Mad Money w/ Jim Cramer 10/20/26

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1:00My mission is simple, to make you money. I'm here to level the playing field for all investors. There's always a boom market somewhere, and I promise to help you find it. Mad Money starts now.

1:17Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramer. I'll do my friends. I'm just trying to make you a little bit of money. My job, not just to entertain, but to educate, to do some teaching here. So call me 1-800-743-CBC-Twee-Mitchell-Kramer. The stock market isn't always a friendly place. It can be volatile. It can be painful. It can just be downright difficult. There are tons of big picture problems that can derail any rally. Problems you might not have had any idea about until they hit us. And that's why I'm so adamant about trying to make you a better investor. I want to teach you the tricks of the trade.

2:00So when the market turns naked, when it gets hostile, you will be prepared. You'll know what to do. The same tricks I teach you about constantly when you join the CMC Investing Club coming alive right here. I've spent my entire career analyzing the way stocks trade, searching for patterns of what's worked and what hasn't. And from those observations, I put together a set of rules. rules that are designed to help protect you from the worst mistakes you can make in both good markets and bad. Rules that now make up the club's guide to investing. As much as I sometimes might seem like an unhinged lunatic, it's what it is.

2:39I'm all about discipline. You're going to make mistakes in this business. It's inevitable. But if you stick to your discipline, if you stick to the rules that should help you minimize your losses and you will maximize your gains, Stick to the rules, people. So let's talk about discipline. I'm always telling you to buy best-of-breed companies, even if you have to pay up for their stocks. I use that phrase constantly, best-of-breed, best-of-breed. Why should you try to identify the stocks of the best-run companies with the best prospects in each industry? Let me flip that one in his head. Why is any best-of-breed even a question?

3:10When you're shopping for a car sale, you buy best-of-breed, or the best you can afford. We pay up for the highest quality brand because we know that a brand, And a good brand signifies reliability. It tells us that we can expect a higher level of service, a quality of ownership that will make your drive safer and easier for years to come. Nobody would ever set out to buy a worst-of-breed car. There are simpler ways to put your life in danger. So why is it that so many people seem to feel differently about the stock market? Why are we drawn to the penny stocks that are constantly being talked up on social media or the endless low dollar meme stocks that get taken up each morning in some sort of shrewd pump and dump gambit?

3:57It's the same reason why people so so many people throw away their money at buying garbage cryptocurrencies. When they could buy Ethereum or Bitcoin, the better known, more vetted currencies. Many of us simply can't resist what we perceive as a bargain. Emphasis, by the way, on perceive. Here's the thing. If you go hunting for cheap stocks of low-quality companies, it's more likely to lead to losses than to gains. Now, let me be clear. I love bargain hunting, but I only want genuine bargains where the underlying merchandise is actually worth something. You know what's not a real bargain? Buying junk merchandise just because it seems to have a lower dollar price.

4:37That's why whenever I get asked about a low-quality stock on the lightning round, for instance, you'll hear me say something like, hey, skee-daddy, if you like blah, blah, blah, you'll love Procter & Gamble, because that's best of breed. Why? Sure, P &G might not give you any short-term pyrotechnics, but it's the kind of long-term story that you can count on. It's an industry leader with a great balance sheet, long history of dividend boosts, and the best brands on Earth. Hey, you could do a lot worse than that. What makes a company best of breed? Like the late, great Supreme Court Justice Potter Stewart once said about pornography, I know when I see it.

5:11But to put it into words, when I say best of breed, I'm talking about well-managed, high-quality companies like a Procter & Gamble. If you can get P &G on sale, great. If you can't get it on sale, though, I'd still prefer you to pay up for something similarly great rather than try to pick up some penny stock or meme stock just because they seem cheap. Remember, at the end of the day, there are very few genuine bargains out there when it comes to second or third-tier players. Their stocks may look cheaper than the top dogs. But that's because they deserve to be cheaper. The businesses are worth less.

5:44Don't worry about paying a higher price-turnings multiple for a best-of-breed business. It may seem more expensive, but in addition to usually being the better investment, you're also buying peace of mind. For the past decade or so, NVIDIA's always looked like a super expensive stock, for instance, on a price-turnings basis. But it always turned out to be cheap when you look back at it, allowing it to become one of the biggest winners of this generation, if not the biggest. Because CEO Jensen Wang consistently delivers much higher than expected numbers. That's what it means to be best of breed.

6:17Now, once you find yourself a best of breed company, the kind of company with the story you believe in, I got another important rule for you. High quality companies represent value and giving up on value is a sin. They know nothing! I see so many people throwing in the towel on companies that have real assets and real worth just because their stocks aren't working right here, right now. And it drives me nuts, frankly, really. Look, patience is a virtue. If you have reason to believe in a business, don't dump its stock just because it's not getting any traction for the moment. You're not a hedge fund manager.

