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 [Music] Now hey I'm Kramer welcome to M money welcome to Kramer other people my friends I'm just trying to make a little money my job is not just to entertain but to educate and teach you so call me at 1800 743c tweet me at ker you want to know the single most useless thing you can do in this business oh that's easy
the most useless thing you can do as an investor is to worry about what everyone else is worrying about the flip side of this is also true there's no point in getting excited about something that everybody else is eagerly anticipating why see because when the vast majority of investors agree that something's going to happen that thing is already priced into the stock market priced in while the real economy moves at its own State pace for example you got to borrow money to buy out it build out equipment then you use that equipment to manufacture goods
and transport them to retail outlets and wait for the customer to come along and buy them the stock market has no such limitations stocks don't quite travel at the speed of thought but they come pretty close so the moment of preponderance of hedge fund and mutual fund managers decide that the economy is slowing or speeding up or flatlining stocks start trading like that's already the case usually it takes some time to build that kind of consensus which is why you rarely see these moves happening instantaneously but once the big institutional portfolio managers are on the
same page about something you can be pretty darn confident that it's baked into the averages this is some basic economics 101 stuff now I don't have a ton of use for economists as a professional in this show they tend to take a totally Ivory Tower approach to this discipline meaning they have all sorts of models for how the the world's supposed to work the econom is supposed to work often very boring models by the way but they rarely let the empirical facts get in the way of a good theory if the data conflicts with the
model Economist have a bad habit of throwing away the data and not the model however as long as you keep that caveat in mind some basic economics is incredibly useful when you're trying to manage your own money for example let's take something a little bit difficult but we're going to get get this together what's known as the efficient markets hypothesis this Theory says that at any given moment stock prices already reflect all the relevant information that's out there and when some new piece of data comes out stocks immediately adjust to reflect the new reality you
often hear Index Fund purist citing this Theory to explain why it's impossible for stock Pickers to get any kind of edge because whatever you know about a company should already be baked into its share price as far as they're concerned markets are so efficient that investing in individual stocks is basically the same as gambling if everything you could possibly know is already priced into the stock that means your homework is meaningless and the only thing that can push a stock higher or lower is it's some random new piece of information nobody knows about it has
to be something totally unknown because if anyone did know they would have acted on already ergo it would be baked into the share price that means under the extreme version of the efficient market hypothesis the only thing that can move stocks are unknown unknowns to use the parli of Former Defense secretary Donald runville and if you're merely betting on unknown unknowns you might as well just be playing roulette it's more fun again that's why index funds Advocates adore the efficient markets hypothesis this Theory tells them that it's impossible for individual investors to consistently beat the
averages so if you want Equity exposure the only smart way to do it is putting your money into a nice lowcost index fund that mirrors the S 500 now as anyone who watches the show regularly knows I have no beef with index funds in fact I think they're the best way for the vast majority of people to invest in the market I've held that way that position since the year 2000 even if you got the time and the inclination to pick individual stocks and manage your own portfolio you should still direct a big chunk of
your savings if not the plurality of it into some cheap S&P 500 Index Fund it's the safest way to give yourself Equity exposure it's perfect for your retirement accounts think of like this it's not that easy to be a good indidual stock investor it takes real work which is why of course we try to help you Jo if you join the CMC investing Club but it's an incredibly easy thing to be an index fund investor putting money in at 401K ra oh that's Index Fund territory you can gradually contribute over time with every paycheck and
as long as you believe the US economy can keep growing over the long haul you can park that money in an index fund and check in on it maybe once or twice a month but to get back on track this idea that you can can't possibly beat the averages because of the efficient market hypothesis tells us stocks are always perfectly valued and you know what that's just totally bogus putting aside the fact that I did consistently beat the averages nearly every year at my old hedge fund gave my clients a 24% compound annual return after
all fees over the course of 14 years versus 8% for the S&P the simple truth is that markets are not perfectly efficient in fact frankly they're often irrational they ignore things make mistakes Mis value information every day and that's a major reason why anyone can make money picking individual stocks these anomalies are everywhere and they can be great for your portfolio ironically this core dogma of free market economics is a lot like communism makes a lot of sense in theory it doesn't necessarily work in life so why the heck did I bring up the efficient
market hypothesis in the first place is it such a boneheaded idea because even if the most extreme form of this Theory isn't true and it's not empirically we know for a fact that markets are all kinds of inefficient it's still a very useful idea as an ironclad law of the universe the efficient markets hypothesis can't help us but as a rough guideline it can lead us in the right direction markets try to be efficient they aspire to be to efficiency when a company reports a fantastic quartered stock spikes immediately because that's kind of data that
can get baked in very quickly when the Federal Reserve changes policy tell is probably done raising interest rates like we saw in late 2023 uh that's huge news and it takes longer to get reflected in the averag baking that in can take months even when the FED abruptly changed courses at the end of 2018 that kind that it took weeks to work in through the averages stocks that benefit from lower rates will instantly sore but it can take days or weeks or even months for the average to fully reflect the new normal because it takes
