>> my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you a little money. my job is not just to entertain you, but to educate you, so call me at 800-743-cnbc. this could be an incredibly confusing time to be an investor.
we're constantly flooded with information with the news agencies and every single piece of data is billed as a cacophony. not every headline matters to the stock market no matter how official and full of gravitas it might sound, but how the heck are you supposed to tell the difference between what matters and what doesn't? in this world of information overload how do you know what truly deserves your attention and what you can pass on? you only have so much time to spend doing your homework on your portfolio so you have to use the time wisely. the squawk on the street, the 9:00 show, but this stuff comes so fast and furiously that you never have time to ask does that even matter? you just presume it has import even if it doesn't. that's why for my new book, get rich carefully, i looked through five years of bulletins from the charitable trust i talk about to see which pieces of data were actually worth paying attention to and which ones were overhyped and unimportant, because i think
this is a really crucial subject. today i want to share with you my findings so you could be a more media-savvy investor. i'm talking tv, radio, web, papers are going do real damage to your portfolio if you're not savvy. let me start with the big one. looking back at my charitable trust for the last five years, there's one thing that stands out above everything else and the only thing that has a lasting impact on the stock market is the labor department monthly non-farm payroll report. that's the big employment report we get on the first friday of every month, and it is worth every bit of focus. there are a ton of different employment numbers that come out in this market, the weekly jobless claims and they have important tales of what will happen with the big picture monthly labor report, and i am telling you forget about the weekly claims.
they are meaningless unless there is a definitive trend and one direction and even then it could be fatal to trade off of as you get close to the big labor department numbers. sometimes by the government's own admission, the weekly figures aren't even tallied right. how's that for credibility? also in the jobs front, the day before the non-farm payroll department we get the report called the automatic data processing or adp, the largest payroll processing firm in the country report, i am telling you, ignore that adp number, too. it's meaningless, people. in fact, the adp employment figures have no reliability as a predictor of what the big daddy, non-farm payroll report will be and that's the only employment report that i am telling you you need to predict and be worried about. you do need to predict and worry about it, though. however, while you can ignore the monthly picks you cannot ignore this labor department non-farm payroll number, as i look back on each bulletin that came out on friday night after the monthly jobs report release. i have five years' worth of data.
i was astonished at how it could be. any disappointing employment number leaves a lasting impact that can take weeks of declines in its wake, really, and if it's followed by another bad number, you get a further decline, even though the market has fallen in the precipitous numbers of accounting and you need to see three months of stability meaning no further job losses and not necessarily job gains before the market will actually stop drifting or plunging lower. i can't believe this. i did this work and i couldn't believe it myself. meanwhile, the flipside is also true. nothing can stoke a bull market or frustrate a bear market more than job gain in excess of the previous month. a big number that's better than expected with an upward that's the ultimate triple whammy for the bears. and can produce a spectacular performance for the bulls. when these payroll numbers come
out, the pundits they'll pick apart some figure to make it less important. i am telling you, these people are charlatans, hold your ears, ignore them and hope that others don't so you can take advantage of any weakness to do some buying at lower levels than you deserve to get. these cynics are simply crafting arguments to justify their misses or excuse their incorrect predictions or they just don't understand. maybe they learned the lesson of the great recession too well and can't believe honest to betsy good news when they hear it. that piece of the puzzle simply isn't as important as the sheer number of hires. what really matters, if you're negative on stocks and they increase the number of hires in a row and not a drop in the unemployment rate then you will miss a terrific opportunity to make money. that's what i found from examining the last five years from my charitable trust. look, i don't blame you if you wait to see a second payroll number in a row for getting
bullish, that's simple prudence. a really good report coming in the wake of several flat ones can justify careful buying. just to be sure, i am quite conscious of the fear of the fed if the economy is getting better as represented by the labor number. i don't care, a strong number is good when interest rates are as low as they have been. if you're trying to buy stocks after an excellent reporting report, here's a tip. if you wait until after 10:00 a.m. on the day a strong jobs report comes out, you will almost always get a better price than you would at the opening. the reason? because after a good payroll report there's often a huge amount of short covering in the first half hour of trading, as the negative hedge funds who bet wrong have to close out their short positions by buying stock. once the buying is done you tend to get a vacuum and the market begins to decline. wait for the moment before you do your buying. don't be picked up on the day that the non-farm payroll reports are out and i would remind you, at 9:00, don't be picked off. i'll be on the floor of the exchange.
