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On a day like Monday, when the averages ended in the red, Jim Cramer thinks it is time to start to dream big with your portfolio. Many stock valuations are trapped by the index to which they belong, the ETF that claims them, or analysts' traditional methods of valuation.
Now, it is time to throw that all out the window.
Cramer thinks that some stocks are undervalued simply because investors just can't think big enough and imagine what could happen in the future. And there could be big bucks in store if investors try to think outside of the box and attribute a small portion of their portfolio to dreaming big.
"They have a literal and linear sense of things, taught at fabulous business schools and then honed at traditional research houses. These quizzical valuations are a product of that upbringing," the "Mad Money" host said.
With this in mind, Cramer used the example of Netflix to show how to think differently about the possibilities that a stock could hold and attribute that to its market capitalization analysis.
The public valuation currently gives Netflix $27 billion market cap, and, since Netflix doesn't trade like a normal stock, the private valuation is basically irrelevant.
Looking back, Netflix pretty much came out of nowhere and is now the dominant way that people consume at-home entertainment. For a small monthly fee, customers have access to a huge library of content. Plus, it has its own programming, which has helped build brand loyalty. The concept that users didn't have to pay for every program that they watch helped Netflix corner the market on binge watching.
However, if Cramer were to value Netflix, he would not do so using the simple boundaries of valuation that are used currently.
"As a private company, Netflix would be thought of as an important form of worldwide entertainment, and if it were up for a new round of financing, I think it could easily be worth double its current public valuation," Cramer said.
Considering the fact that investors are willing to give a company like Uber a $40 billion valuation, or the tens of billions that Airbnb or Dropbox have attracted, maybe it is not that far off.
"Why the heck shouldn't Netflix, which has changed the way we live, be worth much much more than it currently is?" Cramer asked.
Some investors may look into the past and remember when Netflix was worth significantly less and think the value right now is totally ridiculous. But what if management screwed up and the stock was trading at an absurd value back then?
"Netflix is an institution. A worldwide one. It should be valued accordingly. One day it will be. Not this week. Maybe not this year. But one day," Cramer said.
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That is why Cramer recommended investors be willing to allow a little luxury, even if that means accepting a level of risk you would not normally take.
So, if the stock makes any sort of a decline when it reports earnings later in the week, Cramer thinks this could be a great time to add it to your portfolio. At least consider adding one big dreamer stock! The "Mad Money" host could also make the same argument for Twitter, Receptos and even HomeAway.
Cramer wants investors to feel comfortable dreaming big about one slot in their portfolio. Then let index funds take up the bulk of the stock assets, and pick a few individual stocks so you can truly let your mad money run mad.