On Mad Money, Cramer was emphatic about his belief that amateur investors can earn just as much money as professionals. The problem, though, is that amateurs make mistakes that pros just don’t. So he decided to use the show to highlight the five most important things Home Gamers need to know to trade with the best.
First and foremost, pros always have cash on hand. Amateurs, Cramer said, have the tendency to fully invest their money in stocks, leaving no cash in reserve. So when the market takes a dip, putting the best stocks on sale, Wall Street goes shopping, while Home Gamers are left wanting. Cramer recommended having about 10% of a portfolio in cash for just such an occasion.
Another difference between professional investors and amateurs is the focus on downside versus upside. Beginners are only concerned about how much money a stock can earn for them. They usually disregard the fact that all stocks go down eventually. Pros know this inevitability, so they buy companies with huge stock-repurchasing plans and healthy dividends, which protect their investments when that decline comes. Home Gamers need to do the same, Cramer said. Plenty of stocks have upside potential, but far fewer have great downside protection.
Rule number three couldn’t be any simpler: If you don’t know it, don’t buy it. Pros pass up investing in companies they don’t understand all the time because they’d rather hold on to their money. But Cramer said amateurs are quick to snatch up a hot stock, even if they have no idea what the company does. Cramer knows his limitations, so Home Gamers should too.
The next Cramer maxim – there is such a thing as making too much money – might be a bit harder for amateurs to understand. But the bottom line is that making to much money is usually a sign that a portfolio is overexposed to one stock or sector. Think dot-com era, 1999-2000. Everyone was in tech. Everyone was making money hand-over-fist. Then everything collapsed. As Cramer said, it never costs any money to take profits, so do it before it’s too late.
Lastly, Cramer doesn’t want amateurs trying to game a company’s quarterly report. He said he ran the numbers and found out that earnings season produces the smallest profits and biggest losses of the year. Why? Because too many people – analysts and institutional investors – are making snap decisions based on the numbers. Investing during earnings season is too much of a gamble, Cramer said. And when you gamble, the house always wins.
Want to stop making amateur mistakes? Follow these five key rules that every professional knows.
Questions for Cramer?
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