Listen to Jim Cramer’s personal guide through the confusing jungle of Wall Street investing, navigating through opportunities and pitfalls with one goal in mind - to help you make money.
Mad Money w/ Jim Cramer
Mad Money w/ Jim Cramer 3/14/24
(upbeat music) Now is the time to embrace a new wave of workers. Every day, your team grows younger, more digital, and more drawn to entirely new ways of working, which means you need flexible solutions to connect them where business gets done. T-Mobile for business was born digital. With America's largest 5G network, we can make it easier to work together from virtually anywhere. Your team may be changing, but with the right tech, it can be more productive than ever before. Get started at tmobile.com/now. (upbeat music) At Morgan Stanley, old school hard work meets bold new thinking. At 88 years old, we still see the world with the wonder of new eyes, helping you discover untapped possibilities and relentlessly working with you to make them real. Old school grit, new world ideas, Morgan Stanley. To learn more, visit morganstandley.com/yus. Investing involves risk, Morgan Stanley, Smith, Barney, LLC. (upbeat music) - My mission is simple, to make you money. I'm here to level the playing field for all investors. There's always a more market summer, and I promise to help you find it. Mad money starts now. (upbeat music) - Hey, I'm Kramer. - Welcome to Mad Money. Welcome to Kramer, I'm building my friends. I'm just trying to make a little money for you. My job, not just entertain, but to put everything in context, so call me 1-800-743-CBC. Tweet me to Kramer. Investing isn't easy, but it can be a whole lot easier and much less daunting with a little instruction. The whole business of managing your money is made infinitely more confusing by all of the arcane technology and authentic Wall Street gibberish. You need to wait through to learn anything about a stock or an underlying business. If you're not clued into the jargon, you can tell if the professionals are speaking an entirely different language. You gotta remember that there's an entire industry of people who need you to be happily convinced that investing's too hard for you, that ordinary people just can't do it, and the same thing to do is to give your money to a pro. Hey, by the way, that's the huge reason why I started my travel trust. When you join the CNBC Investing Club, our goal is to show you that you can do it yourself and to teach you how it's done. Of course, maybe giving your money to a professional is the right move for some of you, of course, but you don't have the time, but if you put in a little effort, if you do the homework, then I think you can do at least as well as the pros or a low-cost index fund, possibly the better comparison, because in any given you're a lot of the pros really lose to index funds. The fact of the matter is that the financial industry is full of people who are just after your fees. They're more interested in taking your money than in making you money. And if you're a hedge fund or a mutual fund manager trying to fundraise, you've got every incentive to keep regular people sadly ignorant. Why would they make any of this investing stuff sound accessible when they could make it sound impenetrable? If it sounds too straightforward, it's harder for them to raise money. And harder to convince people to convince you to pay high management fees. They're kind of like the Wizard of Oz. They don't want you peeking at the man behind the curtain. They don't want you to understand because if you did, then you take control of your own finances. You pick your own stocks and not pay someone else. You potentially exorbitant fees to do the things you perfectly capable of doing yourself. And after all these years do this show, I know you can do it. And that's where I come in. See, I'm pulling back the curtain and explaining everything. Because while authentic Wall Street gibberts can sound complex, even impenetrable, it's not rocket science or brain surgery. You don't need to go to business school or work in investment bank to understand it. You can comprehend all the mystical sounding vocabulary that we throw around here, as long as you have a translator, a coach like me who can explain what the darn words mean. I want you to think of me as a defector, someone who played for the other team, managing $500 million of already rich people's money at my old hedge fund, but who's now playing for you. Teaching you how to navigate your way through the minefield of the stock market every week, night here, will amab money, and of course, constantly for the CNBC investing club. Forget about the division code. Forget Enigma, forget the Navajo Code Talkers. To be a great investor, first you have to break the Wall Street code, and I'm here to help you crack it. That's why tonight I'm giving you my Wall Street gibberish to play in English dictionary. Consider it a glossary of the most important terms you'll absolutely must understand if you're gonna actively manage your own portfolio of individual stocks the way I want you to. Words and concepts that many people in the financial industry don't want you to get your heads around. Because then you might actually feel empowered enough to pull your money out of their expensive mutual funds. (audience applauding) And hey, even if you're not a pro, you may not know enough, so why not take advantage of my 40 plus years of investing experience to give yourself an extra edge. Let's start with a couple of extremely important terms that go hand in hand. Cyclical and secular. Now you hear these all the time. Yet no one but me ever bothers to explain what they mean, even though they're crucial when it comes to picking stocks. Cyclical has nothing to do with this bin cycle on your washing machine or Wagner's ring cycle. And somewhat my classical music. And secular isn't about the separation of church and state or public versus parochial schools. Oh yes, and kudos to the late great Lou Rookheiser, who first cracked that cyclical washing machine joke and I've always remembered it's probably been about 50 years now. We say a company's cyclical if it needs a strong economy in order to grow. It's cyclical because it depends on the business cycle. Cyclical cycle. So metals and mining companies and oil and gas really any kind of raw materials plus most of the industrials