my mission is simple, to make you money. i'm here to level the playing field for all investors. there is always a bull market somewhere and i promise to help you find it. "mad money" starts now. welcome to "mad money." my job is to teach and coach you so call me at 1-800-743-cnbc. we live in a busy moment for the stock market. always somebody telling you the opposite of what you should be doing and tell you to do the wrong thing with incredible conviction.
sometimes they sound too intelligent. here on "mad money" we are not about the sad and smart. if we were we wouldn't have so many sound effects. we are about getting it right, what to buy, what to sell. you get these things right and it is easier to make money in the market. in my 30 years plus in the investment business the easiest way to get it right is by working hard. there is no trick. not five simple rules to make you a multimillionaire. if you do the work and practice real analytical rigor you might learn something to make you a better investor. regular viewers are probably aware that i have been running my own charitable trust with the help of my terrific research director. because i play with an open hand
we send out a bulletin explaining every trade the trust makes before it makes it which means i have years and years worth of documentation showing where i went wrong and where i went right. as part of the research for my latest book "get rich carefully" i went back on every single trade to analyze what worked and didn't. i have a treasure-trove of valuable information. tonight i want to take you through some of the most important information. before i get down to the details i advise you to do the same thing with your trading history. you can learn a lot by going over your past decisions. know yourself and you need not fear yourself. let's get started. sometimes the best time to buy a stock is right after the
analysts cut their estimates for the underlying company. aren't we supposed to be buying -- one of the best investments made was in march of 2009. when caterpillar going down and down and down for weeks on end as analysts collect estimates ahead of what looked to be a particularly bad quarter. the analysts turned bearish. at what? customers are struggling to get credit for new machines. caterpillar reported the quarter turned out to be uglier than the analysts predicted. some firms slashed estimates for the year big taking it down as much as 50%. can you imagine? but -- and this is important. cat stock barely reacted to the bad news falling slightly and instantly stabilizing and returning to where it was when the hideous earnings
announcement was issued. that the classic sign that you are looking at a bottom. right then cat was screaming look at me, look at me. all the bad news is out. the worst is over. going bottoms can be dangerous. sometimes the market will call the bottom for you and that is what happened with caterpillar. the analysts estimated. and the bottom was formed. it might seem counter intative to buy after it crashed. you want to wait until the bad news is baked into the share price. sure enough. caterpillar roared from the perch as business improved and analysts had to raise estimates from what turned out to be levels that were far too low. the big money men made a huge
amount of money because they bought the estimate cut because cat's earnings have troughed. that's the key word. anybody could have caught this move by watching how the stock didn't get crushed like you would expect after the hideous quarter and the last barrage of estimate cuts. maybe some of you say that was march 2009. let me give you a more recent example of when it made sense. jp morgan. remember back in spring 2012, the rogue trader who caused the bank to lose by hiding losses. the kept going lower in sync with the estimate cuts. the "l.a. times" reported the losses might total as much as $9 billion. and several firms slashed estimates to match the "new york times" figure. just like caterpillar jp morgan's stock didn't get hit. instead it flat lined. and then it inched up ever so
slightly when the news broke. just like with cat the stock tells you the estimates come down too far. sure enough soon after we learned the losses were contained at 6 billion. and that was the moment you had to buy. the stock had been cut down to $31. if you bought it right after the last round of number cuts you caught an immense rally. almost in a straight line over the next 12 months. that is a 61% gain. here is the bottom line. want to know the single most reliable sign? you wait for the moment when the estimates are so low that they can finally at last be beaten. lucky for you must always tell you when that happens as we saw with caterpillar 2009. when the estimates get slashed that is the market screaming that a bottom is probably at hand. can we go to leo in louisiana?
>> jim, look we appreciate you. you helped me recoup the thousands that my so-called professional broker lost for me. >> thank you for those kind words. >> you are also helping me make sure i have a fund set aside for my granddaughter's college. what is the deal with after hours trading and why are we cut out from that? >> it is not a bad thing you are cut out from it. not unlike a quarterback giving it to a halfback bought not really doing it. it is a read option play. i feel strongly that it's just a fakeout. i don't want you there.
you can get in a cab and do it. why trade on no information? that's just guessing. we don't guess on "mad money" but thank you for the kind comments. dave in north carolina, please. >> how are you doing? >> all right. how are you. >> caller: the show is awesome. we all watch it and i thank you for your help. >> thank you. >> caller: quick question. the u.s. air/american airline merger, what is an investor to look for to see about the company being profitable or not with merging or any signs or stuff like that? >> in this particular company run by doug parker who has been on tv a lot, you just listen to the conference call. it is remarkable. he lays out everything. he actually has one of the best. doug parker is the man. the conference call is the thing. robin in california.
