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Cramer's Lesson on the 'Art' of Investing

As "Mad Money" viewers know, Jim Cramer believes there is always a bull market somewhere and he wants to help you find it. Cramer's fiery opinions are unmatched and now, homegamers can get a behind-the-scenes look at how he formulates his investment advice.

"Inside the Madness" is a new column, which features e-mails and more with Cramer and me, his researcher Nicole Urken. This is my very first blog post in the series. Going forward, look for it Tuesdays and Thursdays on madmoney.cnbc.com.

There are two pieces of market wisdom Jim imparted to me soon after I became his researcher in July 2009: (1) When it comes to investing, it is key never to forget the basics; and (2) Investing is not a science—it’s an art.

At best, I had only a hazy idea of what he meant. Could I just nod my head and feign understanding of the Cramerican logic? Take every passing booyah in stride? No. There's been no shortcut. The path to clarity has instead been paved with emails back & forth with Jim. Lots of them. With research memos attached. And the daily epistolary journey generally starts at 4:15am when Jim wakes up to check the Asian markets and catch the European openings. So not quite a walk in the park.

While some of these emails work their way into Mad Money segments, a number of the exchanges are undiscovered gems lost to cyberspace. Oftentimes, they reveal the genesis of a segment, pose questions after a segment has aired, or introduce new investment ideas. And sometimes they’re just downright entertaining. This blog aims to bring some of these to light to give an additional inside glimpse into Mad Money—after all, it’s not all madness.

In an episode back at the end of earnings season, we aimed to answer a key conundrum: How Home Depot was able to blow away expectations in its latest quarter amidst a domestic housing crisis while its peer Lowe’s played the blame game on the uneasy macro environment. One aspect we were not able to fit into the segment comes down to Jim’s first piece of market wisdom to me—that it is key never to forget the basics. For retail that is simply “inventory management.”

What I didn’t understand until recently is that understanding the basics is anything but simple—and is an art itself. For example, never did I expect that helping out my dad behind the counter at his hardware store in Princeton, NJ would one day help with stock picking. It was the below story from Jim, though, about his experience working in his dad’s paper store that shed light on how my dad’s Weber grills and winter shovels could relate to why HD has been able to execute so effectively. Jim has told me that his understanding of inventory management was key to many important calls while at his hedge fund, and he has continued to teach this on Mad Money. The email exchange from earlier this summer elucidates the lesson:

From: James Cramer
Sent: Friday, June 17, 2011 11:54 AM
To: Nicole Urken
Subject: gift wrap

When I was growing up I would go to The International Packaging Products showroom, the family owned business that my father still runs, and marvel at all of the gift wrap my father has. What I didn’t realize was that the rolls were the enemy. They were the enemy because they were inventory. My father said that when holiday season came he had to borrow money from a bank or the supplier to have all the inventory on hand for the mad rush of retailers who needed to wrap presents for their customers. He had to make a judgment each year how robust the holiday season was. He had to nail it because, alas, if you didn’t sell that paper by the holiday you were stuck with it and no one needs seasons greetings paper until the next season. All that excess inventory meant your gross margins got hurt. That’s how I learned the business cycle. Every business has inventory—semiconductors, food, steel, even pharmaceuticals—and if it doesn’t move you have to discount it. I knew this instinctively by the time I was ten because of Pop. That’s why I have an edge. That’s how come I live and breathe gross margins.
Nicole I am sure you learned similarly.

From: Nicole Urken
Sent: Friday, June 17, 2011 12:27 PM
To: James Cramer
Subject: RE: gift wrap

Nicole Urken, Mad Money Research Director

I did at my dad’s hardware store! At the beginning of spring, I remember my dad setting out the Weber grills at the front entrance of the store—all different colors (green, red, blue)—and it was just as important to sell those by the end of the warm-weather season as it was to get rid of the shovels piled up during winter time. Shovels were always hard to predict, because you never knew just how much snow would hit. Not having enough inventory could be just as tough—After a couple of rain floods, the whole town would be searching for water pumps to clean up their basements. They would pay anything for them. But it was hard to track down the inventory last minute. All about the flow.

Now, our aired Mad Money piece focused on the second of Jim’s second piece of market wisdom—the “art” of investing—with a focus on understanding the more cerebral HD management vision. What does this mean? The essential advantage of HD lies in the restructuring program rolled out in 2008 just before the downturn by CEO Frank Blake. His foresight and execution has continued to make HD a winner warranting higher valuation. In contrast, LOW’s more recent restructuring plan suffered from “too little, too late” syndrome. However, ultimately even this more cerebral HD management vision and restructuring plan links back to the basics of managing inventory appropriately—that was the main crux of Blake’s restructuring program, after all.

While investing is, in fact, an art and not a science, it ultimately does come back to the basics. It’s just that sometimes learning basics are rooted in areas you would least expect: say, gift wrap and Weber grills. And, don’t forget, buy Home Depot over Lowe’s—If the company can execute in this uncertain environment, just watch what will happen when we actually see some real uptick demand and stabilization in the housing market. And it pays you while we wait—a nice 3% yield ain’t too shabby. I personally plan to stick with investing over handywork.

Symbol
Price
 
Change
%Change
HD
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LOW
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"Inside the Madness" appears Tuesdays and Thursdays at madmoney.cnbc.com

Follow Nicole Urken on Twitter @nicoleurken

Questions for Nicole? insidethemadness@cnbc.com

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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  • Jim Cramer is host of CNBC's "Mad Money" and co-anchor of the 9 a.m. ET hour of CNBC's "Squawk on the Street."

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