Stocks go up and down all the time. But recently, some of the daily fluctuations in AI stocks have reached extreme territory. Investors need to respond accordingly by changing their approach to leveraging their funds. Jim Cramer said in his Monday morning meeting that he’s not ready to put new money into tech stocks yet, repeating what he discussed at length in his Sunday column. But if investors want to buy on the spurts in some chip makers or other data center businesses, Jim’s advice is to use “broad scale” to cushion the impact of sudden moves. Jim’s wide scale means that he buys stocks gradually at pre-set price levels (with relatively large gaps), as volatility creates opportunities, rather than buying the entire position at once or at too close a price. “What I like to do is think about price,” Jim said. “As you build, you want to do it pyramid-style.”Of course, we always look to buy stocks of blue-chip companies when they’re down. If the investment theory and fundamentals remain the same, lower prices mean better value and more bang for your buck, especially if earnings expectations remain the same. But when a sector, industry, or stock trades change dramatically, as has happened with recent hyperscalers and AI stocks, you need to rescale. Previously, I might have considered adding to my Intel position even with a 5% drop. We should see a decline closer to 10% going forward. We want to build what is still considered a good long-term investment at a level where we can use volatility to our advantage and lower our overall cost base. Using a purchasing pyramid is a strategy that requires extreme discipline and advance planning. The idea is not only to buy at a lower level, but also to increase the purchase size each time. For example, let’s say you want to build a new position in INTC. And let’s say you want to buy a total of 80 shares. There are several methods: 1. Simple dollar-cost averaging: Buy 20 stocks in four installments at a predetermined low price level. 2. Weighted Pyramid: Every four trades, buy more shares in descending order of price. For example, buy 5, 15, 25, 35 shares. You end up with 80 shares, but the majority of the shares are offered on a lower basis. 3. Double Down Pyramid: Divide the total position size by 8 to determine the opening buy. So, you first buy 10 shares, double down on another 10 shares (20 shares total), then double down again on 20 shares (40 shares total), then buy another 40 shares and double down again, for a total of 80 shares. Any combination of these strategies will help you lower your foundation. At the end of the day, it’s all about your style and how comfortable you are with falling. The more important consideration is to “know yourself” and know which strategy you are actually prepared to follow when the time comes. If the stock rises in either of these scenarios, you would stop buying and take a smaller position on the upside, which is likely a high-quality issue. In any case, with increased volatility, you will have to wait for a bigger drop for each purchase than you would in a market with no ups and downs. With this strategy, you can also consider scaling up with each purchase. For example, your first purchase might be made after a 5% drop, but your second purchase could wait for an 8% drop, and your third purchase could wait for a 10% drop. This way, while you’re making a bigger bet each time, you’re also increasing your margin of safety a little bit with each purchase, making it more likely that you’ll be closer to the bottom of the price movement. (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.