robin. >> caller: hi, jim. >> how are you? >> caller: fine, thank you. i am an obedient gamer. i have a question about market limit orders. i have been on open orders and often found the stocks i bought were higher than when i place the order so i took your advice and limit orders and now i get i order sometimes even a little less. i was wondering, though, can i improve on that? the firm i use has limits on clothes. >> those are all tricks. anytime you take it out of your own hands and determine what price you want you could at the market's mercy. a lot of times people say jim you are being too careful. can you be too careful when it comes to your money? >> bottom fishing everyone loves it.
might sound true. it's not. we have a very hard time acknowledging what is going on inside our own heads. we're full of all sorts of unconscious biases and that can make it difficult to learn from experience. i'm not here to give you a psychology 101 lesson. i'm here to be your investing coach. it it is important to remember you need to approach all of this stuff imperically. i used to keep trading in my closet. i spent a tremendous amount of time scrutinizing the buy and sell tickets looking for mistakes and patterns of wrong doing and for patterns of success. these days i don't have a box
anymore but i have the entire record of my trust which we not only keep track of my trades but have my bulletins explaining my reasoning. i analyzed the last five years of my trades as part of my research for "get rich carefully" and it taught me a lot of things. that is why i approach the exercise imperricly because the numbers don't lie. what do they teach us? you need to stop worrying. we are all conditioned when a company issues new stock we are going to get killed by that. it is reasonable. when the company does a secondary it tends to weigh on the stock for a time. these days that reasonable fear is a terrible mistake. the interest rate is still low by historical standards. companies can issue equity to pay back debt. that is why the deals are worth running to and not from. the real estate investment trusts have done a huge number
of these secondaries and those have worked fabulously. the money raised used to pay debt that carries a lower interest rate. the money allows analyzed to immediately raise. stocks go up after the race. the ratings go up when companies issue the stock and that almost always produces a move up. the newly raised capital might allow the trusts to buy more properties. you only find real state trusts doing these offers. you can find these by those hit hard. think about the mortgage insurance companies. that group was pretty much left for dead. come on. the additional capital rates allow them to write more policies on new homes. you made a killing in rating if you listened to me in february 2013 when i told you to buy the stock on the offerings or ahead of the deal. i caught a lot of flack fort that recommendation on twitter as many people assumed the
issuance of stock signaled a top and not an opportunity. there were plenty of sophisticated institutions were choppy. the company got its hand on more capital it could flourish. that is why you had to take action pretty much as soon as the deal was announced. two months later it was a $12 stock. 50% gain. when you see these deals you need to take a bold action immediately. the opportunity will not lost long if you wait. there is another kind of secondary, the kind that the partnerships do, the oil and gas pipeline players that are always issuing stocks for expansion plans across the country for things that are needed to move oil and gas from texas, oklahoma, ohio, pennsylvania to the rest of the nation. constructing new pipeline is expensive. the companies that build them
need to raise cash pretty constantly in the stock market. mark west, they are the best to beat players and they have become serial issuers in equity. these national limited partnerships are super high yielders and can be dangerous stocks and bonds are becoming much more competitive as an asset class. if we aret at a moment where the rates a stable you should jump all over these so they can meet the surging demand. and more capacity means more dividend boost down the road. you should keep an eye out for deep in the hole. wall street means they are being sold at lower prices than where the stocks were trading when the deals were announced. september 2013 when social media darling linked in was trading. company announced to sell stock. the brokers who handled the deal let it be known that linked in was willing to sell shares well below that price. you had to have a full service broker to notice. you got the word.
buyer lined up to get a piece of the deal. linked in sold 4 million shares. it was a good deal for all involved and the stock immediately traded back to where it had been before the secondary was announced. you only get deep in the hole from full service brokers. you have to do business with them, large corporate clients like to do the deals with investment bankers who are part of full service brokers. these deals are almost always worth trying to get on last but not least. before the great recession they have come private. in the past i intended to shy away for fear that the firms knew something we didn't. these days it is too cynical. a lot of things have changed. some of the private equity firms have a lot left over. and they have been able to refinance at much lower rates with the capital from the secondary.
we have seen terrific performance dollar general. here is the bottom line. forget the conventional wisdom that says secondary stock offering means the company is in trouble. many cases secondaries can make fabulous buying opportunities like when companies use the money to refinance debt or when partnerships raise money to expand. and, of course, when you get a deep in the hole deal where the price is too good to ignore. mitch in california. >> how are you doing? >> real good. how about you? >> caller: i'm doing well. i am interested in adding options trading to my investment strategy.
