Cramer: The trick to avoiding single stock risk
Lately Jim Cramer has heard a lot of chatter surrounding the concept of single stock risk. It's the risk that anyone takes when investing—what if you buy the wrong stock and it gets totally clobbered. Should you avoid buying individual stocks all together?
"If you think that I scoff at single stock risk, you're wrong," the "Mad Money" host said. (Tweet This)
The risk behind investing in individual stocks is exactly why Cramer has always advised that the first $10,000 in savings must be invested into an index fund. This way you will have the ability to capture the American stock market progress in a way that is diversified, as with a fund that mimics the .
"I know many people don't have the time, the inclination or the analytical abilities to make decisions about individual stocks and I don't want them to. But you shouldn't be denied exposure to stocks because of those handicaps, so an index fund is a very good proxy," Cramer added.
At the same time, Cramer does not want home gamers to become frustrated when stocks do not go their way. Cramer knows that there is a certain amount of luck when it comes to investing, and it is possible that everyone picks the wrong stocks sometimes.
"But who am I to tell you that you're too dumb or too poorly informed or too easily defeated by the big boys with their short-term trading edge to pick an actual stock or two, or more, after you've put away the requisite $10,000 into that index fund?" Cramer said.
There is one particular element of single stock risk that really bothers Cramer, though. And that is when an investor has to miss out on the performance of an amazing stock because they think it is too dangerous, or they think that they can't do the homework to decide whether the company is worth investing in. Hogwash!
"The people who warn you against owning individual stocks often make this whole business sound like it is too hard," Cramer added. (Tweet This)
So with this in mind, Cramer thinks there are tons of opportunities out there for investors to capitalize on. For instance, Facebook announced that it is going to monetize Instagram with advertising. Assuming that the ads won't actually interfere with the user experience, as Mark Zuckerberg said, that means Facebook is more investible.
Cramer also loved the story behind GoPro, as the semiconductor company Ambarella that makes the brains behind GoPro confirmed that it has a ton of commercial drone work coming. Cramer think Ambarella can still go higher, even after its amazing gain Wednesday.
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Read more from Mad Money with Jim Cramer:
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So while some may think individual stocks are too dangerous, these are just a few opportunities that are waiting out there to be gobbled up by an investor. And yes, there is always the risk that you could own the next Enron, Washington Mutual or a marijuana stock that has gone belly up.
But in Cramer's opinion, as long as you buy the stocks of companies you like and pay attention to them, the reward you will get is far better than if you just dumped your money into a sector basket ETF that includes the good, bad and the ugly of the stock market.
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