are cyclical. The homebuilders are cyclical, the oil makers are cyclical, the commodity chemical makers like that are cyclical. You want a bunch of copper and iron lines like BHB? That's the definition of cyclical. These companies are all hostage to the vicissitudes of the economy. When the economy heats up they earn a lot more money and we're willing to pay more for those earnings. And when the economy slows down or shifts into a recession mode they earn a lot less money and investors pay less for their shares. I always say the sickles are boom and bust names. Secular growth company, the other hand, is one where the earnings keep coming regardless of the economy's overall health. Take anything you eat, drink, brush your teaplet or use this medication. So you've got consumer staples like Procter and Gamble, of course. The foods companies like General Mills, the drug stocks like Pfizer or Merck or Eli Lilly. These are the classic recession-proof names that you want to buy when the economy slows down. Investors flock to the companies that can generate safe consistent earnings unless the GLP-1 drugs actually really take over the world. Because you don't stop eating food or brushing your teeth just because of recession. OK, so why is the secular versus cyclical distinction so important? Why is it the first piece of Wall Street jargon I'm translating for you? Because it helps you figure out how much companies can earn in a given environment. And because it matters to the big institutional money matters, the guys who have so much cash to throw around that they're buying and selling pretty much defines the whole market, at least in the short term. See, the whole hedge fund playbook is about when to buy and sell cyclical stocks or secular ones based on how economies around the world are doing. This is what drives the decision-making process. Now, in the old days, 50% of the performance of any individual stock came from its sector, which is just a fancy word for the segment of the economy as the stock falls into it, like tech energy, machinery, health care, finance. And when it comes to sectors, much of their moves are driven by whether they fall into the secular or cyclical camps. These days, it's much more than 50%. And that's really thanks to the rise of sectoring tips. You don't want to own much in the way of cyclical when the economy is slowing. These stocks are simply going to get crushed because their earnings tend to fall apart as they have during every meeting so slow down, including Chinese slow down. And there's nothing about that you can do it. What do you do? But by the same token, when business heats up and the cyclicals are all doing well, nobody wants to own the boring, consistent secular growth names the food and the drugs. And you won't make as much money in them during those periods either. You have to accept that. You're not a trader, you're just accepted. Now, you always want some cyclical stocks and some secular stocks in your portfolio, because you can never be completely sure with the economy's headed. But when business looks like it's booming, you want a lot more cyclical exposure. And when business looks like it's falling off our cliff, (screaming) you want a lot more secular exposure. The bottom line, investing ain't easy. But it doesn't have to be mystified. You just need to learn the language. Know the difference between cyclical and secular growers and always stay diversified. Shane and Alabama, Shane! - Hey Jim, thanks for taking my call. - Absolutely. - When building a balanced portfolio, is the 60/40 rule still fundamental and how much of that percentage should be in cash? - Okay, I'm blowing out all that. I think that we want to bet against, we don't want to bet against ourselves, we want to bet with ourselves. I'm betting that people are going to have a long life, hopefully a happy life. So we're buying and keeping a lot of stock right almost to the end. When you're 60/70, I still think that's young and I think you should have 70% stock. I know that's higher than what I've usually said, but I just think that you're not going to get the return from bonds than people that people want. And I'd rather have you in stock and then take it down to 30, then 20, 30 or 20. And if depending upon how you feel about yourself, I want you to be thinking about living long and I think you live longer. That's my own psychology. Joseph in Florida, Joseph! - Hey Jim, how's it going? - Not bad, Joseph, how about you? Thank you for calling. - Hey, I'm doing awesome, Matt. - Good. - So I wanted to get some insight on a 529 plan and we're an index fund for my one-year-old child, Jared. - All right, so you look, 529 plan is perfect and put it in a low fee, S&P 500 index fund. I did that for my kids and they are eternally grateful and you're going to do it for yours too. How about Edna in New York, Edna? - Booyah, Mr. Kramer. I'm a new member of your investing club. And I wanted to thank you for all I've learned so far. - Thank you. - Because my husband and I into active investors. - Well, I want you to be informed I do investors. Absolutely, how can I help? - I really rolled over an old employee IRA into a brokerage account and have 20 to 30 years before I leave the funds. - Right. - Right now it's sending in a money market account earning 5%. So would you recommend I put it in an S&P 500 index fund? - Here's what I want you to do. I want you to take starting now every month, take a 12th of that money and put it to work. We're not going to put it all to work at one level, one 12th. And then we get to, if we have a really bad month, I want you to double down and put one sixth in. And when we're finished in the third and fourth quarters, well, we'll figure out whether you need to have a little more cash. But that's how I want you to invest that money. That's long-term money and that should be in stock. Not fine, but over time, not all at once. Investing isn't easy, but it doesn't have to be mystifying. You just need to learn the language only in money tonight. You're getting near your website. I'm not being deemed mystifying all that Wall Street speak. That's what you need from P.E. Mollables to Garb and much more. I'm cracking up my dictionary to help you navigate the market and take charge of your portfolio. That's what I want. So stay with Kramer. (upbeat music) - Don't miss a second of Mad Money. Follow @chimcramer on X. Have a question? Tweet Kramer, #MadMensions. Send Jim an email to madmoney@cnbc.com or give us a call at 1-800-743-cnbc. Miss something? Head to madmoney.cnbc.com. - Resourceful small business owners know how to get value from the purchases they already make for their businesses each month. The Enhanced American Express Business Gold Card is designed to take your business further. 