By Jim Cramer, RealMoney Columnist
Jim Cramer's newest book, Getting Back to Even, is out in bookstores today. We're publishing this excerpt as a sneak preview for TheStreet readers.
So why should you believe that investing in stocks, which got us into the mess we're in, can also get us out of it? Why not just cut your losses and stick your money in a traditional savings account where you won't have to worry about it? First of all, because you'll never get back to even that way, and second, because there is a world of difference between owning stocks, which has caused so much wealth to disappear, and trying to make money in stocks, an approach that at the very least lets you sidestep some of the pain. You can get back to even if you follow the latter course.
Most peddlers of financial advice, even after the wealth-shattering crash of 2008, preach the virtues of owning stocks just for the sake of owning them. They will still tell you to buy and hold, an investing shibboleth that I have been trying to smash for ages. The buy-and-hold strategy, if you can even call it one, is to pick a bunch of good-looking blue-chip companies, buy their stocks, and hang on to them till kingdom come. Selling is strictly forbidden. It's considered a sign of recklessness, of "trading," which all too many supposed experts think of as a dirty word. Same goes for the once-sacred mutual funds, with managers who adopted the same careless buy-and-hold, one-decision philosophy.
If you had practiced buy and hold over the last decade, you would have gotten exactly nowhere. The major averages have literally fallen back to levels they first hit ten years ago. That means, for example, that if you'd contributed a little bit to your 401(k) each month, the way most people do, then most of your buying was at much higher prices. The results are in and this philosophy has lost more people more money than anything save gambling, and frankly, it's hard for me to see the difference between gambling and deciding to permanently own stock in a company that could change its stripes at any moment. It's investing blind, and investing blind is no different from investing dumb.
Jim Cramer will be signing books and answering questions around the New York metro region over the coming weeks:
* Tuesday, Oct. 13, 7:30 p.m.: Barnes & Noble in Paramus, N.J. (765 Route 17 South)
* Wednesday, Oct. 14, 7:00 p.m.: Borders in Bridgewater, N.J. (290 Commons Way)
* Tuesday, Oct. 20, 7:00 p.m.: Mendham Books in Mendham, N.J. (84 East Main St.)
* Tuesday, Nov. 17, 7:00 p.m.: Barnes & Noble at Union Square in Manhattan (33 East 17th St.)
That's why my philosophy is "buy and homework." For every stock you own, you must spend at least an hour a week checking up on the underlying company, and that's in addition to the research you ought to do before buying a new stock. I know it sounds daunting, but I'm talking about a block of time that's shorter than an NFL or an NBA game, and certainly shorter than just about every Major League Baseball contest, even without the commercials. It's less time than you'd spend seeing a movie, and I know you've never made a dime going to the movie theater, especially not with the way they rob you at the concession stand.
The homework, like taking your car in for an occasional maintenance inspection, lets you know if everything is still working under the hood, or if it's time to sell and trade the stock in for a different model. Doing the homework lets you avoid holding on to the stock of a troubled company as it meanders closer to zero like AIG and GM, or sinks all the way down like Lehman Brothers or Fannie Mae and Freddie Mac. It lets you stay on top of what's blue chip and what's been downgraded to red or white or no chip at all.
Just owning stocks because that's what you're supposed to do won't help get you back to even. But doing the homework, and owning stocks not for their own sake but for the sake of making money, definitely can. How important is the distinction between buy and hold and buy and homework? It's the difference between passively accepting whatever hand the market deals you and taking control of your own destiny.
Let me give you an example. On my television show, "Mad Money," where I teach viewers how to be better investors, help make sense of the market, and tell you which stocks I would buy and sell, I made a call, based on my homework, back on September 19, 2008, recommending that people sell at least 20 percent of their portfolio because I expected the market to go lower. On that day the Dow Jones Industrial Average had closed at 11,388. Then, a little more than two weeks later, on Monday, October 6, with the Dow a thousand points lower at 10,332, I went on NBC's "Today" show, and in a much-derided appearance told viewers to take any money they thought they'd need over the next five years out of the stock market because I believed it had become too dangerous and too risky.
That call earned me more scorn and criticism than anything else I had ever said in a career that's been full of scorn and criticism. It was also one of the best calls I've ever made, as the market went on to have its worst week in history. You avoided a 33.6 percent decline in just two months if you heeded my first clarion call, and a 26.8 percent decline with the second. A simple sidestep into cash would have kept your savings from disappearing and thus keeping you from having to work for many more years than you had probably thought would be necessary just a few weeks before these calls were made. And I helped you get back in at the lows in many stocks using the methods detailed here, methods you can use without me after I teach you their rudiments, which will allow you to rebuild your savings and make even more money. Basically, I hit the investing equivalent of a grand slam.
Now that the market's bounced back, there are those who say my philosophy of dodging the declines is flawed versus a buy-and-forget-'em method. But these uninformed critics are ignoring the colossal difference between a rally that makes up some of your losses and a rally that actually makes you money because you sidestepped the losses in the first place. In doubt? Consider the difference between someone who avoided the decline starting September 19, my first sell call, and then got in on March 9 when I said the worst of the downside was over and it was time to come back in, versus the buy-and-hold method. The buy-and-hold philosopher with $100 in the market who ignored my September 19, 2008, sell call saw his portfolio drop to $57.50 on March 9. If he then caught the 40 percent gain through the end of July 2009, he would have $81.
Now compare the person who listened on September 19 and sold his $100 and then got back in on March 9, when I said the coast was clear. By sidestepping the loss and then getting in near the bottom he would have been able to make $40 on that $100 and would finish his round-trip at $140. The person who actively managed his money and avoided the worst part of the crash by selling on September 19 has 72.8 percent more money than the buy and holder at the end of July.
How about the October 6 sell call? The buy and holder who slept through the call saw his $100 turn to $63.50 on March 9 but would be back to $88.90 at the end of July. The person who sidestepped and got back in on my suggestion would have that $140, or 57 percent more than the buy and holder. And all of this arithmetic presumes that you didn't panic out at or near the bottom when the declines became too painful to endure. How can anyone in his right mind compare the returns and say that buy and hold makes more sense?
To get back to even, you need to know what to look for in a stock to figure out if it can deliver in a time when the market is busted and the economy has gone bust. I am no perma-bull, someone who always believes it's a good time to buy and to own stocks, although I do believe that you can almost always find good stocks to buy. I was literally screaming about the financial crisis starting in the summer of 2007, warning anyone who would listen that our entire financial system could come crashing down because our policymakers didn't have a clue about the true depth of the banks' problems. You can still see my "They Know Nothing" CNBC rant on YouTube, meant as a last-ditch attempt to save the banking system from its regulators. The call, obviously, was not heeded. I'm not telling you this to boast. I've made plenty of mistakes, too, mistakes I own and call attention to regularly so that we can all learn from them. My point is that I am not relying on some misguided faith in the idea that stocks will always go higher eventually to help you restore the money you've lost and make even more. I have some new investing strategies, including one that relies on dividends -- yes, dividends -- that will help you generate both income and potential upside while protecting you from the downside.
I've also created twenty-five new rules for trading and investing based on the crash and its aftermath to help make you a better investor. Plus, because the government has such a major effect on the economy when we're in trouble, I'll go through the latest rules and regulations from the feds that can help you and your family save money.
No matter what, don't give up. These are frightening, and occasionally infuriating, times, but with a little help you can stop being scared, stop getting mad, and start getting back to even!