how my strategy of what i call stock replacement and getting back to even works better with options than with the common stock. it's kind of like a cheaper and less risky way to what i call creating a google at a more reasonable dollar amount price than it currently sells at. this stuff is hard. but i am reacting to the requests i get all the time at jim cramer on twitter as many want to know about the option strategies i favor. we can't use options for action -- by the way if you don't understand options at all let alone the sophisticated strategies i lay out in getting back to even, in my firsthand book "real money" that's a compilation of what i taught people who went to work at my hedge fund, i have what an option is. bottom line. now you know the basics of how to trade around a core position if you're so inclined.
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yet another method to my madness, one allows you to generate small gains that add up over time. don't need to do it, but now you know how. stay with cramer.
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i've got one more trick to teach you tonight. one more method to my madness and this time i want to talk selling. which along with when you buy what price you buy may be the most important and definitely the most undervalued tool in your home arsenal. how do you know when to sell a hot stock? how do you get out before the party ends so you're not one of the last people around who gets stuck cleaning up the mess? this is a question that needs to be answered because there's a lot of money to be made owning hot stocks with lots of momentum. but when you play the momentum game you have to know when it's time to leave the table. that's what's crucial. there are always naysayers. and eventually the nay sayers are proven right. virtually all hot stocks imploed except ones able to develop over multiple streams. this has happened multiple times.
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smaller tech stocks kept blowing up. usually occurs sooner rather than later. recklessness disguised as prudence caused you to save money. people shy away because they don't know where they're going to top out. that's understandable. i'd be afraid to buy them too if i didn't have a discipline that let me know when to get out. lucky for you i do have one and you're about to learn it. fi first, when i say hot stocks i mean stocks with low market capitalizatio capitalizations. usually begin with very little research coverage. these names can go up for a very long time. they can catch fire and stay on fire for years without sponsorship. the key to figuring out when interest is peaked and it's time to sell is by watching the analyst coverage being rolled out. you have to use your own judgment here, but a good rule of thumb is once one of these hot stocks gets discovered and then has at least half dozen analysts, that's right six analysts covering it, the run is going to peter out not get stronger. because it's going to be too big and too well known to continue to go up the way it has.
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it's the rare stock that doesn't behave this way. you can find out how many guys will own a stock by looking at anywhere on the internet this isn't hard to find information. it was at one time, not anymore. this formula's worked for me for as long as i can remember. as far as i can tell it works because the number of analysts on a stock is a good gauge of how much awareness and interest there really is in a name. and names don't get hot and followed and pushed by everybody. they get hot because they get discovered by everybody. hot stocks get tapped out when there's nobody left to be attracted to them. when all the people who would be interested in buying them have already bought. they came out of nowhere attracting more and more attention, more and more backers. and eventually everyone who wants a piece of the stock has a piece of it. when that happens the run is over, people. and then you must ring the register and go home. let me give you a great example, hanson natural. the old monster beverage, that was the name it used to be before it became mmst, hottest stock in 2005, hottest stock for the first half of 2006. split adjustment enhancement
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went from $18 and change to $200 when peaking in july of 2006. the whole way up there were people telling you that hansen, a beverage company that really got its momentum from its monster energy drink, was a fad. had to dry out. had to crash. well, it did do that. but as often is the case it took years for the momentum to run out, not days, not months, not weeks, years. i called the top enhancement back then because i know how these stocks work. it peaked in july of 2006 and this was in part because of the fact that the company did a five for one split and even those splits aren't supposed to do anything, this encouraged those in hanson for a long time to take something off the table. but there was another reason i believed it would peak. and that was it picked up its fourth analyst in may 10th of 2006 when goldman sachs started covering it. you had two months to sell between goldman's initiation and the stock's peak. there was still upside left but prudence dictated that we sell once the analysts -- once the stock had four analysts on it. better to clear out early with
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your winnings then wait for them to fade away. and hansen as pretty much with all other stocks hot stocks started to cool off once it hit that massive analyst coverage. incredibly hansen fell off the radar screen, people stopped talking about it and analyst coverage dwindled again. the stock recharged, powered higher and again ultimately coca-cola bought a huge stake in its equity which sent it up even further. a stock i still like. it was an amazing renaissance. again, it was really a testament that when analysts stop following a company or do so on a dissole ri basis, start percolating again a story lazarus move can happen. turns out the fad drink vanquished the competition from major soda brands that failed to materialize. and only the biggest one joined it rather than keep fighting. as analyst coverage gained the stock, there's so many analysts started covering it the stock peaked. when they dropped, stock bottomed. that's how it works. let me give you the bottom line.