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Indeed's a matching and hiring platform used by over 300 million global monthly users, according to Indeed data. Need quality candidates fast? Use Indeed for scheduling, screening, and messaging, and you'll connect with candidates in no time. And it's not just faster. 93% of employers agree that Indeed delivers the highest quality matches compared to other job sites, according to a recent Indeed survey. And here's the best part. Listeners of this show get a $75 sponsor job credit, giving your jobs more visibility at Indeed.com/madmoney. Just go to indeed.com/madmoney right now, and support our show by saying you heard about Indeed on this podcast, indeed.com/madmoney. Terms and conditions apply. Need to hire? You need Indeed. (upbeat music) - Tonight, I'm helping you translate the cryptic, and occasionally unfathomable terminology that makes earning stocks so darn difficult. Yep, I'm giving you the phrase book to navigate your way through the world investing. Hey, what do we call it? The Michelin Guide to Find Stock Tining. Consider it that televised encyclopedia of creamerica for tearing back the cloak of mystery that can make managing your own money seem like an impossible task. The process of picking stocks shouldn't seem as difficult to say, conducting triple bypass hard surgery on yourself. And you don't have to be Stephen Hawking or Albert Einstein to understand this stuff. Although with the way a lot of the pros talk about stocks, I bet even Einstein would have a tough time figuring out what the heck they're saying. Now, I just explained the difference between signal companies that think industrial smoke stack businesses that need a healthy economy in order to grow earnings versus secular growth teams think to the pace, okay? They consistently expanded about the same pace regardless of where we are in the business cycle. How you have to sell the signals and buy secular growth when the economy starts to slow. Then to the reverses, it starts to pick up steam. This is the playbook that all the hedge funds use. And even though these hedge funds can often behave like herd animals, wildebeats who often buy and sell the same stocks at the same time. They operate this way because their playbook works. The reason for that has to do with another piece of Wall Street jibber's lexicon that you absolutely must know if you're going to pick stocks by yourself. It's called the price to earnings multiple or P slash E, multiple. Or just the multiple. They all refer to the same thing. And it's the cornerstone of how we value stocks. In fact, when you hear a talking hedge pontificate about some stock has become overvalued or undervalued, they're almost always really talking about the price series multiple. When you hear someone say that Pepsi's more expensive than Coke, okay? They don't mean that Coke's cheap because it's trading in the 50s while Pepsi's trading in the triple digits. No, the share price tells you nothing about a stock's valuation vis-a-vis another stock to make any kind of apples to apples comparison you need to take a step back. See when you buy a stock, you're actually buying, paying for a small piece of a company's future earning stream. That's where the stock is. So to value a stock, you have to look at where it's trading relative to the earnings per share, which you often see rendered as EPS. And that's what the multiple allows you to do. Now, here's the basic algebra, not even math. That any fourth grader I think should be able to do, the share price P equals the earnings per share, E times the multiple M, okay? The multiple tells you how much investors are willing to pay for a company's earnings. We don't care that Coke's stock might be at $55. We care that it sells for 19 times earnings. We don't care that PepsiCo's say might be at the time 165. We care that it sells for more than 20 times earnings. Or to put it another way, the multiple is the special source of valuation. The main ingredient in that source growth. How much bigger the earnings will be next year than they were this year? And the year after that, and the year after that, on and on. The stocks of companies with faster growth tend to get rewarded with higher price earnings models. Why? Remember, the multiple is all about what we're willing to pay for future earnings. And the more rapidly business grows, the bigger its earnings will be down the road. So if a fast growing sulfur stock sells for, let's say at 25 times earnings. That doesn't make it more expensive than a slow but steady grower like Pepsi. At 20 times earnings, the faster grower actually deserves the bigger multiple. Now here's where it gets real interesting. Price earnings multiples aren't static. In different markets, people pay more or less for the same amount of earnings. When they pay more, we call that multiple expansion. And when they pay less, it's called multiple contraction. Two more terms that sound much more complicated than they really are. For example, whenever interest rates skyrocket, making the bond market competition a lot more attractive, we see market-wide multiples contract because everybody's future earnings are suddenly worth less by comparison. Of course, the earnings aren't static either. When you buy a stock, you're either making a bet that the E or the M part of the valuation equation is heading higher. So what goes in the earnings? How do you make sure that they're increasing and not about the collapse? Okay, here's some more vocabulary. When you're people talking about a company's bottom line or perhaps are net income, they all mean the same things. Earnings, we call it the bottom line because the number is the bottom figure on a company's income statement. To figure out how quickly a company's earnings could grow in the future, you have to look for clues when it reports as quarterly results. That's why I'm always telling you to list the conference calls. By the way, we do that