time for portfolio managers to reposition we're talking about huge slugs of stock here no hedge or mutual fund it's going to buyer sell them all at once sooner or later though we do reach a new equilibrium so let me give you the Mad Money version of the efficient markets hypothesis qual the kind of sort of efficient markets corer when there's a widely held consensus view about something anything be it positive or negative you have to assume that view is already being discounted by the stock market so when everyone's feeling euphoric about the strong job market
that's probably baked into stock prices already when everybody's worried about a temporary fed mandated slowdown is probably baked in when investors are hunkering down in fear of bad earning season don't expect Theo get slammed on disappointing numbers people already anticipating a disappointment in short when all the Talking Heads and journalists and media friendly money managers are telling you to be afraid of the same thing that might be the one thing you don't actually need to be worried about let everybody else worry for you from the stock market's perspective the fact that most investors believe something's
going to happen means that wall Street's already treating it as a reality yet it's so easy to fall prey to group think when you're managing your own money emotions are infectious like a communicable disease frankly when you see all sorts of experts coming on television and saying the same thing while the newspapers print similar stories and your friends Echo this stuff back to you it's only natural to assume it must be true and you know what very often it is true but that doesn't mean it's going to move stock prices by the time we get
any kind of real consensus on an issue that move is probably over you missed it the bottom line if you want to be a better investor don't tear your hair out Freddy about the same things as everybody else instead you should worry about the things other people don't seem to care about because the real threat is the one that you don't see coming let's take questions let's go to Mary and Idaho Mary hi Jim nice to talk to you again I um have a comment and a question for you the comment is regarding uh when
you were talking about um the conventional stupidity yes I sent you an email on that and and I hope you'll have uh an opportunity to to read it um I thought you'd enjoy it um thank the question the question is at what percent of increase in the stock should a person consider taking some or all of their profit either to reinvest immediately or to just hold back as cash to buy something down the road okay let's take this from the point of view of uh that you need to sell something in order to be able
to buy something what I like to do and we talk about this CBC investing Club is that if a stock has change if there are fundamental differences from what happened when I bought it in other words let's say I bought a stock and then subsequently it has two bad quarters well that's what I want to sell I rank the stocks a lower stocks ranking if they've missed a couple of quarters and then I boot that to buy something I think is better there going to be moments where our third quarter turns out to be good
and I didn't get it and I kick myself when that happens but what I've done is create a level discipline that that's what you should do Mary and thank you for your email too let's go to Dave in Colorado Dave hi Jim Dave how are you Colorado booah to you sir booah longtime listener first time caller uh thank you for all you do a side note my mom got me into investing decades ago and had me watch Wall Street weekend review with lisis Riser Marty's W and you are carrying on their legacy well that's how
I got involved too so we're in the same boat let's go to work all right let's go to work here's the setup I'm calling on behalf of my girlfriend who is in her early 60s she's retired with a state pension she has an investment management firm managing 600,000 in stocks and ETFs in tax deferred accounts but they're charging her 1% per year okay they haven't kept pace with the S&P 500 and have actually avoided the mag 7 and growth stocks almost completely she wants to manage her money on on her own two questions how should
she construct a portfolio of her own and over what time frame should she make the changes okay so I would put 2third of it in an S&P Index Fund obviously if they can't beat it just go for it and join it then onethird I would structure around we've been saying a portfolio of say six to 10 stocks of which two or three can be overweighted and large mostly mag 7 I should add stocks that we think are really great CBC investing Club can help you pick those 10 cuz we have a portfolio of around more
than 30 and you just take the 10 that you're most excited about and no more 1% you're now free to move and uh well she is and tell her congratulations for having saved up that much money that's terrific all right the most useless thing you can do as an investor is to worry about what everybody else is worried about remember the real threat is the one you didn't see coming money tonight I'm giving you my mad anomic 101 course and giving you all my best practices for investing sometimes you need to take a step back
and evaluate what not just what you're investing in but how so if you want to better your investing skills I say yes indeed stick with [Music] Kramer don't miss a second of Mad Money follow at Jim Kramer on X have a question tweet Kramer # mad mentions send Jim an email to madmoney cnbc.com or give us a call at 1800 743 CNBC miss something head to mad money. cnbc.com [Music] like I told you before the break when you pack into a crowded trade you're playing with fire if everybody's on the same page about a stock
or even a whole sector that usually means the easy money's already been made doesn't mean you can't profit from something obvious but when you're late to the party you're going to have lower returns and higher risk that look that's just the nature of the be fortunately nobody's putting a gun in your head and forcing you to follow the hedge fund her in fact you don't even have to think about spotting tops and bottoms by gauging sentiment if you don't want to there are lots of different ways to invest some of them take less work than
others for example there's timing you could try to call every generation in the averages buying stocks when they look poised for a near-term bottom then selling them when they look toppy you can trade around a core position you take a large holding then you lighten up on part of your position when it gets overextended to the upside and buy it back when the stock sells off you can keep your battle in your shoulder waiting for the perfect moment where the whole Market sells off dramatically giving you a chance to pick up your favorite stocks for
