Jul

23

Book Review: Mad Money

July 23, 2007 |

Jim Cramer's Mad Money: Watch TV, Get RichI am not talking about the show with the same name, but about the Jim Cramer’s Mad Money Book: Watch TV, Get Rich. It is his own book about the techniques used and how to understand that ubiquitous TV show that you must have seen while waiting at an airport for a flight, or heard about when talking to your friends (when ether they invest or not) at a BBQ. You even get an inside look at the techniques he uses for his famous ‘Lighting Round’. The guy is famous, and his stock predicting abilities are above average. One of those guys that for a while has been able to stay well ahead of the market: and anyone who does that deserves respect.

I bought the book at an airport, paying an overpriced $25, while waiting for a long flight (get it used). A couple of nights before my aunt had recommended me some stocks she heard on the show, and after so many years resisting stock talk show influences, I had to read a bit about the guy. (Especially since I am responsible to manage some of her assets). My conclusion is that the guy is smart, and has something into it, even if he doesn’t share my style.

Cramer believes in trading. No buy and holds. No long term investing. Buying what he things will climb and grow, and selling what has already grown. Bulls win, Bears win, but Hogs get slaughtered is one of his mottoes (paraphrasing). There is some truth into that, albeit I would not take it so wildly as he tries to portray it into his show. He is also a true believer on investing on sectors which will be favored by the Wall Street big houses. According to him, big house investors are predictable and they all act the same, like a herd: you can benefit from their actions. Me, being more of a value investor, it is difficult to agree with absolutely everything he says, but still I can learn from him.

Some things to learn from him:

  • Don’t buy your position at once. Buy a third of your position. And keep studying the company. Chances are it will go down a bit, and you can buy another third (or even a third third) of the position you want. If the stock goes up, don’t worry… you still made money, while giving yourself a chance to investigate the company a bit more.
  • If a stock has gone up 10 or 20%, sell some. Keep the same position you wanted to keep in terms of dollars, not number of shares. Makes some sense: it is the same old idea of diversification. Don’t be a hog. “You haven’t made a dime in a stock until you sell it and take your profits to the bank.”
  • Don’t buy the morning after his show recommendations. Use that time to research the company. Buy a few days later, or even a week later, if the conditions are still valid.
  • Watch the Price to Earnings to Growth ratio more than the P/E ratio. If PEG > 2.0 run away! If it is relatively low, close to 1, take a very close look at the stock: it may be good.
  • ”…can’t invest in a stock based on borrowed conviction, meaning someone else’s conviction.”
  • Don’t buy stocks in after-hours.

Some five steps he suggests for picking stocks:

  1. Find out, in precise terms, how a company makes its money.
  2. Understand what could affect the performance of the company’s sector.
  3. Examine recent performance and behavior of the stock and company.
  4. Compare to competition, and analyze their threat.
  5. Due diligence: income statement, balance sheet, and cash flow.

I would not consider this book one of my core reference books, nor one I would recommend to a beginner investor. It is a good read, however, if you watch the show and you will be following any advice at all from him: it can really help you use his fast-paced advice in the way it was intended and in the way that it could really be useful.

Cramer is very passionate about trading (shorter term). Any investor should get himself educated in both, long term and short term styles of investing, and find their own concussions. Peter Lynch is a good example of traditional style of investing. I have written some reviews, and these are some of his books:
Learn to Earn: A Beginner's Guide to the Basics of Investing and BusinessBeating the StreetOne Up On Wall Street : How To Use What You Already Know To Make Money In The Market


Comments

1 Comment so far

  1. mika on August 7, 2007 7:15 am

    I don´t agree with all these ideas. If you see the good chance, you buy - you will not lower your buying price later, it´s pretty much killing yourself if you´re wrong. And if you´re wrong you need to know where´s your stoploss. Timing is everything.

    Also if stock has increased 20%, often of time to buy even more, not sell your stocks. With derivative market different rulez certainly exist.

    And thirdly fundamendals does not matter as their pretty much lag if particular stock is going to make turnaround, market smells even half year before the news. When fundamendal news hit the tape it´s allready too late.

    Regards,
    http://just-charts.blogspot.com/

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