homework for you and the investing club with all the child, which I was holding, says why I think it's such a good identity member of the club. Step one to get in your head around the future earnings is trajectory. You need to look at the top line. Oh boy, another unnecessary piece of Wall Street jibbers that's totally interchangeable with revenues or sales. They all mean the same thing. You want to see strong revenue growth, which tells you that there's demand for a company's product. This is ultimately the key to the ability of most businesses to sustainably grow their earnings long term. And that's why it's especially important for younger, smaller companies to have fast growing revenues. Oh, and investors will really pay up for accelerating revenue growth. Accelerating revenue growth, let's see, A, R, G, R, which means the sales are growing at a higher, higher rate. With a more mature company, you should be able to turn its revenues into profits by cutting costs. And then it can return those profits to shareholders in the form of dividend or potentially a buyback. Beyond the top line and the bottom line, it's also crucial to consider the gross margin, which is in no way disgusting and not to least but marginal. The gross margin tells you what's left after you subtract the cost of goods sold from the sales. It's a key profitability metric. To figure out the gross margins, you have to consider the competition, the cost of production, and the cost of doing business in general. Businesses with cutthroat competition like supermarkets tend to have terrible margins, while virtual monopoly like Microsoft has margins that are down at their own beast. In some industries, the margins can vary widely. Take the oil business where the margins swing up and down with the price of crude. In that case, you need to watch supply across the whole industry. Oil production for energy and employees for retail too much oil pushes price down, right? Too much retail inventory for stores that discount their goods aggressively in order to make space for the new merchandise. Both are what we call marginal killers. So here's the bottom line. You need to know the vocabulary before you can evaluate a stock. When you're comparing, look at the price to earnings multiple, or PE, the growth rate, the top line, the bottom line, and the gross margins. I know this might sound basic to many of you, but I'm here to educate people, and I don't want anybody trying to pick stocks without a firm understanding of the basics. It's another great reason, by the way, to join the CNBC investing company. Man, money is back after the break. Coming up, finance is full of $5 words. But don't despair, Kramer is breaking down the Wall Street lexicon. Some key terms made easy. Next. Now is the time to embrace a new wave of workers. Every day, your team grows younger, more digital, and more drawn to entirely new ways of working, which means you need flexible solutions to connect them where business gets done. T-Mobile for Business was born digital. With America's largest 5G network, we can make it easier to work together from virtually anywhere. Your team may be changing, but with the right tech, it can be more productive than ever before. Get started at tmobile.com/now. (upbeat music) (upbeat music) Tonight, I'm going to pen and tell her mode, diversifying all the overly complicated technical sounding Wall Street gibberish, that you hear constantly, but might not understand. I want to translate the most overused, under explained terms in the business, putting them in a language that's fit for human consumption. Consider this show, you're Wall Street to English Dictionary, a televised glossary that'll help you navigate your way through tough markets, and the tough sounding terminology. They keep so many people out of stocks, not doing myself justice, and I got to help you to understand this stuff, so you can be better. Of course, joining the club is going to help. Now again, all this investing terminology sounds difficult because the pros speak Wall Street gibberish fluently. Well, they want it to sound difficult. They're the opposite of me. They want you to terrify. They want you feeling totally ignorant. And a complete loss when it comes to managing your own money. My mission is just the opposite of theirs. I am here to try to enlighten you, to teach, because I know that you can do better for yourself than the professionals. I've been down here for 40 years on Wall Street. I know this stuff, and most of the professionals, they kind of just want your fees. I'm not managing anyone else's money, and I don't own stocks except for my travel trust, so I give away my winnings to charity, and I walk you through the whole process of running the trust for the CNBC investing club. It's the anti- well, establishment. It's not, look, it's not just enough to come out here and tell you which stocks I like, because you can own them if you can't understand them. No, I want you own is a must. It's one of my cardinal rules. It says if you don't have a good grasp of what you own and what your holdings are, you wouldn't have any idea what to do when the stocks turn against you. And believe me, inevitably, at some point, they will. You can't know when to hold them and know when to fold them in the immortal words of stock stage kitty Rogers, unless you know what the heck it is that you're actually holding and what might make you fold. Unfortunately, the profusion of arcane terminology in Wall Street makes it much harder to know what you want. So let's continue our vocabulary lesson with another ultra important piece of verbiage that's hardly ever explained to you, even though it's used constantly, risk reward. The risk reward analysis pretty much defines short-term stock pings, so what does it mean? All right, let's break it down into its component parts. Assessing risk is all about figuring out the downside. How much you potentially stand to lose in a given stock. How far can you considerably fall in the near term? Assessing the reward, on the other hand, means figuring out the potential upside. How much the stock could rally if everything goes right? Too many investors only focus on the potential upside when they're analyzing stocks, and that is a great, great mistake. It's much more important for you to understand the risk side of the equation, because the pain from a