6:55You don't need your position to show a gain every quarter, every month, or even every day. You don't have investors who pull their money because one particular position is taking too long to pay off. So you can afford to wait for these stories to play themselves out. I say this because you will be tempted to sell even best of breed stocks. You may correctly identify value, but this market can make it very difficult to stick to your guns, even with something you truly believe in. When you own a stock that's going down, you're going to feel compelled to give up on it. But in many cases, if you've done your homework and you have conviction in the underlying business, that urge to sell will be a mistake.

7:33Perhaps you should be buying. And look, it happens the best of us. In 2016, I did this interview with Tim Cook, the CEO of Apple, after a stock had plummeted from split adjusted$31 to$23 in a fairly short period of time. Everybody was giving up on Apple. I looked at stock, which was selling at incredibly low price earnings, multiple. I looked at the customer loyalty, the service revenue stream and the cash position. And I said, what the heck is the point of selling the stock of a company that makes the greatest products in history? That may sound like a no brainer, but there are tons of Apple skeptics out there constantly arguing, perhaps through their beloved iPhones, of course, that the company's best days are behind it.

8:10Presenting these surveys of Apple's component suppliers is evidence that the business is in decline. Time after time, they've been proven wrong, yet they just won't go away. Sure enough, telling you to buy Apple$23 turned out to be a fabulous call because the insane amount of negativity gave you a wonderful opportunity to pick up the stock at a major discount. The key here is that Apple is a high-quality company, a best-of-breed company. So when its stock goes down, you know that it's getting cheaper. Selling Apple$23, as so many of the so-called great minds told you to do, well, that would have been a classic example of giving up on value.

8:46And you would have missed one of the biggest moves ever. Oh, and no apologies from those who downgrade it then, at least that I know of. And look, in late 2022, many people were tempted to make that same mistake with NVIDIA as all things tech had gone through a miserable year. But I've learned my lesson from Apple. So we stuck with NVIDIA saying, own it, don't trade it. And the stock went on to rally more than 800 percent over the course of 2023 and 2024. NVIDIA is my best pick ever. But there were times when you had to hold tight. There were whole commercials devoted to its demise. I say ill-advised.

9:22Here's the bottom line. Don't be afraid to pay up for best-of-breed stocks. They may have higher price earnings multiples than the stocks of lower-quality companies, but they're also much less likely to blow up in your face. The best-of-breed premium is worth every dollar. Oh, and once you find a company that's best-of-breed with a store you believe in, don't let the bear scare you away. even if it is temporarily broken. Patience is a virtue. Giving up on value is a sin. Jerry in Missouri. Jerry. Hey, Jim. Thanks for taking my call. Of course, Jerry. What's going on? Jim, I've never played Am I Diversified with you because I think you'd reject my portfolio.

10:07My investment strategy is growth with profitable companies. I like that. My portfolio is mostly technology, but I have it broken down into much greater detail. My investments are in tech retail sales, software, semiconductors, data center, and advertising. All of my companies are the ones that are either in the trust or have been recommended by you. Can you bless this strategy? I'll tell you, I'm in favor of people having an index. I will bless it if you have an index fund side by side with it. But I want one stock that is definitively not tech. Tech is 26 percent of the S &P to 30 percent. So I get what you're trying to do.

10:49Give me one non-tech stock and I am there with you. Two stocks if you're a little bit older than, let's say, if you're in your 50s, 60s, 70s. Let's go to Catherine in Virginia. Catherine. Hey, Jim. Thanks for taking my call. Oh, certainly, Catherine. What's going on? OK. So you have mentioned a few times in your show how a P.E. ratio is a good indicator of whether a particular stock is a buy or sell. My question to you is, which of a company's P.E. ratios would you consider most relevant in making an investing decision? Its current P.E. ratio, forward P.E. ratio, P.E. ratio adjusted for earnings per share, or maybe something like a P.E.G.

11:35ratio? Well, no, I am going to say I'm a very traditionalist when it comes to evaluating stocks. I want you to do the P-E ratio both next year and the year after. I don't care that much about this year in any given year. I care about what's called the out years because I want to be able to be in a stock like NVIDIA because it has very good out years, even though it looks expensive near term. Thank you for that question. Don't be afraid to pay up for best-of-reach stocks. And once you find them, don't let the bear scare you away. Patience is a virtue. Giving up on value is a sin. On Mad Money tonight, I'm giving you my rules of the road from how to design a high-quality portfolio to reacting smartly when the market crushes your stocks.