i want to know how important it is to implement option spreads and what are indications to look for when choosing the option. >> in the book i wrote called "getting back to even" i have 100 pages that tell you what to do. in the book "real money" i talk about the elementary options. tony in california. >> caller: something like that. >> exactly right. >> caller: this is tony from california. my question is not about any one company. it's more like what mastercard did for its long-time shareholders. and i was wondering why other companies don't do that more often. >> it's two words. warren and buffett. warren buffett decided not to split the stock. people decided he knows more than we do. he knows it is eye candy. believe it or not they say we are not going to split and that stock is up big. sales force.com said we have to
make our stock more equitable. i go to john in virginia. what's up? >> caller: i have been very fortunate thanks to you and i have done my research. i'm back to even. i retired at 62. i have a portfolio that i'm really pleased with. and now my question is how do i in retirement, how do i protect it? i don't feel like i need to amass it, i just need to protect it. i have been doing my homework and came up with two options and i wanted to get your read on them. >> sure.
>> caller: on these bond funds paying and when you did down into them there is a few bonds in there but a lot of derivatives and a lot of other stuff. that's one option is the bond funds with a monthly payout which will help income flow. and life insurance products that cap the down side and the upside so you really can never lose your portfolio but you can be limited to 1% one year and then 16%. >> you never want to cap your upside. i think you should try to find a bond fund that is very short term right now because interest rates will go higher and then lock in good cds. i think you are way too young for that strategy, sir. i have to secede to the wishes of those who call. we can learn from our mistakes. a secondary doesn't always mean a company is in trouble.
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if ever there was a musician who understood the stock market it was kenny rogers. you have to know when to fold them, know when to hold them. you know you can follow along. i have suggestions for when you should fold them if not walk away from your positions or even run. before i get there let me remind you i am not just blowing smoke here. i am sharing the results of my research into what works and doesn't, research i conducted when writing "get rich carefully" my most comprehensive book yet about the stock market. when it comes to picking stocks, cash is not always king. if you buy a stock because it is sitting on a mountain of cash you can get crushed. what does microsoft, oracle and cisco have in common? people willing to buy because they have cash on their books. you hear this or that stock has a gigantic position in cash and therefore it is cheap, must be bought. as if cash, per se is somehow a bullish thing. maybe in a high interest rate
environment it might be good because then companies get extra income. unless rates are high cash by itself means very little. what really matters is how companies put that cash to work. those yields haven't meant much as before. these have also bought back a lot of stock. these companies have bought it back badly. you can buy stock badly, often too high. they buy their own stock all over the place. oblivious to whether it is attractive at the moment. that cash has been wasted on undisciplined buy backs. when you see a company do that pass on the stock. time to walk away.
here is what you might not know. when it makes it difference particularly during ravaging down turns when most ceos seem frozen and are unwilling to step in and take advantage of the weakness that is market driven and not wyndham driven even though declines are truly not stock specific. he thinks it is his duty to return excess cash to the shareholders. it's their money. i find it refreshing. he doesn't sit on it and do nothing except watch it grow. he is part of a new breed of executives. he wants to fulfill his end of the social compact with shareholders. you stick with him and don't rent wyndham world wide stock, you own it. in return make sure you get your cut of the business.
and he grows that business as fast as he can. he is the very model of what they needed to help. understands the stock price going higher is very important and recognize td part of his job to figure out the best way to make that happen. let me tell you about another sign that you should fold on a stock and leave the table. if you own shares in the company and it starts blaming customers for poor performance it's time to walk away. >> sell, sell, sell. >> i learned this lesson the hard way. trust decided to buy juniper networks in 2011. juniper was trading low 40s when
it had its first short fall and blamed nameless japanese customers for lack of orders. i listened. i thought the explanation was plausible. japan's companies were using juniper products and the company and the country both got hit by the tsunami and the subsequent fukushima disaster dried up the orders. the stock dropped in the 30s. this time we heard orders of europe and united states. i stuck with juniper because the company had a lot of cash. it was clear europe had problems and u.s. government had been a big customer. it wasn't until the stock
dropped to the 20s. now you are in half that i realized juniper blamed the customer. turned out major competitor cisco was taking market share the whole time. that was then and this is now. the juniper customers were sitting on their hands. they were buying elsewhere. which i didn't realize until we dug deeply. the information was there to be had but only from a competitor and not from juniper itself. there is a pretty simple moral here. when a company blames the customer check to see whether the customer isn't actually still buying except from a different vendor. here is the bottom line. know when to hold them and when to fold them. when a company is sitting on a mountain of cash that is the stock you do not want to own.