big loss hurts a lot more than the pleasure from an equivalent-sized game. Trust me. But how exactly do we figure out the risk reward? Okay, these are determined by two different cohorts of investors. The reward the upside is defined by how much growth-oriented money managers could be willing to pay for stock. They create the top. The risk, the downside, is created by what value-oriented money managers do. What value-oriented money managers would pay on the way down. They create the bottom. To figure out the risk, you need to consider where the value-guys will start buying on the way down. To solve for the reward, you need to think about where even the most bullish of growth guys would start selling on the way up. When asked, I usually boil the risk reward down to something quick and dirty. Like, five up, three down. But how do I get there? How do you know where growth money managers will start selling and value-guys will start buying? Okay, for that, you need some insight into how they think, and that requires translating another piece of esoteric Wall Street lingo. It's called growth at a reasonable price. I really believe this, by the way. Growth at a reasonable price is AKA GORP. When we talk about growth at a reasonable price, that's not subjective. It's a method of analyzing stocks first popularized by the legendary Peter Lynch. By comparing a stock's growth rate to its price, it's already spoilable. If you want to figure out the maximum that growth guys would be willing to pay for a stock, you need to be able to look at the world according to GORP. You want to learn more from Peter Lynch? It's easy. Go to Amazon and buy one up on Wall Street or beat the street. These are two of the most important investment books ever written. Now, here's a quick and dirty rule of thumb that's hardly ever let me down, although there are some exceptions. A rule that can really help us figure out when a stock might be overvalued or undervalued, based on what the growth in value managers would be willing to pay. If a stock has a price rate is multiple that's lower than its growth rate, then that stock's probably cheap. And any stock's selling in a multiple, it's more than twice the size of its growth rate, probably too expensive. So if a stock's trading 20 times earnings, and it has a growth rate of 10%, then it probably doesn't have much more upside. It's reached the two times growth ceiling. Always remember that. Here's another piece of Wall Street Chippers that can help simplify the process. The pay ratio, PEG, that's the price they're earnings to growth rate, or the PEG multiple divided by a stock's long-term growth rate. A peg of one or less is extremely cheap, and two or higher is prohibitively expensive. So-so-so. A high-octane super-vast grower could sell for 40 times earnings and still be inexpensive, because if it has a 40% plus long-term growth rate, giving it a peg of just one, right at the cheap end of the spectrum. And the growth keeps accelerating, sending the stock to a new high after new high. That makes sense to me. Where did I come up with these numbers? Observation. The value investors who will be attracted to stocks selling in pegs of one or less, create a floor. You'll usually be able to find a buyer if the stock's multiple, is it at or below its growth rate? The growth investors who'd be buying high multiple stocks hardly ever pay more than twice the growth rate. A peg of two, which means there's almost no way that stocks go higher. So stick with the example of Google back when it's still held that mega growth mojo with a 30% long-term growth rate, it would have become a sell if it traded to 60 times earnings, just two darn high as I have learned over and over and over again, since the show began oh so many years ago. Like with any of my methods or anyone else for that matter, this one is rough approximation, a bit of subjectivity. It's useful, especially when you're trying to figure out the risk of work, but it's not always right. And it only applies to companies that trade on earnings, not unprofitable companies with stocks that trade on sales. Plus, stocks will often get cheap on an earnings basis, simply because the estimates are too high. You see this all the time going into a slowdown. In those cases, the stock could trade well below the one times growth floor. Its peg could just keep sinking and sinking. And the fact that it looks cheap, it's a value trap. It's not a buy signal. On the other hand, the best time to buy sickle stocks, think the smokestack industrial types, is when their multiples look outrageously expensive, because the earnings estimates are way too low and need to be raised to catch up with reality. That happens when the economy's bottoming and about to rebound. The bottom line, know what your own and know what others will pay for it. That means you need to understand the risk reward, the potential downside and potential upside before you purchase anything. By figuring out where the growth investors put in the ceiling and where the value investors create. The floor. Nicholas in Nevada. Nicholas. - As we call Mr. Kramer, this is Nick Michelle from Las Vegas, Nevada. I'm a college freshman out here in California, trying to start my own investment management company. I was just looking for some quick advice and kind of personal, I guess, advice on how to run that from a freshman's perspective. - Well, I'll tell you, you're young, and that means you have to go with higher risk stocks and I typically talk about it on the show. Maybe some smaller cap stocks, maybe some biotexts, maybe some companies that are on the ground floor of AI. I don't want you to be loaded up with companies that are older because you have your whole life to make it back if they go away. A lot of our older viewers and middle age viewers cannot afford that to happen. So go with high risk, potentially high reward stocks. Mark and Iowa, Mark. - Hi, Jim. I'm a happy club member. And thank you for taking my call. - Thank you for being a member of the club, it's terrific. How can I help? - Well, Jim, I have a real estate question for you. - Okay. - Higher interest rates make it more difficult for families to afford a new mortgage. What effect will this have on REITs containing single and multifamily units? - Well, I think they're gonna be under pressure. And I think it's natural that you ask that