that strength won't last. you'll get better prices that moment if you just wait for the panicked short sellers to finish closing out the wrong positions and those who fear the fed tightening dump their holdings. >> the house of pain. >> don't be worried that you missed the move that the market has more room. i just want you to got the best cost basis possible after a great monthly report. here's the bottom line, not every piece of government data that gets thrown in your face by the media really matters, but the non-farm payroll report, that is crucial. so please don't ever ignore these numbers. they're the most impactful ones that you'll ever come across. when your eyes glaze over, take solace. the only one that matters comes out at 8:30 a.m. on the first friday of every month. john in florida. john! >> hi, jim.
john k in dundedin, florida. >> how have you been? what's up? >> i'm certain of the following question, if i purchased 1,000 shares of a company, let's say at $10 today, and three months later i purchased another thousand shares of the same company at $5. now, if the stock goes up a dollar, can i take the profit on the second thousand shares or must i sell the first thousand shares and take a loss of a dollar? i'm uncertain of the answer. >> okay. i want you to talk to your tax guy on that. you can elect the lot, but you've got to talk to your tax guy, because i want to know what he says and i don't think that specific advice is going to be helpful to you. can i go to jim in arizona, please? jim. >> hi, jim. thanks for taking my call. >> of course. >> my question is about secular and cyclical stocks. you're always telling us to make sure that we're diversified in our stock portfolio. >> right.
>> and i'm just wondering how should i diversify these types of stocks in my portfolio? >> get rich carefully goes over this because i think the most confusing thing i may have done for a lot of people is to say i like secular growth, not cyclical. cyclical means you need big gdp growth. international paper. secular means you have a long runway of product that will be in demand no matter what. that's celgene. what you have to do is you plot how your stocks have done against a market in good times and bad, when there's growth and no growth. that's what i do. i've looked back using charts, 1989 and 1991. 1996, 1998, 2000, 2002 and see how they've done. you've got to do that history if you really want to feel confident that you have a secular grower whose numbers don't get cut, versus a cyclical grower whose numbers get cut. a whole chapter on that in "get rich carefully."
sonny in illinois. sonny! >> jim cramer, a big chicago windy city boo-yah to you. >> sweet. >> hey, jim, i'm always taking your advice. longtime fan. enjoy your show and your books. >> thank you. >> i have a general question for you. so i'm always taking your advice and reading up on the companies, going in and listening in on the quarterly conference calls. a company reports solid numbers and fundamentals, what is your definition? >> i've always used 5% to 7%. something lee cooperman when he was the research director at goldman. he said the first 5% to 7%, take a hard look. that may be where you're starting to do some buying. i know it's easy to get over the numbers that are thrown your way every day. 8:30 a.m. on the first friday of each month, that is the number to pay attention to, the rest of them, don't let them confuse
you, but a good employment number is good for the stock market. don't think otherwise. "mad money" will be right back. don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer, #madtweets. send jim an email to email@example.com or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com.
in this era of information overload, how do you tell what really matters to your portfolio? i think that filtering out the clutter and being able to focus like a laser on what's generally impactful is so important that i devoted an entire chapter in my latest book "get rich carefully" to show you what does matter and what doesn't, and tonight i'm sharing some of these insights with you gratis, although the cynics in the audience might point out i'm be shamelessly self-promotional @jimcramer, to which i say, of course.
