Mad Money: Know the Stocks You Own - Mad Cap Recap

FEATURED SLIDESHOW

  Who Is The Worst CEO?
Mad Money needed new inductees for its
Wall of Shame, so we asked viewers for
  nominations.

RECENT POSTS

Get stock and market information from Mad Money's Jim Cramer sent to your mobile phone.

Road Rules

Investing can be confusing. Luckily, Cramer has mapped out some road rules for all you Home Gamers trying to navigate the jungle that is Wall Street. Think of it as "Mad Money 101" –- some fundamental advice to keep in mind as you play the market. Whether you're a first time investor or a seasoned financier, it's always good to remember the basics.

Watch the Videos

Text Size

Apr.16

2:28 PM ET

Wednesday, 16 Apr 2008

Know the Stocks You Own

Posted By:Tom Brennan

Topics:Technology | Stock Picks | Stock Market

Sectors:Technology

Rule No. 2 tonight is “know what you own.” Just because you own a tech stock doesn’t mean the company is representative of the entire sector. There are industries within a sector, and those that ignore this important fact can end up losing money – or missing out on big opportunities.

There are times when you’ll see a rally in an entire sector. If the Federal Reserve is cutting rates, almost everything cyclical will get a boost – and cyclicals don’t even comprise a sector, they are a whole bundle of sectors. If the economy has taken a turn for the worse, then you’ll see a jump in the consumer staples, the food and the beverage companies. These are broad, sector-based rallies, and you don’t have to be all that discerning to pick out a good stock that will make you plenty of money when these things happen, Cramer says.

But most rallies don’t work that way. There will be talk of a healthcare rally, a transports rally or a tech rally, but that doesn’t mean the whole sector’s rallying. (Cramer caveat: Always be suspicious of anyone on TV – except for him – calling a sector rally. You want to know how broad that rally truly is.) It’s the industries within these sectors that really count.

Case in point: Cramer called a tech rally in June 2005 by writing two ticker symbols on his hands – MSFT and CSCO. He figured these two names best represented tech on the whole, even though the rally was happening in gadget production and not the entire sector. By February 2006, Microsoft [MSFT Loading... () ] was up over 11% and Cisco [CSCO Loading... () ] was down 3%, while Qualcomm [QCOM Loading... () ] was up 37%, Broadcom [BRCM Loading... () ] was up 87%, Apple [AAPL Loading... () ] 95%, and Marvell Tech [MRVL Loading... () ] 71%. These were the real participants in the so-called tech rally that was really a gadget rally.

Bottom Line: Don’t let yourself be fooled. Your second rule tonight is to never mistake a rally in an industry for a rally in the sector to which it belongs. It’s an easy mistake to make, but if you remember Cramer's rule, you should be able to make a lot more money.

Questions? Comments?

Questions, comments, suggestions for the Mad Money website?

Tools:

Print Email

Previous Post Back to Main Page

ADD COMMENTS