when a company starts blaming customers for short falls like juniper did in 2011 always be skeptical. those customers may be given business to another player. larry in massachusetts. >> caller: i can't wait to get my hands on the new book. it it sounds like some of the best and most sophisticated insight you have yet given. >> you are very kind. it is sophisticated and long. you want to do something carefully you have to do time doing it. >> caller: to prepare us for the next earning system you hate companies with bad news and chide those with a down beat story yet a big fan of under promise and overdeliver. since the headline is misleading can you list buzz words we should look for to sniff out a wall of shamer? >> you want to see right up front. avon had one of these where they said it was a bad quarter. you want to hear someone saying a bad quarter is a bad quarter or go right to the numbers. right before the q&a give us an outlook including what you think
the forecast is going to be for this quarter and next year. it should be reasonable. don't go nuts but show us conviction that business will be better next year or shutup. let's go to tome ey in maryland. >> caller: thank you for take my call. >> of course. >> caller: i would like to know how do i identify a problem stock and if i am positioned in one how can i strategically exit? >> let's anticipate the upside. a bubble stock is not defined by four walls of share. it is revenues. i like earnings. i accept the fact when i'm not in earnings per share i am in a bubble. all you are doing is playing the greater fool and that's okay. it can be played. can i go to ian in new york? >> caller: happy holidays to you and your family.
a big thank you for all that you do. >> terrific, thank you. >> caller: i own goldman sachs and held on to a 60% round trip on each stock because i believe in the story. my question to you is, what specific percentage decline in a stock would you accept or would cause you to automatically pull? >> it is always based on fundamentals. when i was a trader i would say down five percent i have to go because i don't want to turn a trade into an investment. these days if i do the homework and the stock goes down i am drawn to the decline. i'm not endorsing bubbles. i'm saying if you are going to do the bubble thing do it with deep in the money calls. it is not my thing. you got to know when to hold them and when to fold them. watch out when companies sit on heaps of cash doing crazy buybacks and beware of companies
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a huge part of the business can be boiled to a simple thing, figuring out where a given stock is headed. sometimes it is a lot less obvious than the other times. as i am constantly telling you most stocks trading on earnings per share numbers. when the earnings are going higher the stock rallies. at least you know what you are looking at. of course, i said most stocks most of the time. you are aware that for some industries earnings are not the most important metric but if the only thing you are following you can be clobbered and that is why you need to keep track of the key metrics. for example, when it comes to oil companies, production growth
and not earnings is the key. for many it is the average selling price of the products and not the earnings. these two sectors these metrics are more important than anything related to beating the earnings estimates. the company's production growth disappointing and wasn't producing enough new oil. even though it beat wall street estimates the stock went down. if it reported lower earnings and higher production growth the stock would have rallied. i know that because my charitable trust owned chevron at the same time. it's no wonder devon one of the worst performed although i think it is great assets but under managed for a long time now. i totally missed the bottom in micron. i wasn't paying enough close attention to the real key metric here. when the company reported terrible earnings number i thought who cares. then the stock jumped. what did i miss? dynamic random access memory chips.
and the bread and butter had a bump up in the average selling prices. during the quarter it was extraordinary. it happened because the business was so horrible for so long that many had thrown up the hands and given up. supply became constrained. micron went on to buy a failing competitor and it has been off to the races ever since from december 2012 to december 2013. triple. one more situation, the metric that might not seem to be important but is all that matters. when a company is based in the united states and all we care about is how it is doing in merging markets particularly china. one is picking up yum brands declining because of the kfc chicken scandal. you are flabbergasted it could go down as much as it did on china alone. the growth of the american company isn't in the united states but in china.
when chinese kfc had a short fall stock got clocked. the estimates were beaten. after the company demonstrated to turn china around. let it be known that earnings would be slashed as it boosted chinese advertising. eps coming down. even though the earnings were about to get hurt you had to buy the stock on the earnings short fall. not long after that yum gets a turn around because kfc sales growth in china is more important to yum's stock than the actual reported earnings of the entire chain. as much as we like to keep things simple sometimes the truly important metric can elude us. all that said with most stocks the earnings per share number is the key metric. ever since 2009 endless criticisms about the bottom line
numbers only without real revenue growth. i'm telling you that analysis was and is absurd. these so-called experts think they are being careful when they tell you they are waiting for revenues to work and are being reckless. here is the bottom line. earnings are not always all important. in some sectors like tech and oils not to mention u.s. companies there are key metrics that matter more than earnings. for the bulk of the market nothing is more important than beating the earnings per share estimates. stick with cramer.