in an effort to cut the through the bull, not that kind of bull, let me tell you why you should stop caring about it immediately. i know we want to presume that every piece of data, every single piece released by the government, whether it be the commerce department, labor department and the federal reserve, is of great import that it would somehow impact your investment, i say hold it! we listen to this stuff, we read it and wait for analysis from people who are supposed to know what they were talking about and we make decisions off these bits of data and we sell the stocks off them, and when you do this, you think you know what you're doing. let me tell you, it's a mistake. after studying the last five years of public trades of my charitable trust, i can tell you other than the monthly non-farm payroll report i mentioned after the break, most of these data has been just plain wrong. i know that sounds inconceivable
but the media has spent so much time dissecting these numbers how can it not mean anything? every news editor has a list of data that comes out in any given day and in advance of its release has decided that a big story must be done around that information. yes, there actually is a day book. although when i started in journalism it was a handwritten ledger, now it's a keystroke entry. notice that every gem or piece of fool's gold is held up as being all important and that is what i call hyperbole. unfortunately, hyperbole is the gist of this business. it's having something to say day in and day out. how do you think that all of those blogs get filled? with that in mind, let me warn you about one of the most overhyped day book stories out there, the monthly release from the federal reserve. these minutes are considered to be the holy grail, i kid you not, but i have to tell you in reality they mean nothing. nothing at all. the minutes are almost a total
sideshow, and i should know, considering that my most famous tv moment came because i knew that the fed knew nothing. first, let me explain the fixation with the fed minutes. a nonrelated entity releases a summary of its thinking that took place at the median trading. they wait with bated breath and it is viewed as one of the single most actionable papers, meaning they want to take action on it, but the truth is it's not actionable at all, even as so many take uninformed silly action, i might add. forget that the fed minutes are already a month old by the time we get them. forget that circumstances may have changed since the last meeting and a spike in oil and a cliff jump or two in washington. the document is treated with reverence, even though it should be viewed as irrelevant and it's often just plain inaccurate with the current set of facts. in the beginning of the horrific period that degenerated into the great recession, i was beginning to get hideous feedback from many of my sources within major
investment firms that things had gone seriously awry. over my 30-plus years on wall street i managed to meet people early. not everybody is right, but these people are people who i trust for the most part, and they trust me. at the time of august 2007 i was getting an earful from acquaintances who thought i wasn't doing enough to bring the financial network to light. i was listening to a conference call from the lamented bear stearns and i was shocked by how defensive and fearful the executives seemed to be. they were having difficulties, but they were prepared for them. the only way for a brokerage firm to prepare for difficulties on wall street is to say nothing about them. that meant bear wasn't prepared at all as we saw from the firm's collapse when it came not long after. at the same time the management was yammering on about how they were holding things together. i was getting calls from several
senior people in the mortgage business, saying if the federal reserve didn't start cutting rates right then and there would be a huge problem, not just for the mortgage industry, but for the entire u.s. economy. when i showed up on "street signs," i was steamed so badly they violated my rule about trying to be considered and not hot headed. i went ballistic and then i began to rant, as erin burnett gingerly tried to calm me down, i went on a tear about how the fed was oblivious to the pain in the system. >> i have talked to the heads of almost every single one of these firms in the last 72 hours, and he has no idea what it's like out there and bill poole has no idea what it's like out there! my people have been in this game for 25 years, and they are losing their jobs and these firms are going go out of business and he's nuts! they're nuts! they know nothing! >> we now know how everything turned out. the fed really did know nothing.
