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If you want to invest in individual stocks, you have to be ready to do your homework, CNBC's Jim Cramer said Thursday.
The "Mad Money" host told a story from his childhood about how his father, "Pop," began buying stocks of National Video through a tip that he received from his brother. Pop, he said, eventually put a large chunk of his life savings into the equity as the price was rising. Once the stock began falling, Pop, like many people, had no idea what to do besides asking his brother to fetch another tip from his friend, Cramer said.
The tip was to keep buying National Video and the only thing that Pop knew to do was continue buying the stock, which means he was at the "mercy" of the stock's movement, he said.
"One of the precepts of 'Mad Money' is to know how to invest in an individual stock if you are going to do so," Cramer said. "Tips, as I like to say, are for waiters ... You must do homework if you are going to own individual stocks ... [and] if you can't do homework then own an index fund."
But if you fear losing money, "don't own stocks at all," he said.
Click here to hear the full story.
Cramer took a stroll down memory lane to reflect on the history of "Mad Money with Jim Cramer" and how it has evolved over the past dozen-plus years.
While "Mad Money" has retained two members of its original production team from its 2005 launch, the show's focus has changed over time from stock picking to stock educating that seeks to help viewers understand the value of index funds, Cramer said. The host said he was inspired to reflect on the show's changes from his interactions with "Mad Money" fans and critics via email, phone and Twitter.
"We have been doing it for so darn long, we take it for granted what we do, and tonight, you know, I'm gonna change that, I'm gonna correct it," Cramer said. "Tonight, I want to talk to you about the show, its evolution, and how you can best use it or worse misuse it, and I am doing so because there's so much we throw at you that you might not be able to use it as effectively as we would like."
Click here to read Cramer's evolution.
Prior to his career as "Mad Money" host and before his days as a hedge fund manager, Cramer said, he was a journalist looking to make more money by playing his hand in the stock market "the right way."
Back then he found an "edge" by reading as many periodicals he could get his hands on, like Forbes Magazine, that covered stocks, he said. That's when he created his concept of "Mad Money" — extra cash that he saved outside of his IRA contributions to buy shares of American Agronomics at $9 each.
The stock dropped and the investment was destroyed, he said. Cramer later learned, he said, that a steel company at the time named SPS was looking to grow its workforce. The stock wasn't doing the best and had negative reports in the news at the time, but Cramer said he had gotten new information that would give it a different outlook.
"In other words, I had insight nobody else had. I was ahead of the story. Now these days it's hard to get that kind of an edge. Everybody pretty much knows everything they want. Edges do exist though and we do our best to present them every night. Interpretations of news and events can augment those edges and analysis is very important."
After investing in the company and making a "ton of money," Cramer said he was later "hooked." The host would eventually make enough money to pay for his first year of law school.
Click here to learn how Cramer did it.
Cramer said the indexing of individual stocks began while he was a student at Harvard Law School that ultimately became the . Still, at the time, he was more interested in individual stocks
When Cramer joined Goldman Sachs in 1984, he said his mother would call often to ask about her favorite stocks by following the Peter Lynch theory of buy what you know and stay on top of it. He said that she would ask often about names like Giant Food and Gantos, among others.
But Cramer would eventually learn through none other than his father that sometimes Wall Street research gets it wrong. He tried to get "Pop" to buy stock of Gantos, the women's apparel chain that was "heavily promoted" by the firm, until Pop took him to an outlet store near Philadelphia. After hours of staking out the Gantos store, Cramer said only about a dozen people entered the store.
"Most of all I want to show you that it isn't reckless to try to pick individual stocks and those who say it is just don't understand the process of first hand experience, married with research buttressed by skepticism," he said. "Here's the bottom line: My mom was no genius at stocks, but she did have a genuine interest. My dad was a genius at retail and I would like to think that some of that rubbed off on me."
Cramer said he encourages his viewers to invest in index funds and not stocks because it's not ideal to buy a stock on a tip without research, but stock pickers must have an edge or personal experience to match the research you put into a stock.
Still, you have to be skeptical at all times, he said.
The purpose of "Mad Money" is to educate viewers and produce profit for charities, Cramer said, which has led to more than $2.3 million since its inception. Viewers can keep up with the ActionAlertPlus.com charity to see how the money works, he said.
"All I'm really trying to do is keep you informed in an entertaining way knowing that if I didn't do that ... it would have failed commercially years ago," Cramer said, acknowledging that he's not perfect himself. "The education is what it's about as long as you know that the bottom line is that I'm doing my job and hopefully doing it right."