12:18So stay with Kramer. Don't miss a second of Mad Money. Follow at Jim Kramer on X. Have a question? Tweet Kramer. Hashtag Mad Mentions. Send Jim an email to madmoneyatcnbc.com or give us a call at 1-800-743-CNBC. Miss something? Head to madmoney.cnbc.com.

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14:20How can you keep track of a confusing market? Let me give you some advice that's rarely ever steered me wrong. There are two things I want you to watch. One, macro big picture, and one, micro company specific. Let's start with the big picture so you don't know about this stuff. If you want to know where the stock market might be headed, keep your eyes on bonds. Look, I know the bond market is boring as all get out, but it's much larger than the stock market. And more importantly, it's very important to the overall direction of stocks. Back in the day when I was running my old hedge fund, I'd always call in from the road the same way.

14:54If I had to be away from my desk, I'd begin every phone conversation by saying, where are the bonds? That's how much it mattered to me on a day to day basis. Yet stock market investors seemingly forget the bond market all the time. They forgot it in 2000, even though the bond market was screaming and told us the economy was softening right near the dot com peak. They forgot it when the Fed raised interest rates 17 times lockstep fashion in the lead up to the financial crisis, precipitating the worst downturn since the Great Depression. People paid little attention to bonds when interest rates peaked in 2022, even as it became the best time in years to buy the industrials and even the home builders.

15:32Look, it should never come as a surprise to you that long term interest rates are rising or falling. You simply must know what they are doing at all times. Bonds can punch your portfolio in the face if you aren't paying attention, hence the excessive focus on the yield curve. That's why I say don't forget bonds. Always keep those bond prices and interest rates in front of you if you want to know what might be happening in the future. When I was coming up at Goldman Sachs, I was trained to focus on bonds because bonds are the true competition stocks. The competition I most fear when short term interest rates, the ones set by the Fed, go sky high.

16:09you have to expect that the dividend stocks, the stocks of companies with high yields, will sell off because their dividends can't give you yields big enough to compete with their fixed income alternatives that are risk-free. Unless, of course, they sell off big enough that they are, once again, legitimate competition. But who wants to endure horrible capital losses for a measly 4%, 5%, or 6 % yield? When long-term interest rates rise, the one to watch is the yield on the 10-year U.S. Treasury. Then you have to start being wary that the entire stock market might be worth less. It's simple. If the bond market competition gets more attractive, the stock market gets less attractive.

16:48This can be like a giant zero sum game. Of course, you should be especially worried about rising long term rates caused by a pickup in inflation, like we saw during the great bear market of 2022. Inflation eats away at the value of long dated assets like equities because their future earnings streams will have less purchasing power. That's especially true for growth stocks. Higher interest rates don't just make bonds more attractive. They also make it more expensive for banks to lend, putting a damper on the whole economy. For a long time, we had an ideal environment for stocks, low inflation and low interest rates.

17:21But then the pandemic hit and the world turned upside down with the worst inflation in 40 odd years, which led to a hideous market wide meltdown as the Federal Reserve lowered the boom on us. Let me put this another way. If this were basketball, I'd be saying that if you just watch the man with the ball, and he's stuck in your name, and you don't watch the other teams doing on defense, the bonds, there's no way you're going to get the basket. You can't watch your favorite team. You have to watch the team they're playing against, too. Makes sense, right? Stocks are always playing against bonds.

17:56Okay, what else do you need to watch out for? on the micro level, not the macro, but the micro level, the company specific one, you need to be very cautious when you see unexplained resignations by key executives. To put it bluntly, when the chiefs resign, so should you. Yet when you see a CEO step down for no discernible reason, you should presume something is wrong, maybe very wrong, and do some selling. Shoot first and ask questions later, please. I've sold stocks simply because the CEO or the CFO resigned. And if it turned out to have jumped the gun, if If there was truly nothing wrong, I'd simply buy them back.

18:30But in my whole investing career, do you know how many times I can recall that a CEO left for an undisclosed personal reason and his stock was still worth buying right there? Off the top of my head, once. And that was Visa. I racked my brain to come up with other examples. I just can't think of them because they're that uncommon. Why? Simple. CEOs don't quit for personal reasons, not if they want to keep their bonuses. CFOs don't quit for personal reasons either. These are fabulous jobs. You don't get to be a chief executive by being devoted to your family. Nobody gets one of these jobs without giving up a great deal of what most people enjoy about life.