the economy collapsed, as the fed held tight to the view that there was nothing wrong at all, and their judgment may have been the worst economic policy blinder since the hoover administration, fortunately the fed reversed itself over and it was a better late than never affair and here's something didn't know at the time and it cuts to the core of how useless the minutes are. the fed releases the full transcripts five years after their meetings, so i later learned that the fed met soon after my stop trading appearance and my rant actually came up in the conversation. it came up as a laugh line. they actually made a point of ridiculing my prognostication. as we soon learned it was a very dark comedy. here's where the fed minutes come in. not long after my rant the fed released the minutes of their previous meeting where they said all was well and those who felt it was just plain wrong. the minutes emphasized that the fed would cut rates as needed and things were nowhere that dire. when i read that, the people now who think these are all
important i and my source might be too negative and my sources were wrong. maybe i was being too bearish. the minutes were so reassuring that i actually acted on them and sent out a bulletin on august 17, 2007 saying, quote, at last i believe the worst is behind us. even though i had been right about the systemic risk of the crisis to come and did change my mind soon after from that bulletin, i ended up putting too much faith. the fed was way late in cutting rates and took its time about it and the damage occurred pretty much as predicted, and i did believe the fed's statements were paramount. i just violated -- and instead of the actual actions taken by the secretive committee, and since then i learned not to put too much trust in anything that comes from these out of date notes. you shouldn't either. the bottom line, i need you to do something that i think is
very difficult and i need you to ignore the fed minutes and don't make any serious decision, and i know given the furious and volatile action that occurs after the release, it probably seems ridiculous that these minutes could be that irrelevant, but they are, people. these supposedly all-important releases are dodges that throw you off the scent and cause you to make bone headed decisions. if anything, the only thing the month-old fed minutes are good for is giving you buying opportunities for some of your favorite stocks by creating unwarranted and, yes, undeserved, pullbacks. after the break i'll try to make you more money. i'm jim cramer and welcome to my world. one man, one mission. >> i just want to make you money. >> you need to get in the game! >> tens of thousands of miles traveled. >> this new black gold rush is just getting started. it's the sound of american industry roaring back to life. >> hundreds of ceos. >> my life story can be your
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the stock market, like everything else these days, is now hostage to the 24/7 media cycle. that means if you're going to make even a token effort to actually follow your investments, you'll be bombarded with all sorts of overhyped information and it can lead you astray, causing you to make nasty, money-losing mistakes. as your investing coach it's my job of keeping you from being misled in making those mistakes. which is why i devoted an entire chapter in my latest book "get rich carefully." you need to do your best to ignore. once a month we get reports from the big investment reports and specifically what they decided to buy or cut back on. we here in the media pore over 13f forms that these funds file with the s.e.c., trying to find what stocks investors like george soros or carl icahn might
be getting into or maybe getting sick of and a lot of people make the mistake of assuming they might be wrong if they happen to own any of the stocks that these big boys happen to be selling. what do people do when they read these? >> sell, sell, sell! >> they dump these stocks even though they've done an enormous amount of homework on them, based on the presumption that no matter what you know, these iconic money managers have to know more, right? the most closely followed trail is the one by the greatest investor of our time, warren buffett. this is a mug's game. you should never dump a stock you have conviction in simply because you found out some famous money manager is selling. >> sell, sell, sell! >> how do i know this? first of all, selling is not like buying. we have no idea why some hedge fund might be selling something. maybe the portfolio manager who specifically followed that stock has left the firm. maybe the stock is in a sector of the economy that's fallen out of favor with the money manager in question, at least short term. maybe some hotshot investor thought he had insight or bought the stock for a trade and turned
around and sold it when the insight proved wrong. maybe the money manager is trying to free up cash for an even better investment that he's got up his sleeve or maybe he does have real reasons for selling that we'll never know, we're never going to learn about. the point, though, is that you don't know. you can't know, and basing your investment decisions on something so unknowable is always a bad idea, people, even if you're trying to follow in the footsteps of a giant like warren buffett. i've got a painful example of how selling off the 13f filings tends to be a huge mistake. years ago my charitable trust, you can follow it on actionalertsplus.com, union pacific, sold it in the 70s and take a look at where that stock is now in large part because warren buffett's 13f disclosure form showed at this moment that he exited his position in the stock. he blew it out, we should blow it out, right? isn't that what people think? what a regret. not only did union pacific go into double, but buffett actually went out and bought union pacific's competitor,
