Inside the Madness

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Inside the Madness

Cramer on Timing the Market

From: James Cramer
Sent: Monday, September 26, 2011 10:27 AM
To: Nicole Urken
Subject: Top of the show

What would have been a better strategy than panic, beyond simply buying the S&P 500 in the middle of last-week’s pullback?  I always emphasize the idea of a shopping list around here, a list that takes into account these classic over-reactions so that you can profit from them.

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Monday, September 26, 2011 10:30 AM
To: James Cramer
Subject: RE: Top of the show

Think as additional point, show top could be good lesson on scaling.  Particularly with many high quality names that are being taken down with macro worries, it could make sense to buy a little and scale into it…  That said, as you have emphasized, things could get worse. But if you scale into particular high-quality names that have reported stellar quarters – with emphasis on slow & steady—it could be very interesting opportunity.

From: James Cramer
Sent: Monday, September 26, 2011 10:31 AM
To: Nicole Urken
Subject: RE: Top of the show

Always good to show how I do it for my charitable trust…

They say that in life timing is everything. Investing is no exception.

Mad Money Markets: Don't Panic!

This notion is, in theory, one that is universally accepted. But, calling a precise bottom or top somehow is rewarded the top accolades in the world of finance. That is where the problems begin, because that specific undertaking is near-impossible. No matter what anyone says, such an exact call is something that, frankly, incorporates a heavy dose of luck. And while there have been many savvy investors that have had the right call on one end, they have missed the warning signs on the other—look no further than John Paulson’s impeccable timing during the great recession contrasted with his current underperformance.

But, unfortunately, the difficulty (read: impossibility) of calling a precise bottom or top keeps too many people out of the market. With investing, timing is everything… but that doesn’t mean the timing has to be perfect. The mainstream investing dogma preaches the opposite: Index fund enthusiasts who say you can’t beat the market draw attention to the impossibility of timing it exactly. But while they’re right on the difficulty of being able to make perfect calls, that’s no reason not to own individual stocks. Instead, it’s the reason not to put all your eggs in one basket… and not to buy or sell all at once.

For example, in the last month, industrial names including Eaton and Caterpillar, materials names like Freeport, and energy names like Schlumberger have been damaged as we’ve seen a rotation to more safe havens. But because investing is not synonymous with “gambling,” diversifying among more defensive names with yield—like the General Mills—or more recession-friendly names that also have growth stories embedded as well—like The TJX Companies—will position you effectively.

Along with mixing your names levered to an upswing with those that have downside protection (i.e. diversification), another antidote to full-out massacre of your portfolio is scaling. Scaling into positions and scaling out of them. This allows you to lock in upside and limit downside.  What does scaling mean? It means buying stocks in increments as they go down to lower your cost basis and selling in increments as they go up to secure profits.

If you never want to be wrong, then you shouldn’t take a position in a stock. But, unfortunately, that would mean you could never be right either. Money management is putting yourself in the arena and managing your risk along the way. Ultimately, investing is not about getting everything right. It’s just about making more right calls than wrong calls and managing your risk and exposures effectively. “Winning,” a word popularized by none other than Charlie Sheen this year, is not about calling a bottom or top in the market. The right way to win is to take some risk, manage it appropriately, and scale in and out of positions to secure gains and manage your cost basis. That’s how to cope with—and profit from—this volatile environment, which is still largely macro-driven.


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