question, and it's one of the reasons why I'm not recommending those stocks because you correctly have thought about what is the nemesis of those particular stocks. Now, as long as you understand the risk for work, the garb and the peg ratio associated with picking stocks, you're much better prepared to know what you owe and know what others, more importantly, will pay for you. Now, much more made money, and do you know the difference between a rotation and a correction? I'm not done cracking the walls because. And you better be seated when Professor Kramer opens the dictionary. Plus, my colleague, Jeff Marks and I, are taking all of your burning investing questions. So stay with Kramer. - Coming up, what big investment lesson can you learn from a bottle of milk? Kramer's working till the cows come home. Keep it here. (upbeat music) - Imagine your own money is a whole lot less daunting than it seems when you have a translator. Someone like me who can help you to code the intentionally obscure terminology at the experts you used to talk about stocks all the time. And that's why I've been giving you my televised Wall Street gibberish to English dictionary so that you can see through the mystery and understanding of, and understanding, I gotta get to the essentials of investing. It's the most important thing I can do. That's what I do for a living. So far, I've been explaining the complicated sounding pieces of jargon that are actually pretty simple. Stuff we do every day at the CBC Investing Club, but the difficulty goes in two directions. Just as there are many concepts that seem misleadingly complicated, there are also plenty of other terms that are much less simple than they appear. Take the notion of a trade versus the notion of investment. A lot of people would say these two words are interchangeable. That there's no difference, but that couldn't be further from the truth. They're distinct and in the immortal words of those 90 stock gurus offspring, you gotta keep them separate. Isn't this just splitting hair something it's not recommended for the faulty challenge like myself? Isn't it Kajus tree? That's a SAT word of the day. That might send you searching for a real dictionary. No, a trade is not the same as an investment. And if you treat the one like the other, if you turn a trade into investment, breaking my first commandment of trading, then in true Mr. T fashion, I'll have best of the Rockies. Rockies three, my prediction for your portfolio is pain. When you buy a stock as a trade, you're buying for a specific catalyst. I mean, anticipated future then, you think we'll drive the stock higher. Maybe the company's about to report its quarterly results and you think it will deliver better than expected numbers. Although I don't recommend trying to gain earnings, there's just too much chaos and confusion in individual earnings report, which can cause the stock to get clobbered, even if delivered stellar numbers. The catalyst can be news about some event you're predicting, for example, let's say a pharma company getting FDA approval for a big new drug, or even just some clinical trial data you think will be positive. These are data points that can send a stock story if they go your way. So when you make a trade going into it, you know that there's a moment to buy before the catalyst and a moment to sell after the catalyst happens. Sometimes your trades won't work out. The event you're waiting for won't happen, or maybe the data point you're expecting simply turns out to be less positive than you expected. Either way, when you buy a stock as a trade, it has a limited shelf flight. There's only a brief window where you want to own it. Once the window passes, you must sell. Hopefully you'll turn out to be the right catalyst and you'll rack up a nice game. That happens, no point in sticking around, ring the register and lock in your profits before they evaporate. But if you turn out to be wrong, well guess what, you still need to sell. I want you to think about this. When you buy a bottle of milk, you don't drink it after the expiration date, right? You throw it away. The logic of trading is pretty similar. You can't just buy more and call it a longer-term investment because without the catalyst, you got no reason to own the darn stock and you never, ever should own anything without a reason. I've watched an endless parade of people lose money by turning trades into investments. They come up with alibis for staying in a stock long after its expiration date. They're really fooling themselves into believing they're doing the right thing and then more often than not, they get crushed. So remember, without a catalyst, you don't have a trade. If you find yourself in that position, then you better sell and cut your losses. No catalyst, no point. An investment, on the other hand, is based on a long-term thesis. The idea that a stock has the potential to make you serious money over an extended period of time. You're not just banking on one specific catalyst. You're expecting many good things will happen in the company's not too distant future. And that's not an excuse to buy a stock and then forget about it though. Investments can go wrong too, which is why I'm always telling you to keep examining your stocks after you buy them. That's called buying homework, not buying a whole. Of course, we help you with that homework for our charitable trust teams in the CBC investing club. So when a stock you like as an investment goes down in the short-term, it makes sense to buy more as long as the fundamentals are still sound. The court alert here is that you don't ring the register after the first time the stock jumps at price. With an investment, you're looking for a longer gains, larger pick gains. And what you do is you measure it not in terms of trade and sell, but it's a much longer period of time. And again, that is what we do at the investment club. Bottom line, not all Wall Street gibberish is a separately complicated. Some of it's a separately simple, like the distinction between a trade and an investment. Don't confuse them. Remember, they're not to say. And it's a big mistake to turn a trade based on a catalyst, whether it's successful or unsuccessful, into an investment, which is a long-term bet on the future of the business. They have money's back after the break. Coming up, if only the market were as reliable