burlington northern, because he loved the rails so much. of course, was there no reason for buffett to keep holding stock in one railroad when he was about to buy another one lock, stock and barrel. it was a huge mistake to assume something was wrong in union pacific just because buffett sold it. the truth is, his selling was merely a symptom of his love of the sector and he only sold it while acquiring another railroad. he bought burlington northern. don't jump to negative conclusion when a big-name investor sells something. please remember that union pacific lesson. it should be large in your mind when you take action off these bulletins. this was a valuable lesson. it was one that the charitable trust managed to profit from when buffett created a nice price break in kraft this time, by deciding to exit his position in that company after he had a spat with its ceo, irene rosenfeld. if you bought after the news
broke that buffett had sold, which was a well-covered event, you caught a terrific bargain as kraft went on to break itself up to create value for shareholders. so you really need to take those 13f filings, now widely talked about and acted upon, with a grain of salt. if you like a stock that a big-name investor is selling and you've done your homework and you have conviction, if anything, you might even want to use that weakness to buy more of the stock. by the same token, you should never buy a stock just because some money manager you respect surfaces in these reports as having taken a position. they're a-month-old by the time you see them and it's a snapshot, and at that very moment he could have trimmed has position the next day. you have no idea. a fund i admired took a monster stake in freeport mcmoran. i knew the fund did superb work. i knew they had an excellent
track record so i decided to piggyback off their efforts to buy freeport, a stock i'd been debating if i should purchase before the filing and you what? it was a disaster. >> the house of pain! >> freeport was at $87 when the s.e.c. released the 13f showing that this hedge fund had taken a tremendous position in it. not long after the recession hit and guess what in the stock went down to $8. yes, $87 to $8. all of the work the firm may or may not have done didn't matter, oh, and of course, shortly after that the firm closed. i was able to escape my position with freeport before it did too much damage to my charitable trust because i did my own homework, which showed the company's profits were decelerating rapidly. still, it was my decision to follow the tailspinning hedge fund before i got into trouble. when i talk to investors about
the positions they're thinking of taking so and so bought it and i know this manager is terrific. believe me, you have no idea why he bought it or even if he'll be right. even the best money managers make mistakes. if the idea goes awry, he doesn't know how things are going to be better and you shouldn't care about him. end of story. in fact, in all of the years i've been running my charitable trust, i've only found one big-name manager who's worth following, and that's nelson peltz and his partners. he's an activist investor. he tries to get management to make changes and unlock value. peltz is fabulous, giving you huge returns even after we've become public knowledge. you think that they're doing the heavy lifting for you by pushing management to the right direct. my research shows it's too late as the bump from the news an activist has gotten involved pretty much ruins the potential
upside. of all the activist i found, peltz was the only one which you could and after, and the bottom line, never blindly follow big-name money managers into or out of their stocks based on the 13f filings. if you want to be a good investor, you need to do your own homework and stick to your own convictions. we've done the research and the simple fact is piggybacking off the big boys will not make you beat the averages. in short, never sell because an iconic money manager is selling and never buy because a respected hedge fund is buying. that's the opposite of careful investing. it's lazy and worse, it doesn't work. danielle in kansas. danielle! >> boo-yah, jim. >> how are you? >> i'm well. thanks. i'm wondering how investors would be with inflation given banks increase lending and how will investors know this inflation is coming?
>> i still use the producer price index, which is actually a pretty decent sign of inflation, but more importantly i follow the bond market. if interest rates start going higher, that is going to be a tell of inflation if we do not have strong economic growth. i'm giving you the scenarios that i've historically looked at. i am not concerned about inflation right now. i am still more concerned about deflation. may i go to paul in texas, please? paul! >> boo-yah, jim! >> boo-yah, paul. >> my wife retired and i read your book "stay mad for life." >> thank you. >> at the end, you listed 20 stocks and 10 to 15 funds, and i wonder because of the housing real estate bubble burst and the financial meltdown, would you consider revising that list and adding any companies? >> it's one of the reasons, frankly, why i wrote "get rich carefully" because there were a lot of new themes that didn't exist. that book was written a long
time ago and not to say you have to buy the new book to find out what the old book was right or wrong about. there are changes and i've addressed that. >> may i go to sid in texas. >> big, burly boo-yah from corpus christi, texas, where the good winds are for sailing and the red fish are tailing. >> didn't know that. >> my question is this. with the volatility in gold, what should us baby boomers do about the percent of gold in our portfolios? >> i want you to think of it as a currency. we're in america. all we ever think is the dollar unless we go overseas. i regard gold as a hedge against the dollar. i think you can have 10% of your money in gold. i prefer the gld to coins. up to 20%, 20% is pretty high, but it's a good hedge against anything else that you own in life. follow the leader. how about doing your own homework? i don't want you ever to blindly follow the big guys based on the
