Jim Cramer wants you to buy and hold stocks — if you’re willing to do some ongoing homework.
In his book, “How To Make Money In Any Market,” Cramer outlines his system for building long-term wealth through your investments. About half of your portfolio, he writes, should be invested in index funds, with the bulk of the rest distributed across a handful of stocks in fast-growing companies.
Ideally, you’re looking to hold these names over the long term while compounding returns help you build wealth, Cramer says. But giving that a chance to happen will require effort on your part, he tells CNBC Make It.
Cramer says all investors should listen to earnings calls, which happen quarterly at most major publicly traded companies. In addition to reporting financial results required by law, most firms also host calls in which top executives discuss performance with analysts, media and investors. Many post recordings or transcripts of the calls on their investor relations website.
The calls can help give you a sense of how things are going. Did the company exceed analyst expectations for earnings and revenues over the past quarter? Have any new products or services taken off? How do the top execs realistically expect the company to perform next quarter? These are all questions you should regularly be getting answers to, Cramer says.
“I need you each quarter to go listen or read the conference call so you can be sure that nothing’s changed and your story is good,” Cramer says.
If you want to invest in individual stocks, these quarterly check-ins are worth your time, Cramer says. “A casual observer can spend four hours a year on an individual stock. If you can’t, then you do have to default to an index fund.”
The importance of ‘buy and homework’
Cramer doesn’t think you need to go hunting for diamonds in the rough to find great companies. The beginning of your research can amount to looking into the companies you interact with every day.
“You can say, look, I like Meta, I like Instagram. Well that’s fine, that counts. I use Google all the time, and I watch YouTube. That counts,” he says. “But you need to have some curiosity.”
That curiosity, Cramer says, should manifest in research into the company’s fundamentals — such as growth in earnings, cash flows or profit margins — which can help you establish a thesis for owning the stock.
From there, “if you just do buy and hold, you’re probably going to own one clunker,” Cramer says. “And we don’t want you to own a clunker. We want you to own a really good stock.”
That’s why Cramer advocates for what he calls “buy and homework.” First, buy stocks you like. Then, check back at least quarterly to make sure you still like them.
If a stock in your portfolio has declined, and you discover that it’s due to a sea change at the company that drastically changes its prospects — say, a new product line you believed would change the company’s prospects has flopped — you can safely move on from the stock. Conversely, if you discover in your research that the stock’s problems are temporary and your long-term thesis remains intact, you can maintain or, hopefully, add to your position, Cramer says.
“If you’re curious and then you find out about the stock of the company you like, when the stock goes down — and it will go down — you’ll buy more,” he says. “And that’s the secret of good investing … to not buy high and sell low, but to buy something you like because you did the work ahead of time.”
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Source: Jim Cramer: If you can't spend '4 hours a year' on this, you
