I’m not letting Jim Cramer’s zany, crackpot presentational style put me off listening to his advice about investing strategy. Although he’s an American television personality presenting CNBC’s Mad Money, he’s also a successful former hedge fund manager. And I want to get rich from shares like he did.
He’s got some useful things to say based on his hard-won wisdom and what worked for him in the markets. Firstly, I like his advice to not own too many shares. Although Cramer believes in some diversification, he reckons it’s always tempting to buy too many names from the same sector.
A focused portfolio to get rich from shares
So, he advocates keeping a portfolio as small as possible while maintaining diversity. And to do that, he set a limit for the number of stocks in his portfolio and then ran a policy of forced displacement.
In other words, if he found a better share than the ones he was holding, he had to sell one to make room for the newcomer. He reckons the tactic enhanced his performance and he made the most money when he owned the fewest shares.
The second piece of advice that resonates with me is to buy the shares of the best companies. I think that’s in line with stock-trading pioneer Jesse Livermore’s approach of buying the strongest player in any given sector. Cramer reckons we do this with other major purchases, so why not with stocks? It often pays, he asserts, to spend a little more to get something better.
Third, I like his approach of not buying all at once. And that chimes with the way Livermore used to approach shares. And in today’s markets, market wizard Mark Minervini does the same thing. The idea is to see if an investment begins to work out as planned before committing larger amounts of capital.
If a small position goes wrong, I’ll have only lost a small amount of money. But if it starts to go right, I can pile in with a bigger position. Portfolio execution techniques like this can be very effective.
Damaged shares, not broken businesses
The fourth tip I’m keen on from Cramer is to buy damaged shares, not broken businesses. We see so many articles about buying cheap shares. But I wouldn’t buy shares in any old company. For me, the underlying business must remain sound. And any damage to earnings or other challenges must be temporary.
That leads me to examine quality indicators and to look for strong balance sheets. It also steers me towards billionaire investor Warren Buffett’s preference for buying wonderful businesses selling at fair prices. The alternative is to buy mediocre business selling cheap, and that’s not for me.
Cramer reckons he keeps a watch list of great companies and buys during general market sell-offs. Or he buys when sentiment drives a share price down, even though the fundamentals of a business remain sound.
So, the stock market crash caused by the pandemic has thrown up some interesting opportunities. But it’s important to be discerning about what shares to buy. Some businesses will have suffered irreparable damage from the coronavirus crisis. So, I’m following Cramer’s advice to keep me away of them.