tonight i'm teaching you how to navigate your way through an environment where you are constantly inundated with information about the economy and individual companies that's often overhyped, overblown and just plain not as important as it seems. >> boo! >> there are so many things you need to keep track of as part of your investing homework that you can't afford to get sidetracked, or worse, derailed by data points that don't really matter. nobody in the business will come out and say, of course, this news isn't really a needle mover, but we're telling you
anyway. the press makes everything sound much more important than it is now, especially the people on the blogs who are desperate for information to write about. that's why i'm doing my best to help you sort out the wheat from the chaff when it comes to processing information about the market, both here, on the show and in my latest book "get rich carefully." i'll let you in on another valuable lesson, don't get caught up in giant contract wins. they have a big win, big win, whether they be a technology company, don't get caught up. i've been too enthusiastic myself about companies that capture big multi-year contracts for seemingly big jobs that in reality barely mattered, failed to move the earnings needle. take transocean, the world's largest offshore driller and transocean, experienced the $140 down to $40. do you know that all through this client company kept receiving giant contract win after giant contract win? in the end the huge contracts
didn't matter because the price of oil kept falling. when crude drops dramatically, you have to assume that the drilling projects will ultimately get canceled or at the very least the company like transocean will have to give their companies major discounts if it wants to keep doing business, and that's why even with the wins transocean stock ended up a gigantic loser and so the same thing with the engineering construction firm whose stock sank from $95 to $50 during the greatest streak of contract wins in the company's history. it turns out that not only did it have energy exposure when all things energy were getting crushed, it also had huge losses from older contracts that went over budget, nullifying the new business that i mistakenly thought was so important. you know what? the exact same thing happens in tech all of the time. you'll see an enterprise software company like sap getting a huge contract win from oracle or salesforce.com and you will take a contract from hewlett-packard.
when it does nothing or the sales force doesn't run, you might think, you've just been given a wonderful chance to buy. nope. the stocks are right not to react, and you're wrong if you think it's an opportunity. yes, some companies report lots of good-sounding news that never seems to matter at all. it gets incredibly frustrating when these contract wins don't impact the stock because you're looking at them thinking it should. sometimes the only thing that does move the stock is the actual quarterly earnings report itself. i learned this the real hard way when i got super frustrated with the stock of deere, de, the agricultural equipment maker. deere put out press release after press release, including lots of new big equipment purchases. i was salivating. during this same period, we got crop report after crop report saying that deere was going to have an amazing quarter, at least i thought so. i couldn't believe the stock hadn't moved and what a great moment to buy, sure enough, when the company reported the quarter was terrific, but deere is a
famously cautious company or should i say infamously cautious. so even when things are good and the company refuses to acknowledge the positives and often simply stresses the negatives, it is amazing how this happens over and over. deere failed to turn the good news into profits and it gave a downbeat outlook saying the good news continues and no matter how many new orders and the positive conference call, the stock's not going higher, so don't get confused about this. it doesn't work, and there is an important corollary, though, even though i don't like buying stocks with contract wins, you may need to is the stock of a company that loses a big contract that's been on the books. my charitable trust owned chicago bridge and iron, cbi, and it announced that a huge oil and gas customer had canceled a contract, the company had wanted to build a gigantic liquefied natural gas project in austria. they pursued the contract with a significant amount of money. when we saw the news, we hesitated, and we thought
perhaps the market would see how they were other major projects in the books so cbi would make up the loss, but the market didn't hesitate. the stock got hammered because analysts felt compelled to cut their estimates as they built the australian project into their models already, so the models had to change for the worst to reflect the cancellation. here's the bottom line, do not get bamboozled among the engineering construction firms or tech companies or oil plays or machinery companies. at the end of the day what matters for most stocks are earnings, not orders. by the same token, if a company has a major contract already on the books and it gets canceled, you probably need to -- >> sell, sell, sell! >> skedaddle. the analysts will cut numbers and that will punish the stock, as was the case with cbi a year later. it was higher than it had been when the giant contract was cancelled. stick with cramer.