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small steaming hot momentum stocks are worth owning, but you must know when to sell and that moment comes when you see too many analysts jumping on the bandwagon. use four as a good rule of thumb to let you know when to start selling. sitcothose.ile you sit n and even fargo, in fargo! binge, while you lose weight! and enjoy a good cliffhanger while you hang from a... why am i yelling? the revolution will not only be televised. the revolution will be mobilized. introducing the all in one plan. only from directv and at&t.
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got to get some of the tweets you've been sending me. here we go.
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our first tweet who can use technical more water sm resources for technical analysis and indicators for the novice. i get most of my technical analysis from realmoney.com. that's one of the things i did get rich carefully is pick the best technicians who explain what these terms mean and then show you them in action. and that's what i did in that book. next, a tweet from @redsquare27, #getaplan. should i have my money in an index fund or stocks or both? stocks, my friend. and by the way let's be very clear. that's not the case with 401(k) which is why i likes the ira option so much more. ne next, jim, i've watched you daily for over ten years. daily, you are awesome. you have helped massive amounts of people. thank you. i cannot tell you there are so many people who come up to me and they apologize that they want to tell me that they like the show. excuse me, jim, i don't want to bother you but i like the show.
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when you say excuse me, i usually think you're about to say, boom. no, don't excuse yourself. i'm absolutely thrilled that you say you like the show. it means the world to me. i sometimes figure what the heck do i come out here every night for other than the fact that you like it. @clearbaffles -- okay. tweets the following. please discuss balance between adding to a position and selling your cost same applying to etfs or -- i like to lower my basis. as the stock goes down, i buy. and as the stock goes up i like to sell the higher basis. i think typically what i'm just trying to do is lower my basis as an owner. why do i want to lower my basis? because i don't like chasing and i do like buying at a discount. and lowering my basis is the equivalent of getting a stock i like of a company at a cheaper price than i got it before. that means i'm getting a bargain if the fundamentals are still
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good. nex next,@jimcramer has more followers than wyoming has people. i like his stock advice better too. wyoming has more oil than i have. wyoming wins. i have a long list of research companies that like to invest in but don't have money for all them. how do i narrow my list? this is very easy. what you got to do is you got to figure out, okay, which of the best at which levels. if you like them all, try to figure out what level would be the one where you really want to buy something and then stick by it. one stock's coming down people run from levels instead of to them. stay with cramer. at ally bank no branches equals great rates.
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it's a fact. kind of like mute buttons equal danger. ...that sound good? not being on this phone call sounds good. it's not muted. was that you jason? it was geoffrey! it was jason. it could've been brenda.
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everyone loves the picture i posted of you. at&t reminds you it can wait. i'm jim cramer and i'll see you next time.
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>> narrator: in this episode of "american greed"... pam phillips and gary triano -- their charmed life makes others green with envy. >> the public saw them as a power couple. they saw her as beautiful. they saw him as charismatic. >> narrator: he's a mega-millionaire developer. she's a socialite. but don't envy them, because the money isn't his. >> he owed a lot a people a lot of money and declared bankruptcy. so, gary had a lot of enemies. >> narrator: and when greed takes hold of their marriage, is there anything they won't do for money? >> i am very serious about this. >> you're gonna be very serious when you sit in a women's prison for murder.

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