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Everybody knows investing’s first rule: Buy low, sell high. But what about buy high, sell higher?
That strategy works, actually, though only for high-growth stocks like Google [GOOG
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] during its heyday. Money managers will always jump at any company that’s growing at 30% a year, which in turn propels the share price upward. That’s why GOOG soared from its $85 IPO price to its $740 peak.
While the stock looked expensive at $200, $300, even $600, it wasn’t, because the growth was there to support the move. That exponential earnings expansion was enough to lure new buyers into GOOG and keep the momentum going.
And on a price-to-earnings-multiple basis, Google was cheap – all the way up to $650, Cramer said. If a stock trading at just $20 or $20 had the same PE multiple and growth rate, investors would have been buying hand-over-fist. So why should GOOG at $300 be any different?
Of course, come 2008 when the specter of recession loomed, it was time to cash out of Google. But those who followed Cramer’s advice on Google – straight to that $740 peak – made a lot of money.
Watch the video to find out how leaders like Google affect the market.
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