when you're picking stocks, there are so many ways you can find yourself being led off course, which is why tonight i'm helping you sort out the things that should matter to investors from the things that don't matter, and the ones you simply shouldn't care about at all. something i devoted a whole chapter to in "get rich carefully," my latest book. as much as i love the way the internet has made the information available to everyone, it's also made it possible for pretty much every opinion to get itself heard, even when it appears on faulty logic and it will save you money. here sent that i see being waved around all of the time as a reason to buy stocks even though it is a serious money loser. i call it the relative valuation rationalization, bear with me.
i want you to never, ever buy a stock just because it's relatively cheaper than the rest of its cohort or the market as a whole. all stocks are not created equal. some deserve to be worth less than others. this is a mistake i've made myself with my charitable trust, which is why i know just how damaging it can be. back when the trust owned cisco, networking giant, we were super frustrated with the underperformance as the stock seemed to tick down almost every day. we noted that cisco had the higher growth rate than the average stock in the s&p 500, but somehow strangely it sold at a lower price to earnings multiple than the average stock, in short, cisco looked cheaper than the market on both the pure earnings basis and the growth basis and this is the complicated jargon money managers use all of the time. it doesn't always work. theoretically yes, when you compare it to the s&p and you compare the growth rate and if the stock is growing faster, you should pay a higher price to earnings multiple than you would
for the s&p as a whole. it's growing faster. a company that grows 20% faster than the average stock of the s&p 500 should not be trading at a 20% discount than the price to earnings multiple, which was pretty much the case when the charitable trust was loading up on cisco. however there was one fatal flaw in our analysis. sure, it was better, but it was slowing. in other words, when you make a relational bet, meaning that one stock seems cheaper than another based on a particular function, you have to be sure that the reason for the cheapness isn't going away, making the stock more expensive down the road, not cheaper, and that's exactly what happened with cisco. the stock's cheapness didn't matter at all after the company reported a shortfall soon after, and the stock was hammered mercilessly, leaving the charitable trust holding the bag. so here is the bottom line. yes, you should always be on the lookout for bargains, but just because a stock is cheaper than its peers or the whole market on a relative basis doesn't mean it's necessarily worth buying.
hey, we've got to get some of the tweets you've been sending me @jimcramer, #madtweets. first up we have a tweet from jeffrey cianci. should a young investor worry about the market leveling out to fair values as mentioned by buffett and icahn? i don't even want you worried about the market. that's the big misnomer. worry about the companies stocks that you own. do the homework, get conviction and then stop worrying about the fair value of the market.
that's not what this show is about. it's not what you should be about. now let's go to @soapboxwire. these companies that get dropped from the dow, does it hurt them? there's absolutely no empirical evidence whatsoever that it will hurt them and by the way, they dropped by the bottom, hewlett-packard and alcoa being two that i am thinking could have been that case. and if the real dustin 24 posted the fake dustin 24, he tweets this question, sell into strength, thank boss, one of my mantras, sell into strength, buy weakness. i care about the price i buy a stock at. if you chase you won't get a good price and therefore the odds dramatically go against you when it comes to making both long-term and short-term money. a tweet from @scott_juba. need a place to stay when visiting mom and pop at mountainside, are we ever. room 14 in particular. we love kids at the place. we don't like dogs. we like kids and i'll serve breakfast on the weekends for you, and by the way, i can make poached eggs martha stewart style. a little vinegar.
let's go to a tweet from @officedrone, which of your books would you recommend for a more experienced trader/investor real money was the book written as a handbook for people who came to work at my old hedge fund, otherwise "get rich carefully" is more in sync with the current market though the market has changed. and now to sam roadwayrouge, louis ck with jim cramer. it's a heck of a lot better to be confused with louis ck than it is with vladimir lenin. and now a tweet #madtweets. i want to invest in some big-name companies. we don't like to buy stocks that are selling at two times or more of their growth rate, because if they screw up, the stock gets eviscerated and that's one of our rules. here's one from @matt_cad. what is the secret to having so much energy in the morning? i get almost no sleep, but it's a hereditary thing and maybe the secret is i love my job. don't tell the bosses.