19:06Things like family, friends, nights out. Competition for these positions is so fierce that when you finally land one, you don't happen to leave, not for no reason. When C-suite executives leave for undisclosed personal reasons, it's almost always because there's something wrong at the company. Hence my rule. When high-level people quit, a company just sell. Aha, you say, I know a CEO who quit because he had an epiphany about climbing K2. Or I know a CFO who left because she wanted to spend more time with her family. Fine. There are exceptions. At some point somewhere, a CEO really will step down just to spend more time with their kids.

19:43But here's the thing. When you're investing in the stock market, it's not the exception that matters. It's the rule. There will always be some situations where it's a mistake to sell a stock when senior executives leave. I don't care because most of the time selling will be the right decision. This is the kind of rule that helped me keep in the game. It kept me in the game at my old hedge fund. It's all about helping you avoid losses. And one way you do that is by not necessarily taking fewer risks, OK? No unnecessary risks, like figuring out where the CEO just resigned, why he resigned, or for undisclosed personal reasons.

20:17It's just good analysis to say, uh-oh, I got to sell that stock. Bottom line, I want you to get a hand on the stock market. You need to watch what's going on with bonds. That should be obvious at this point, but it's something people quickly forget once the economy regains some semblance of normalcy. And when you're looking at individual companies, remember that unexplained high-level executive resignations equals sell. Bad Money's back here for me. Hey, Jim, your mission has been very successful in our family. I listen to your show multiple times a week for investing knowledge. I just want to say thanks.

20:51I love your show. Thanks for always looking out for the world back. A huge thank you for all you've done to make me a better investor. I got to call Kramer because I can't make a move without this guy. I want to make people better investors. If they make money, fantastic. Let's go to work.

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22:44Before you can be a good investor, you need to be a realistic investor. There are far too many people in this game who are not realistic. Either they allow their emotions to cloud their judgment, or they allow themselves to be surprised by the inevitable. Let's start with the inevitable. You'd think people would get comfortable with the idea that stocks can go down. After the dozens of corrections, meaning sizable pullbacks, we've had over the last 20 years, you'd think we'd get used to the process and accept that watching your stocks drop in price is something that can happen and will happen.

23:15If people were reasonable, if we were a realistic species, you might assume that we'd say something like, let's prepare for the inevitable correction because it could be right around the corner. Yet aside from the permanent bears who think we're always due for a pullback, Most people act like every correction is a total shocker, the type of thing that never happens. So every time the stock market goes down, there's a huge contingent of people who seem stunned, just caught totally by surprise. To me, corrections are like the rain. I know that rain is inevitable. I expect it to rain. I prepare for it.

23:44When the rain comes, I'm ready. I have an umbrella or a coat or I stay indoors. That's how you need to approach the possibility of a pullback in the market. Sooner or later, we'll get one. So best have some cash ready on the sidelines just in case that time turns out to be now. Of course, plenty of corrections happen at allegedly unexpected times. In recent years, we've had a lot of major declines that were preceded by terrific up days during which we made lots of money and everything looked peachy. In January of 2018, the stock market roared higher. People were acting like we had this unstoppable rally.

24:16But in February, the average just got obliterated. In the fall of 2021, we were coming off a magnificent year-and-a-half-long rally where practically everybody was making money because picking winners were so easy. Then the whole market rolled over, and it took months for people to realize, no, this was not some temporary dip. It was a bear market that lasted almost a year. But there were some terrific days in November 2021 before everything fell apart. Why do I mention this? Because the time to be most worried about a looming correction is the moment when nobody else is concerned. That's when we get these brutal, supposedly unexpected declines, when everyone's euphoric.

24:52Now, get this, because I thought about this a lot. I used to have this rule at my hedge fund. When I made 2 % in a day on the upside, I knew I was too exposed. I knew I was too long. I knew that my portfolio would kill me if we caught a storm. I had simply made too much money all at once. So as the market lifted, or if my performance was swinging too much to the upside, I pulled back, sometimes furiously, selling stocks into strength to prepare for that big down day just around the corner. Now, sometimes the corrections never came and I had to swallow my pride days later and buy back everything I'd sold at higher prices.

25:27But when we did get hit with a major sell off, my hedge fund outperformed by so much that my clients thought I was a genius. It wasn't genius, though. It was discipline and preparation. Plus, because I'd taken something off the table in order to raise cash, I've been able to use that money to buy all sorts of high-quality stocks into weakness. Look, we may not be able to predict when a storm is going to strike, but we do have barometric readings that can help immensely. Yet, if corrections are like, great, then where should you get your weather report? I like to follow the proprietary market edge oscillator.

