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CNBC's Jim Cramer always tells investors to buy shares in best-of-breed companies, even if that means paying more for their stocks.
For the "Mad Money" host, it's a matter of discipline: the best-run companies with the best prospects can help shelter investors' portfolios and minimize their losses.
"Why is owning best of breed even a question?" Cramer asked. "When you're shopping for a car, you buy best of breed — or the best you can afford. It's not even an issue. We pay up for the highest quality brand because we know that a brand, a good brand, signifies reliability."
"The idea that you would purposefully try to buy a worst-of-breed car is downright crazy," he continued. "Nobody says, 'I'll take the one without the airbags, it's cheaper.'"
Cramer argued that the same concept should be applied to stocks. Investors tend to go after low-quality stocks because they see them as bargains, but that's more likely to result in losses than in gains, he said.
"I'm all about bargain hunting, but a stock is only a bargain if the underlying merchandise is actually worth owning," he explained. "A real bargain is when the market gets hit with a sudden sell-off, taking down everything, and you can pick up the stocks of best-of-breed companies at a discount."
But buying stocks just because they're cheap doesn't qualify as a bargain, Cramer said.
Instead, the "Mad Money" host advised investors to pay more for shares of well-managed, high-quality companies with good long-term prospects than bet their portfolios on penny stocks.
"At the end of the day, there are very few genuine bargains out there when it comes to second- or third-tier players," Cramer said. "Their stocks may look cheaper than the top dogs, but that's because they deserve to be cheaper — the businesses are worth less."
Investors must also recognize that best-of-breed stocks of high-quality companies represent value, "and giving up on value is a sin," Cramer said.
Too often, he sees investors give up on companies with real worth because their stocks aren't working at that moment, and it drives him crazy.
While Cramer understood the temptation to sell during declines and give up on even best-of-breed stocks, he argued that it's almost always the wrong move.
"In many cases, if you've done your homework and you have conviction in the underlying business, well, that urge to sell will be a mistake," the "Mad Money" host said. "Once you find a company that's best of breed with a story you believe in, don't let the bears scare you away from it, even if the stock is temporarily broken. Patience is a virtue."