as Joe DiMaggio, when the tape turns red, remember the Yankee Clipper. Kramer explains, next. Welcome back to the Wall Street gibberish to plain English translation guide edition of Man Money. All that I've been explaining, overly arcane and esoteric investing concepts and financial jargon to help you become a better investor and make the whole process of managing money seem less daunting. So what else you need to know? Okay, here's one of the most dreaded and probably understood terms in the business. The correction, what a euphemism. A correction's when after the market's been roaring, it turns around and then it gets crushed. Maybe the client of as much as 10%, making it feel like the world is ending, of course. The sky is falling and you never want to own another stock again in your life. And that's precisely the raw reaction. It may feel horrible, but stocks can come back from corrections. They bounce back from big declines all the time, especially coming off a major run higher. Think of it like this. When the market goes on a 56-game hitting streak like Joe DiMaggio and then doesn't get on base the next day, that doesn't mean you'll never make money again. It doesn't mean all your holdings that we pulverize. It's just what happens when we go up, say, too far too fast, and that's why you should expect corrections. They can happen to an individual stock and index the whole market. They can even happen to bonds as we saw the great bond retreat that started in 2022 and then rage beginning in the spring of 2023. And you'll most likely never see these corrections coming. So you shouldn't beat yourself up for not anticipating it. Selloffs are a natural feature of the stock market landscape. We don't have to like them either, but we do need to acknowledge that they will happen no matter what. So you shouldn't get flustered or worse panic when they inevitably smack you right in the face. Let me even know the piece of investing vocabulary. Execution. Now this is a tough one because it's compared to subjective. When we talk about execution, we mean management's ability to follow through with its plans. When you own this stock, they're all kinds of risks associated with execution. Messed up mergers, failed new product launches, bad cost controls. The number of ways a bad management team can screw up in business is practically infinite. That's one of the reasons why I like companies with proven management teams. Because they're much less likely to make these kinds of unforced errors. And it's a big reason why, for instance, it's so important for you to pay attention when I bring CEOs on the show with those interviews, nobody has a company better than the people running it. And since you probably can't get these CEOs on the phone yourself, you want to hear what they have to say about their business firsthand on the show. This notion of execution is also crucial when it comes to understanding why it's worth paying up for best of breed companies. Big emphasis is their best to breed. The top players in any given industry almost always come with proven executives. Best to breed stocks are typically more expensive than their cheaper competitors, but they're worth the price. A good management team is less likely to make mistakes. And more important, less likely to get buried by big problems. And more likely to figure out how to solve them. Finally, one last piece of Wall Street jibbers, the dreaded rotation, which is just when money flows out of one sector into another, or one big group into another big group, like a cyclical to secular rotation. The kind of thing we get when the economy's stolen so the cyclicals go out of style. Now this is probably completely antithetical to what you've been told about the right way to invest. The conventional wisdom is that you're going to pick your own stocks. Something which, by the way, the conventional wisdom regardless of being the height of it is because you're not supposed to be able to beat the market. See, they sell you short. And then you should find high quality companies and stick with them through thick and thick. Then eventually, if you hold out long enough, you'll make some money. Now this is the brain dead philosophy of buy and hold that I spend so much time trying to debunk to you. It's a zombie ideology. There refuses to die, even though it's been utterly discredited by the market's performance, as we're always teaching you in the CBC investing club. That doesn't mean that you should play the rotation game and only own the group that's in style. Not at all. Remember the need for diversification, another important piece of investing vocabulary, which simply means making sure you don't have all your eggs in one basket. One sector basket. To me, you're diversified when no more than 20% of your portfolio is in any single sector. That way you won't get annihilated. For example, a sector rotation takes down your single stocks because you'll have some secular growth names that are holding up much better, or even making you money at the same time. All tech, very bad because tech trades together. Bottom line, don't be afraid of rotations and corrections. Don't be intimidated by people who use the words. And remember, even though it's hard to quantify execution as a crucial factor, when it comes to picking stocks, you won't companies with proven season management teams that are less likely to drop the ball. Stick with me. Coming up, Chef Mark's joins Kramer to help handle your most urgent questions. The floor is yours when we return. I always say, my favorite part of the show is to answer questions directly from you. Then I bring in Jeff Marks, my portfolio analyst partner in crime, help me answer some of your most burning questions. Now, for those of you who are a part of the investing club, well, if you didn't need no introduction, for those of you aren't members, though. I hope you will be soon. And I would say that Justin Seitz and our back and forth helped me to do a better job for you. So please, I want you to join the club. Tonight, Jeff and I are covering all grounds going directly to phone lines and answer some of your email questions. So let's take some calls. Andrew in New Jersey, Andrew. Hey, Jim, Mr. Kramer. Boo, yeah, who are you doing? Not bad, how are you? I'm doing pretty good. I'm a 65 year old guy, ex-tech guy and mobile dividends. And in this