One of Cramer’s most important rules is “buy broken stocks, not broken companies.” A big decline is a great chance to pick up some of those broken stocks because while almost every stock will get hurt, not every one deserves it.
Remember, the stock is not the company. And the best way to make sure the stock is damaged and not the company is to do your homework. Listen to those conference calls. Read everything you can about management and its decisions. Review the balance sheet. If the fundamentals are good and the stock is down, that could be a buying opportunity.
So if you’ve done your research and you know which companies you’d like to own, then you already have your shopping list ready for when the next decline hits. Keep adding to that list so you have a good bunch to choose from when the market bottoms out.
When you feel the bottom is close, that’s when you start building up your positions in your unbroken shopping-list names. Then you’ve turned a gut-wrenching marketwide decline into a great opportunity to buy great companies with damaged stocks.
Bottom Line: All of this is impossible without homework – create your shopping list of broken stocks, and be sure to pass on broken companies.
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