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Short-Term Trading’s Bad Rap

Wednesday, 6 Oct 2010 | 7:38 PM ET

Wednesday’s action was a perfect example of a longtime “Mad Money” maxim that you must take profits on stocks that have run too much, as the Dow struggled intraday and the S&P 500 closed in the red.

Methods to the Madness
Cramer coaches you to stay the course even in uncertain times.

This is otherwise known as “trading,” something that’s anathema to so-called buy-and-hold investors, and its endorsement seems to earn Cramer their ire. But to him it just makes sense. It’s an important part of portfolio management, whether you operate on Wall Street or Main Street.

Look, Chipotle , Netflix , Salesforce.com and VMware were just a few of the names that had, Icarus style, flown too high. So you take a little off the table and play with the house’s money. You’re not walking away from them forever. Instead, you’re merely letting them cool off before buying them back at lower prices.

This is a tested strategy that has served Cramer well for 30 years. And if there were proof that buy-and-hold—or simply buying an index fund, for that matter—generated the kinds of returns earned from actively managing your money, he’d offer a mea culpa immediately.

No, not every stock needs such constant attention. Steadier names like Verizon and Clorox offer dependability, and a nice dividend, to balance out a portfolio. Cramer’s message, though, is that you can own these longer-term investments and trade the aforementioned momentum names at the same time. You might as well use every avenue possible to grow that nest egg, or save for your kids’ college tuition, or even just buy that classic Caddie you’ve had your eye on.

There’s money to be made here and now, Cramer said, regardless of the doomsday projections we’re constantly hearing in the media, whether from pundits or the media itself. And if their dire predictions do come true, you can, as an adept money manager, reposition your holdings to suit. In the meantime, make money.

For proof that Cramer’s thesis is correct, just remember his call right before the generational bottom in March 2009 when the Dow was flirting with the 6,000 level. In the face of TARP losses, bank failures, devastating earnings losses, a slowdown in China and a host of other terribles, he told “Mad Money” viewers to buy stocks. And what happened? We closed a mere 33 points from Dow 11,000 on Wednesday.

Think about the run you would have missed by focusing only on the potential dangers that lay ahead and not on making money when you had the chance. And therein lies the whole point: that trading, at times, works.

“The buy-and-hold emperor has no clothes,” Cramer said. “And those who proselytize for it are not your friends. In fact, they’re your portfolio’s worst enemies.”

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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