cash environment right now and the returns we're getting on, I might have more of a request than a question. So I get your thoughts on being able to do that in the future. I was wondering, at times, you could do more of a contrasting, acknowledging that you're not a tax advisor, but acknowledging more often, which companies, which investments have the favorable 20% capital gains rates versus cash, which, you know, for, you know, income tax brackets range from anywhere from 25% to 37% for some of those higher-end people in the show. And then part two of my question, real extracurricular credit, is at the end of the year, as we approach the end of the year, and we do think about a lot of tax harvesting of the losses, loss harvesting for tax purposes. Would you ever go so far to say this stock, I'm recommending a hold, but if you're thinking about the 30-day wash rules, maybe you want to sell it, harvest the loss, and then buy it back 30 days. You have to go that far. These are very interesting issues, and I've got to tell you, in my first book I wrote, do not fear the tax man. What matters are the quality of the stocks. So I would not ever sell a stock if I thought it was going to be great for a wash sale, again, if I thought it was going to be great, get improved, and I really don't want to sell any stock basis because you might be long-term short-term Jeff. I think that we're investing, and we're investing for the long-term, and if a company does poorly, we sell it, and if a company does well, we don't touch it. And I don't think the tax person should figure into our equation. No, and of course, all of our capital gains and dividend income, the Childable Trust has, each year, gets donated to charity. But yeah, I think if you do have a really specific tax question, seek a tax advisor, but they'll give you the best qualified advice. Yeah, but we're focused, we're very focused on how stocks are performing. Right, and people could all be in all different practices and have all different ideas. Yeah. Why don't we go to Kevin in Maine, Kevin? Jimmy, Bouillon. Bouillon, Bouillon, Kev, what's up? Thank you for helping millions of people build themselves into a better investor. You are single-handedly responsible for encouraging millions of Americans to get into the stock market, who otherwise would not have myself included. So, thank you. Oh, man, you make my day. Okay, thank you, buddy. I do appreciate everything that you do for all of us regular people. Jimmy, quick question. My charts have only three tools on them. Price, volume, and OBV or on-balance volume. I'm sitting on a few 10 bags and 130 bags. Jimmy, if you were forced to choose only one tool on your chart, other than price and volume, which one would it be? Okay, this is terrific. What I would check is to see the oversold over, what? Is it too far down? Is it too far up? And I use the same thing for stocks. I wish we had an oscillator for, I mean, for the stock exchange, the S&P. I wish we had an oscillator for each interval of stocks. That's what I'd be looking at. Yeah, well, I'm not a technician. It's a little harder for me to say. But I think also, moving averages is something that technicians often quote. So that would be the other one. Right, let's have the stuff that Larry Williams says, I really, really like. All right, so now let's go for some emails. Let's start with Diane in Ohio. And she asks, "I am trying to build a position to company at the stage of not owning as much as desired. How do you balance taking profits and building a position?" Thank you. Okay. So if you put it in a small position and if it jumps up, you just sell it. That means you missed it, you didn't get it. That's okay. We'll get the next one. Otherwise, what you do is you build it on the way down in pyramid style. And what you'll do is you'll have a better basis, trying to improve the basis, provide the thesis is still right. And that's what matters. Yeah, I think just because it's a smaller position, that doesn't mean you should break discipline and be greedy. If the stock's had a huge run, looks a little bit overextended. But we also don't want to chase stocks either. And just because it's small, just start buying because you think it may go higher. Right. You don't want to discipline, it always comes back to you. Yeah, I mean, look, I hate having to wait. I hate having to build a pyramid. It doesn't matter. This is not a game of emotions. It's a game of empirical analysis and it's worked. All right. Now let's go to Chris in Illinois, who asks, "How do you address the weighting of different sectors and diverse white portfolio? Do you mass the S&P or market weighting? Or do you specify sector weightings based on macro trends, et cetera?" All right. Now, this is another one where the club is very different from most people. What we do is we look for good companies. And if the companies are good, we don't care about the sector. Now, we don't want to have all semi-conductors. But we are about finding the right stocks. And if there are a lot of stocks in that sector, we pick the best one in the sector. But it's not the way we think of things. No, we're diversified. But if there's a mega-theme that we like, whether it be electrification, clean energy, infrastructure, then we're not opposed to investing more heavily in that space. Because these are multi-year trends that are seeing a huge flow of investment dollars. Exactly. And that's why you come to the club. We are unconventional, but we are rigorous. I like to say, there's always a bull market somewhere. And I probably try to find it just for you right here. Make money on Jim Kramer. See you next time. All opinions expressed by Jim Kramer on this podcast are solely Kramer's opinions and do not reflect the opinions of CNBC, NBC, Universal, or their parent company or affiliates. And may have been previously disseminated by Kramer on television, radio, internet, or another medium. You should not treat any opinion expressed by Jim Kramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Kramer's opinions are based upon information he considers reliable. But neither CNBC nor its affiliates and/or subsidiaries warrant its completeness or accuracy. And it should not be relied upon as such. To view the full Mad Money disclaimer, please visit cnbc.com/madmoneydisclaimer. 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