26:01It's a terrific indicator. I pay for that to tell us when the market is getting overbought or oversold. Whenever this oscillator, which you can subscribe this to, by the way, through the investing club, registers plus five or above, that tells me we've come up too far too fast to the point where it's gotten dangerous. We could have a big sell. So to me, a plus five reading means you need to pull back aggressively, wait for correction. What do I mean by pull back aggressively? if you're nimble, admittedly a big if, you might want to ring the register on some of your portfolio as always, always, always advise you if you're a member of the CNBC Investing Club.

26:34We spend hours teaching you how to learn this sell discipline. That way you'll have a ton of cash on the sidelines that you can use to buy back your favorite stocks at lower levels when the storm hits. Even if you're not nimble, you should be selling something to raise some cash when the oscillator hits plus five. Don't worry, you won't lose your position. You'll have plenty left. We just need to take something off the top, so to speak. So if the market gets hit, you have room to buy it back at lower levels. That's a key to outperformance. Hey, by the same token, when the oscillator hits minus five, it means the market is incredibly oversold.

27:06In that kind of situation, we've usually come down so far so fast that we're due for at least a short-term bounce. That's a good place to put your cash to work, even if you haven't already. Some of our best work with the travel trust has come in when we tiptoe in down 5 on the oscillator. We always have something worth buying when the market's that oversold. Oh, and when the oscillator hits minus 10, where it was a week before the market bottomed, October 2022, you often get massive moves higher, which is why we have to hold our noses and pretty much buy everything in the portfolio, every single one of the stocks, especially stocks that have become accidentally high yielders purely because they've come down too much.

27:47Those are the ones that go first. So this tool can help you spot bottoms and avoid tops. Worst case scenario, you sell something at a high level, but there's no storm and stocks go higher, which means you want to perform the averages because you had too much cash on the sidelines. Big deal. You did not get hurt. I'll admit that it's a real risk to have an upside without you, but look at it this way. Using this methodology at my hedge fund, I gave investors 24 % compound annual return after all fees. That's about three times what the S &P would have given me during the same period. As I see it, that's pretty strong evidence that avoiding losses on big down days more than makes up for the possibility of missing some partial gains on the big up days.

28:27Now, let's talk about the other component of realistic investing. You need to stop yourself from making investment decisions based on misleading emotions, and the worst of those emotions is hope. Whenever I hear the word hope, as in I hope that doom stock du jour will come back to where I bought it so I can sell it without taking a loss, I get furious. Always remember, hope is not part of the equation. Don't hope for anything. Hope is emotion, pure and simple. And this is not a game of emotion, or at least not your emotions. Every stock you own because you hope it goes higher is another position in your portfolio that's not being filled by a stock that you believe will go higher.

29:05Yet I hear hope constantly. That's fine if we're talking about religious sports. You know the coaches of some of these comfort behind NCAA men's basketball teams keep their players motivated through hope. But in the stock business, hope is a mistake because hope supplants reason, especially when we're talking about stocks that trade in the single digits. You tell yourself, I bought this at$5. Now it's at$4. I hope it goes back to$5. Then I'll sell. How hard could it be to go from$4 to$5, right? Wrong. No company ever sets out to have a single-digit stock to begin with. Most companies will fight tooth and nail to keep their stocks from going into the single-digit territory.

29:44it. So when you find something that sells for just a few bucks, the market has already rendered a harsh judgment. When you let hope become part of the equation, you can end up holding these low-quality pieces of paper waiting for something that will never happen. Forget hope and waiting for higher prices. Cut your losses and move to a stock you can actually see going higher under its own power, not because of hope, but because of reason. Of course, there are times when hope pays off, like late 2020 and early 2021, where all sorts of garbage could work higher because there was so much easy money and so many credulous investors looking for easy wins.

30:22But the moment the Fed took away the money, took the easy money away, you know, took away the punch bowl, so to speak, that whole playbook blew up in your face. And anyone who kept buying stocks, especially on margin, or borrowed money based on hope got eaten alive. And that's what I'm trying to protect you against, the bottom line. It pays to be realistic in this business. So prepare yourself for corrections. Big pullbacks are light green. They're inevitable. And whatever you do, don't make stock picking decisions based on hope. You need to invest in the real world, not in fantasy land. Let's take some calls.

30:57Let's go to Dennis in Massachusetts. Dennis. Hi, Jim. Could you offer your top sector recommendations for a 401k investor seeking good long-term growth potential. Okay, well, look, it's absolutely true that technology is first and then healthcare is second, and then literally nothing unless you want to be in the meme stocks. I certainly don't want that for 401k. Now, remember, 401k, most people are not having any chance to be able to buy stocks. Younger people should be in the NDX and older people should be in the SPX. That's just the way it is. Let's go to Jacob in Alaska. Jacob. Hey, Jim. As a younger investor who recently became a first-time home buyer using a significant portion of my investment assets as a down payment.