if there is one lesson i learned from viewing my trades, all the ones from the last five years, the one i want to leave you with is this. when you have a high quality stock with terrific prospects that you want to own for the long haul don't sell it at the first sign of turbulence. if you have a conviction in a stock you need to let it ride. let me put it in sports terms. when a football team wants to
keep a player they name him a franchise player. i can't tell you how many times i had the destination of franchise player. instead it is a core holding. say we want it, that is the word, operative say. so often we don't follow through with that and it is almost always a big mistake. the temptation game is often so powerful it can take every fiber of your being. you never want to let a gain turn into a loss. when i first pinned the gain to loss rule i was really talking about trading and not investing gains. if you own a stock and you go up for the next few years and not the next few days then do your best to make it a franchise player. stick the nontrade label on it. you won't regret it as long as the fundamentals stay positive. if that is the case you must
immediately sell or you will be to blame if you go for the gains. that is really the only case to rig up for core holding or leave an enormous amount of money on the table. all of that great research you did out the window. once the stock dumped the franchise player stop giving it away and hold out for better prices. buy more. the record is crystal clear on this. when we own a stock we think is materially under valued i have to do everything i cannot to take the gain. that disparity, got to let it percolate. it is vital that you keep enough left in your portfolio so it will be meaningful. what makes you so sure of the rule? because we rate stocks. the ones are by far meant to be
core positions. franchise players and are supposed to be hallowed ground. as i peruse the bulletins it is how many the category of ones we sold because of short term market turbulence. wait for the stocks to continue to roar ahead. core position is what it says, something integral to your portfolio. i know that if we have been able to hold core positions for the trust we would be a able to donate a heck of a lot more to charity than the 1.8 million since we started. resist the urge to sell franchise players. the only time it makes sense to blowout is if the fundamentals take a nose dive. you need to try to let the winners ride only trimming your position somewhat to keep it from getting too oversized versus the rest of your portfolio. "mad money" is back after the break. ♪
first one is from brian. this one says how certain is your exit strategy before you buy a stock? thank you. if it is a trade i have a catalyst. when the catalyst comes not matter what i sell the stock. if it is an investment my exit strategy is usually multi year. if i sign it as a franchise player meaning a number one, you can read about how i grade things and price targets in our weekly bulletin. now let's go to a tweet from andy. who has the best piece of advice you have gotten? >> from jack shepherd who told me they don't all go up at once. i would get very upset when stocks go down on an up day. it would drive me crazy until he told me i was driving him crazy. keep that in mind when you have a bad position. up next a tweet. are you a fan of selling puts in order to start or stop when you sed sell a put you have
unlimited down side and unlimited up side. what kind of strategy is that? when i was in the 87 crash the people who did that strategy got wiped out. our next tweet. when you have a price target what is the time of fruition? i just want to own it. if the story keeps checking out i will stay in it. if the story doesn't check out, if it starts getting worse i will go. our next question. by 4-year-old son gets excited i turn to "mad money." hopefully the stock advice will stick with him for life. i am a huge believer if you get people in early they can make mistakes and have the rest of their life to make up the mistakes.
that is why i am passionate about early. let's take a tweet from barney. is a buy order treated differently? what matters is what your broker does. if your broker has a different type for short and long then you have to designate. let's go to a tweet from katie. thanks for everything you do for us home gamers. love the show. you are very sweet. i pour my heart and soul into this one. up next a tweet who asks how is the little guy supposed to get in on an ipo? call four different brokers. it is up to the brokers. i know it seems unfair. it is the way it has been and i don't think you can buck the trend. this is for good clients. if you are not a good client it is a fact of life.
life is unfair. stick with cramer. [ male announcer ] here's a question for you: the energy in one gallon of gas is also enough to keep your smartphone running for how long? 30 days? 300 days? 3,000 days? the answer is... 3,000 days. because of gasoline's high energy density, your car doesn't have to carry as much fuel compared to other energy sources. take the energy quiz. energy lives here.
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peace and prosperity from all of us here at "mad money." i like to say there is always a bull market somewhere and i promise to try to find it just for you here on "mad money." i'm jim cramer and i will see you next time. of "american greed." >> everyone catered to joe in this town. >> he-he essentially was a patrone, a godfather. >> joe conforte, a pioneering pimp, who makes millions pedaling sex at his world famous "mustang ranch." >> you cannot eliminate this business. >> he was colorful. uh, he was aggressive. he was as scoundrel. >> it was just a matter of greed. he just didn't want to give the united states government their due. now, he's racked up an $18 million tax debt and is on the run from uncle sam. and when one man crosses him, he ends up dead.