Jim Cramer wants you to buy and hold stocks if you’re willing to do ongoing research.
In his book, How to Make Money in Any Market, Kramer outlines a system for building long-term wealth through investing. He writes that about half of your portfolio should be invested in index funds, with most of the rest spread over a small number of stocks in fast-growing companies.
Ideally, Kramer says, you’ll want to hold these stocks for the long term and build wealth through compounding returns. But it takes effort on your part to give it a chance to happen, he told CNBC Make It.
Kramer argues that all investors should listen to earnings calls. Financial results announcements are made quarterly for most major listed companies. In addition to reporting financial results as required by law, most companies also host conference calls where top executives discuss performance with analysts, media, and investors. Many post call recordings and transcripts on their investor relations websites.
A phone call can help you figure out how things are going. Did the company beat analyst expectations for revenue and earnings in the past quarter? Are new products and services being launched? How do top executives expect the company to perform in the next quarter? These are all questions that should be answered on a regular basis, says Kramer.
“They have to listen to and read the conference call every quarter to make sure that nothing has changed and that they’re telling the truth,” Kramer said.
If you want to invest in individual stocks, checking in quarterly is worth your time, says Kramer. “If you’re a casual observer, you can spend four hours a year on individual stocks. If you can’t do that, you should default to index funds.”
The importance of “doing your homework before buying”
Kramer believes you don’t have to go looking for diamonds in the rough to find great companies. The beginning of your research may equal looking into the companies you interact with every day.
“You can say, look, I like Meta, I like Instagram. Well, that’s fine, it’s important. I use Google all the time, I watch YouTube, it’s important,” he says. “But you have to have a certain level of curiosity.”
That curiosity should show up in studying a company’s fundamentals, such as earnings, cash flow and profit margin growth, which can help build a theory for owning the stock, Kramer said.
From there, “if you just buy and hold, you’ll probably end up owning one plonk,” Kramer says. “And we don’t want you to own crappy stocks. We want you to own really good stocks.”
That’s why Kramer advocates what he calls “bought homework.” First, buy stocks you like. Then check back at least quarterly to see if you still like it.
If a stock in your portfolio declines and you discover that the reason is due to a major change that significantly changes the company’s outlook (for example, a new product line that you believed would change the company’s outlook fails), you can safely exit that stock. Conversely, if your research shows that the stock price issue is temporary and your long-term theory remains intact, you can maintain your position or, if possible, increase your position even further, says Kramer.
“When you learn about a stock in a company that you’re interested in and like, when that stock goes down, and it will go down, you’ll buy more,” he says. “That’s the secret to good investing…instead of buying high and selling low, buy what you like because you’ve prepared in advance.”
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