31:39How should I think about rebuilding and rebalancing my portfolio going forward? And what principles or strategies would you recommend for someone in my situation to make smart, long-term investing decisions while balancing new financial responsibilities? Okay, here's what you want to do. You want to divide your money that you invest equally, five stocks that you like, and then index funds. So index for 50%, stocks for 50%. If you want to, you can share it with something like Bitcoin or gold. I prefer you to use the gold bullion. If not, then the GLD. This way, each month you put money to work and you get the individual stocks that you like.

32:15And one of them could hit big. Another one could hit big. And next thing you know, you are a millionaire because of the individual stock side. And the other side, the diversified S &P fund will help you. You're young. Do the NDX fund, not the S &P. All right. Being realistic is key. expect corrections, and don't rely on hope as an investing strategy. Hey, much more mad money at. I'm sharing more of my rules of the street, starting with how to know what you own like the back of your hand. And one of your favorite aspects of this show is getting to hear from you. So I'm hitting the phone lines to answer some of your investing questions.

32:48So stay with Kramer.

32:54Booyah for the emperor of Kramerica. Honorable James J. Kramer. You got me jumping around my office right now. Thank you so much for all you do for us. I enjoy your show and I find you very entertaining and informative. I watched your first ever episode of Mad Money back in 2005, and I've been watching every single episode ever since. Don't miss Mad Money every night at 6 p.m. Eastern. Plus, join the CNBC Investing Club and stick with Kramer around the clock.

33:30You don't need me to tell you that the Internet has been kind of a double-edged sword. That's true in every area of life, including investing. Sure, the Web makes everything more convenient. You have all sorts of information available at your fingertips, something that was unimaginable when I got started in this business. It was much harder to do the homework in the old days. It took real effort. These days, everything is searchable. So the Internet's great for investing, but it also creates a ton of new problems. When we have new problems, we need new rules to help contain them. For example, you absolutely have to be able to explain your stock picks to another human being.

34:05If you can't explain it, you don't understand the story well enough to justify buying the stock in question. Here's the thing. In the old days, this rarely came up. But the rise of the Internet took away one of the most important breaks on the process, one of the most important warning systems, which is talking to another human being about what you want to buy. It used to be that you had to talk to a broker to buy anything. Now, with a stroke of a key, you can buy any stock without ever having to tell another person why you're doing it. And you don't even have to pay a commission. Why is that an issue?

34:34Why do you need to explain this stuff to someone else, anyone else? It doesn't have to be a professional, by the way. It could be anybody, preferably an adult. But you can fall back on explaining it to your kids if you can't find an adult who's willing to listen to you talk about the market. Buying stocks is a solitary event, too solitary. But we're all prone to making mistakes, sometimes big ones, to Errish human. If you want to cut down on these mistakes, you should force yourself to articulate to someone else why you like a stock. Do you know how they make their money? Do you know how their earnings are supposed to look?

35:06If you don't, then you're setting yourself up for trouble. I always see this problem in biotech. So many people own biotech stocks without even the vaguest understanding of what the underlying companies do or how they could possibly turn profitable. You see this with speculative stocks all the time. So many people own these things without even the vaguest understanding of what the underlying companies do or how they could possibly turn a profit. I bet that 90 % of the people buying meme stocks have no idea what these companies do. They just know that they're hot, hot, hot. Real bad reason to buy.

35:40I urge you to be able to articulate a thesis for owning every stock in your portfolio, including memes. Think of it as a test to make sure you've actually done the homework. That way, if the stock gets slammed, you'll know whether to cut and run or buy more. If you don't actually know what you own, believe me, you're going to get slaughtered on the next decline. And there's always a next decline. And it's the declines you have to worry about. When I was at my hedge fund, I always made my employees sell me the stock, literally sell it to me like a salesperson before I buy it. Pitch it to the boss.

36:08If you're in a position where you're picking stocks yourself, get someone to listen to you and let you articulate your reasoning. I also like to ask people, what's going to make this dog go up? What's the catalyst? Or have we missed the move in this overvalued stock that's up 100 % already this year? And of course, what's your edge? These are all important questions. If you can't answer them, you shouldn't be buying. And look, the ability to make hasty decisions is not the only thing you need to be wary of on the web. There's something else you need to watch out for. The Internet has vastly increased the power of the Wall Street promotion machine.

