In order to help investors become better at navigating the stock market, Jim Cramer revealed some of the biggest mistakes he has made in over 30 years of investing.
"Frankly, there are so many mistakes here that it might take a bit to explain them all," the "Mad Money" host said.
He learned that when it comes to investing in commodity stocks, investors must know that it doesn't matter which ones they pick — like going for a better balance sheet or higher growth — if the underlying commodity is hit. If that happens, they will all go lower.
Cramer thought he could avoid getting hurt by taking on a high-growth deep-value strategy, by only buying the highest quality companies for his charitable trust. He bought EOG Resources and Marathon Oil, and was wrong on both accounts.
Though EOG had the best properties, no one cared. Oil stocks all traded together, and almost every company wasn't able to cut spending fast enough to beat the declining price of crude.
"Don't think you can outrun a commodity grim reaper, even with a derivative situation like a master limited partnership," Cramer said.
Cramer harbors a grudge for Wall Street professionals who tell people they can't invest on their own.
"I watched people clobber the market regularly and I have always, therefore, resented those who tell you that you can't do it yourself," Cramer.
When Cramer worked at Goldman Sachs advising wealthy investors on their portfolios, he was astonished by how often home gamers would crush the market simply by doing their homework.
The truth is that not all money managers are perfect and they do make mistakes. However, their need to appear as though they are perfect can be discouraging to investors. Cramer thinks it could lead many to believe that investing should never be done at home and they should give their money to someone else to manage.
It seems to Cramer that the notion that investors shouldn't own individual stocks has become more popular in the last decade.
"The industry of money management does you such a disservice on television, because the combination of their seeming perfection coupled with the debasing of your own abilities is a toxic brew for do-it-yourselfers," Cramer said.
One of the principles of investing is to decide when it can actually be done alone, or if it is too difficult. A classic mistake that Cramer has encountered is the choice of stock and the company itself.
A sobering example of this is anyone trying to profit from the pharmaceutical innovation with drug stocks. The key is to avoid a company that has only a few drugs in the pipeline that one day may or may not be approved for use by the FDA. They might be too risky, and never get approval and limp along forever.
"When you have a drug company up against a difficult disease that many others have failed to cure, be more skeptical. There is a reason that others failed. It is an incredibly difficult problem to solve. The company you like might fail, too," Cramer said.
Cramer has become an expert at detecting an attractive growth story to hang on to, even when it's not the popular thing to do.
"Solid growth stories are hard to come by, and when you find them, you need to hang on for the ride," Cramer said.
It might be hard to remember, but Facebook was once considered a disappointing company that failed to live up to its potential for about a year after it came public. It seemed to Cramer that Facebook missed the entire migration to mobile from desktop, and the stock was pummeled.
At that time, Facebook was trading in the $20s and Cramer started digging into the company's conference call transcripts. He found that the company not only reported a good quarter, but that as the company adopted the switch to mobile, advertisers were flocking to it.
Cramer's charitable trust bought Facebook in the mid-$20s and was fortunate enough to catch a huge rally after that. He hung on to the stock because each quarter showed an improvement in the numbers and the stock's price to earnings multiple wasn't expanding.
"You were simply paying the same amount for even bigger earnings growth. That is the best kind of situation," Cramer said.
As an investor it is always easy to know you made the right move when you look back. Hindsight is always twenty-twenty. It is much harder to get things right in the moment when things are emotional and you're trying to predict how something will turn out in the moment.
One of the benefits of being an individual investor is that they don't have clients breathing down their neck who get angry when money isn't made every quarter. Unlike a hedge fund manager, individual investors can take their time waiting for a story to play itself out.
"If you think that a stock deserves to go higher, whether because of a re-rating or a takeover or anything else that will produce greater returns, then wait. No one is looking," Cramer said.