One of the most frequently asked questions from new club members looking to build a portfolio from scratch is, “Where do I start?” A common misconception is that members, like clubs, should invest by targeting around 30 names across multiple sectors. That’s understandable, since we always emphasize the importance of diversification. However, it is important to consider the resources and time required by members to stay abreast of news and developments affecting their holdings. In addition to Jim Cramer, who communicates with management, industry experts, and analysts throughout the day to obtain information, Investing Club employs two full-time certified financial analysts and a team of reporters and editors who scrutinize filings, news reports, and management commentary to ensure you don’t miss any meaningful updates about our stocks. For most members, including those with full-time jobs, such interviews and research are nearly impossible. There are only a few hours in a day. A good rule of thumb for gyms is that members should complete approximately one hour of homework per meeting per week. Covering 30 stocks and tracking new potential opportunities is a full-time job. Members only need to rely on the club for research and copying trade alerts. But that’s not what the club is about. Our main goal is education. Yes, please use us as a resource. But don’t blindly follow our movements. We strive to show how professional money managers operate behind the curtain and show the process along with their wins and losses. Jim calls this “playing open-handed,” and it’s all about teaching and empowering retail investors. So where do you start? We’ve broken it down into five steps to ensure your members get the most value from your club. Diversification is important, but we understand that when users sign up, we want them to spend their money as quickly as possible. This is the right idea, considering that long-term investing is all about harnessing the power of compound interest. The more time you spend in the market, the more beneficial compound interest becomes. At the same time, funds cannot simply be spread across different sectors without considering the fundamentals of individual companies. While diversification may be possible, the most important element in active long-term investing is stock selection. Don’t rush that part of the process. Step 1: Invest in a low-cost S&P 500 index fund. There are many exchange-traded funds (ETFs) that track the S&P 500, and to get you started, we introduced some great options in a previous mailbag. Generally, we recommend investing your first $10,000 here and building your position over time so you can dollar-cost average your cost basis. For example, if you invest $2,500 every two weeks for 8 weeks, your overall cost basis will be equal to the average of your 4 purchases. This strategy of fixed investments over the long term (dollar-cost averaging) helps investors reduce risk by buying more stocks when prices are low and fewer stocks when prices are high. You can also take advantage of rebounds by accelerating the process when the market drops significantly. In any case, don’t spend too much time trying to make money. For this core position, you don’t have to worry as much about the timing of your purchases as you do when investing. Step 2: Start researching individual stocks. Think of our portfolio as a list of recommendations, or as Jim calls it, a “menu.” Think of it as a good place to learn more about best-in-class companies across a variety of industries and sectors. Be sure to consider the ratings we maintain for each holding. These assessments, along with our daily commentaries, reports and morning meetings, will help you understand what opportunities are available at the moment. In addition to ourselves, Wall Street analysts are steadily publishing research notes to a professional client base. It’s definitely worth reading these. That’s why we try to summarize as much content as possible for club members. However, there is also a wealth of important information that is free to access and will help you achieve your investment goals. Check out these five locations to get started. Step 3: Target 5 companies. According to Jim’s rules, owning five companies means doing five hours of homework a week, which should be bearable for most investors. You can scale back to 3 initially, or scale up to 10 if you have time. Owning more than 10 stocks can be a full-time job if you want to do it well. When scanning the stock market, keep diversification in mind. You don’t want to offset the diversification benefits offered by an S&P 500 index fund with five highly correlated stocks in the same industry, sector, or similar megatrend (artificial intelligence). There are many different ways of thinking about diversification. Step 4: Determine the size of the complete position. For clubs, the full position is approximately 5% of the portfolio. However, to maintain portfolio management and healthy diversification, we may expand the names to around 6% before we start trimming them. If you want to start a position with 5-10 stocks, a “full position” may vary depending on the size of your portfolio and the size of your investment in the S&P 500 Index. Knowing what that looks like for you before you start moving money around allows you to set a game plan and move your money around in the most methodical, rules-based, and emotionless way possible. Quick note: To calculate the percentage weight for a position, divide the amount invested in that position by the value of your entire portfolio, including any cash you have allocated to future investments. Step 5: Start building your stake. Once you’ve selected your five investment stocks, it’s time to start thinking about how to buy them. At this point, you’ve already identified a company with strong fundamentals and a management team you can trust to execute on your plan. (Be sure to check out our five-part series on how to analyze a company’s financial health.) Next, you need to decide whether a valuation based on these factors is attractive. Paying the right valuation is critical, as what you pay is ultimately the deciding factor in your long-term return. Of course, the goal is to buy stocks that are undervalued and avoid stocks that are overvalued. You also need to consider the overall state of the market, i.e. whether it is overbought or oversold. We rely on the S&P Oscillator as the most reliable indicator of how the market will behave during big uptrends or big downdrafts. Learning the basics will help a reasonable person decide what to do. However, markets are made up of both prudent and irrational participants, and all their actions, both logical and illogical, will be reflected in stock charts. In other words, it helps you look at stock charts over different time periods and find key support levels or price points where buyers have intervened in the past, based on all rational and irrational market participation. Keeping these levels in mind will help you decide when and where to deploy capital when building these positions. The goal is to make all subsequent purchases at a lower price, thereby reducing your overall cost base. If you buy a position and the stock price rises immediately, you may not make as much profit as you expected, but you will still make money. We call it “high quality issues”. As you follow these steps, remember that this game is not a “buy and hold” game, but a “buy and do your homework” one. That is, complete the step, rinse, and repeat. (See here for a complete list of Jim Cramer Charitable Trust stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