36:44Most people simply don't have enough respect for the promotion machine. You don't have to like it, but you have to acknowledge its power. When Wall Street falls in love with the stock, it'll go much further than anyone expects in its efforts to hype that stock to high heaven. Think about all the garbage SPAC stocks, the startups that came public in 2020 and 2021 by merging with special purpose acquisition companies. Basically, big pools of money that exist to make big acquisitions. Originally, they were meant to make lots of little acquisitions, but in 2020, some geniuses realized they could use SPAC mergers to bring hot startups public while skirting all the intense regulatory scrutiny you get when you do an actual IPO.

37:24We had so many of these electric vehicle or electric vehicle adjacent SPAC deals in 2020 and 2021 with totally made up forecasts that went out many years into the future. If you tried to pull something like this with a real IPO, you might end up in prison. Yes, that bad. If you went to a bank to borrow money with these projections, they'd let you out of the route. Yet Wall Street let these SPAC deals happen because the investment bankers wanted the fees. Meanwhile, the Securities and Exchange Commission, the supposed cop on the beep, was asleep at the wheel. Wall Street's a strange place. There's no one around who says, you know what?

37:59We should crush people with made-up estimates and impossible-to-meet projections. We shouldn't close our eyes to what we know can't work. You know, we shouldn't do this. But they want the money so bad they don't ask those questions. They didn't care that the people running these SPAC targets were charlatans who didn't police themselves because the regulators didn't seem to care either. Eventually, the most egregious of these SPAC operators got prosecuted, but not until after they lost people fortunes. And the level of hype to legitimacy here was ridiculous. And beware, SPACs are still somehow legal.

38:34And often their only watchwords are that the sucker is born every minute. This is just terrible investing. I don't want you in any SPAC, any SPAC. So the next time you see this kind of enthusiasm for potentially dubious merchandise, take your cue from Public Enemy. Don't believe the hype. One last thing, and this is really true of all media, both online and off, whether you're watching TV or scrolling through social media, it pays to be a skeptic. My general approach is that what you hear on TV is possibly right and likely not fraudulent, but no more than that. Same goes for the web, except you have to be a lot more careful because there's a ton of junk information and uninformed commentary online.

39:14That's just the world we live in. Sir, repeat after me. Just because someone says it on TV, that doesn't mean it's true. You can't believe everything you hear. That's one reason we mostly just talk to high-level execs on our show. They can still mislead you. But if the CEO of a public company outright lies about how their business is doing as opposed to a trader who comes on here, whatever, let's just say their legal bills will really start to build up. How about that? But generally speaking, you see a lot of money managers coming on television, and for a variety of legitimate reasons, these guys aren't always well vetted.

39:46And often managers can't help themselves when it comes to being promotional. Here's a good rule of thumb. If a money manager is on TV and he's moving his lips, he's probably talking his book. When someone comes on and says that some plunging stock is a buy, do you think, hmm, that sounds like an opportunity? No. Instead, you should wonder, he must be really stuck in that pit. Is he bailing when I am bailing? It's awfully hard to tell. You know, the government doesn't go after people who say they like stocks and then sell them because it's not illegal to change your mind if circumstances warrant.

40:20Please remember that. The bottom line, always be able to explain your stock picks to another human being and never take anything on faith in this business. Not from the Wall Street promotion machine, especially not from money managers who love to come on TV and tell you they are right 100 % of the time.

40:40Booyah, Jim Kramer. I'm a first-time caller, a happy club member. I want to thank you for being the biggest champion of investing. Thank you for helping me become a millionaire.

40:57No matter how smart you are, no matter how well informed, no matter how lucky, sooner or later, you're going to make some suboptimal stock picks. It happens to the best of us. Every portfolio has a few duds in it. The truth difference between a good investor and a bad investor is how you handle your losers. People seem to have a natural aversion to selling their losers. Professionals and amateurs alike hate doing it. I know, believe me, I sure hate selling them for the trust, but it has to be done. Still, somehow we just keep hoping, operating under the assumption that a sinking stock is somehow wrong and everything will be just fine if they just hold on long enough.

41:36They rationalize that the weakness they see will be fleeting and that others will soon recognize the value of the stock in question. That's all well and good until you need money. Maybe you want to raise some cash because your portfolio has gotten a little too stock heavy. Maybe you have some real life expenses that require you to put together a lot of cash in a hurry. Maybe you're a money manager with some investors who want their money back. Well, then, how do you decide what to sell? This is where the tendency to hold on to our losers shows its sinister side. A lot of investors would prefer to sell their best performing holdings rather than their worst performers.

42:13They'll sell their winners to subsidize their losers. You then get a self-fulfilling spiral as the bad stocks stay bad. They usually keep going down. And with fewer winners, your performance will get even worse. This is particularly dangerous for a hedge fund because bad performance triggers yet more redemptions from your clients. And if you keep selling winners to give them their money back, it becomes a vicious circle. Individuals do the same thing. You only have a finite amount of capital to invest. Rather than take your medicine, they'll lose far too many people they prefer to just remain in denial and pretend the losers aren't losing.

42:50They fantasize. That's my rule. Never subsidize losers with winners. Don't sell the winners and keep the losers. My advice to anyone who's stuck in this position is simple. Sell the losers and wait a day. If you really want them, go back the next day and buy them. But once they're out of your portfolio, I doubt you'll be tempted to bring them back. By the same token, you can't keep hanging on to a low-quality stock just because you're hoping for, say, a takeover. Look, I get it. Nothing's more exciting than a takeover. Nothing's as lucrative. You can put on a lifetime's worth of gains in a day from a takeover.

43:25So people go to great lengths to try to capture these moves. And that includes buying a lot of bad companies in the hope that they might catch a bid. Funny thing about bad companies, they rarely get bids. In reality, what gets acquired are great companies with cheap stocks, not crummy companies with stocks that seem cheap but are, in fact, pretty expensive. Yet so many people buy this junk merchandise because they think a takeover will save them. Which brings me to my next rule. Never speculate on takeovers of companies with bad fundamentals. The odds are that you'll end up owning something that could go down much more than you thought, even as it has very limited upside.

44:04Even if a bad company gets a takeover, it might end up coming in at a much lower price than what you initially paid for the stock. That's the thing about bad companies. Their stocks tend to go lower. You can do much better buying a well-run company that's in good shape and can still get a takeover bid than you can from buying a company that's doing poorly and thus unlikely to get a bid. It makes sense. Not many bad companies get acquired because not many CEOs can turn bad companies into good ones. So don't wait around for a company with lousy fundamentals to be taken over. You could be waiting forever.

44:36You've got my blessing to speculate on takeovers if you're betting on well-run companies, because even if a deal doesn't happen, a good business has other ways to win. Plus, when the stock of a good company goes down, you can confidently buy more into weakness. That's not something you can do with a company that's gone from bad to worse while you were waiting irrationally for lightning to strike. The bottom line, never sell your winners to subsidize your losers. If you need to raise money for whatever reason, just take the loss and sell something that's underperforming. And absolutely do not speculate on takeovers in companies that have deteriorating fundamentals.

45:13If a possible takeover is the only reason you have for liking a stock, you shouldn't like it in the first place. Stick with Craig.

45:30I always say my favorite part of this show is answering questions directly from you. And that's why I'm talking. I'm taking this inbox. We're going through it. We'll look at the topics you're interested in right now. By the way, this is something we do every month for members of the Investing Club. If you like this, be sure that you join the Investing Club. Let's take some questions first. We're going to Nancy, who asks, when you advise people to take out their cost basis and play with the house's money and let it run, at what point do you suggest people taking profits? Once you've taken that money out, I'm not kidding.

46:00Once you've taken the house's money out, you can't lose. So you know what you're going to do? You're not going to sell. You're going to let it run and maybe get ultra rich from one position. It can happen. Think about NVIDIA. Now we're taking a question from Herm, who wants to know, Jim has been talking about battling the stocks that are down. What exactly does that mean? Trading a particular stock for a while, doubling down on a stock that is down from its cost basis, finding a good exit point to sell the stock? Boy, these questions are amazing. OK, I like to have when a stock flies up, I take a little bit off the table.

46:30And then if it goes all the way back down, I start buying from below where I first bought it and then buy again. That's battling in a pyramid style. So if I bought 10 shares where I sold 10 shares, I bought 10 shares back and then it went down again, I might buy 20. And then it went down and I might buy 40. Ultimately, I'll come right back up and sell some of that low basis stock. That's the battle. Now, let's go to Michael, who asked, can you recommend a few stocks specifically when investing for young children? Many of us invest for our children or grandchildren, so that would be helpful. Yes, you're going to have to buy tech and health care.

47:02I think that you can buy a stock like Johnson & Johnson, AAA balance sheet, maybe the only one. And when it comes to tech, you know I'm going to go back to NVIDIA, own it, don't trade it, and Apple, own it, don't trade it. Those are my best of breeds. I've got to be there for those. And I've got to tell you, can I just tell you, if I had said that when I started this show 15, 20 years ago, everybody who watched it would have said, you know what, I feel like being a millionaire. I'd like to say there's always a bull market somewhere, and I promise you'll try to find it just for you right here on Mad Money.

47:32I'm Jim Kramer. See you next time.

47:47internet or another medium. You should not treat any opinion expressed by Kramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Kramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Mad Money disclaimer, please visit cnbc.com forward slash mad money disclaimer. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

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