much less than there were my fave p on my old hedge fund I love doing this stuff if you've got the time and of course you need the inclination and the right resources it is a terrific way to make money but if you got a full-time job this whole approach is just nuts and I say that as someone with the terrifying extended family history of mental illness regular people who work come on that's funny regular people who work for a living don't have time to stare at the tape all day even if you work the
night shift it's just not a good use of your precious free time more importantly trading this actively just isn't worth the agitation that's why I come here every night to do the show I focus on the market like a hog so that you can take a less intense approach to investing one that let you go to work and have a personal life it's why we help walk you through all these different things with our charal trust when you join the CMC investing club which you know I really want you to do so how should you
approach the market if you're not prepared to devote your entire Waking Life to watching stocks what's the safest way to handle individual stocks part-time for starters let me say once again that index funds are a wonderful thing if at any point when I'm describing sounds too daunting to you or just too timec consuming please do not hesitate to say individual stocks are not for me and just put most of your mad money that's the cash you invest with that's not part of your retirement portfolio into a nice lowcost Index Fund or ETF that have very
low fees that mirror the S&P 500 I said this before the break too but that's because it's good advice being a Savvy stock investor takes work being a Savvy Index Fund investor well let's just say It's relatively easy sure if you manage your portfolio well if you do the homework and state disciplin I think you can beat the S&P 500 with a diversified group of individual stocks and I do like one or two overweighted just you know but not everybody has that kind of time not everybody has that temperament not everyone is comfortable taking on
more risk to chase a higher return and that's perfectly fine too see you got to do what's right for you call that suitability what suits you so keep that index fun option in your back pocket now assuming you really do want to try to profit from Individual stocks let's talk about how you can do that without the stock market taking total control of your life first from the getg go you need to accept that the best is enemy of the good there's no point in trying to buy or sell stocks at the perfect moment nobody's
that talented even making the attempt will drive you nuts you need to accept results that are good enough rather than trying to chase Perfection for example if a stock you like gets hammered down from $60 to $50 and you pull the trigger but then it goes down another couple of points before it bottoms and rebounds at $60 please don't kick yourself from making a mistake you didn't screw up you made a good pick okay yeah you could have made a couple extra points if your timeing have been Flawless but a win's a Win Second regular
viewers know that I don't believe in the concept of Buy and Hold I believe in the concept of buy and homework meaning you need to keep researching your companies after you own a piece of them and if something goes terribly wrong well you may have to bail I think it's a good idea to buy stocks slowly on the way down and sell them gradually on the way up all this requires a certain amount of active management please don't feel compelled to be too active though now the last thing you need is to be flitting in
and out of stocks with every gation in the broader Market you want to be an investor not a Trader you think you can time things perfectly and flit in and out but most gains occur in concentrated burst so you're allowable to miss them if you're on the sidelines thank you great Peter Lynch for fil for putting that in my head again if you've got the time and the inclination to trade that's great however most people don't when when you got a full-time job and you're trying to manage your own portfolio you need to be willing
to sit tight with the stocks you believe in there will be sell-offs there will be rotations out of one group and into another there will be crazy action on a week to week and even day-to-day basis you don't have to constantly adjust your Holdings based on these moves if you believe in the stocks you own and you shouldn't own anything that you don't believe in then you should be willing to stick with them when the backdrop gets tough ideally you you'd be able to trade in and out but like I told you the best is
the enemy of the good in reality when everybody's panicking over the latest crisis you're going to be tempted to panic too and just sell everything get out now you might even avoid a substantial decline by bailing on the whole stock market sooner or later you're going to need to get back in the whole point of sidest stepping a decline is to sell high and buy your favorite stocks back at a lower level unfortunately again it's really hard to nail the time here you see my theme it's I don't want you to do the possible if
you dump everything there's no guarantee you'll be able to buy your stocks back before something changes and the market comes roaring back witness when the market bottomed an October of 2023 when long-term interest rates peaked and started heading lower well something almost nobody saw coming what's the solution if you don't want to give yourself a panic attack every day keep doing the homework so you know what you own when your stock surge higher use that opportunity to ring the register just on part of your position raise a little cash after 20% move or more you
need to take something off the table that's my limit these days when you stop when your stocks get hit put that cash to work buying more shares at lower prices but you don't have to nail every short-term top and bottom let me give you the bottom line here to trade or not to trade that is the question If you're trying to be an investor who doesn't need to stare at the tape all day long it's no bler in the mind to suffer the slings and arrows of Outrageous Fortune you don't need to be perfect at
managing your money you just need to be good enough and that means you shouldn't waste your time trying to anticipate every little gyration in the market take a page from Jimmy chill and relax everybody's back after the boy I love you man I've been watching you from day one thank you for all the wonderful advice that you provide us I'm learning so much watching your show watch your program every day I love it always wanted to say booah on your show thank you for being the greatest in the world we consider you the money market
maker and we thank you for all you do I love your show a long time fans your show and we think it's the most ENT ping program on [Music] TV stop marking talks to me a and I mean that figuratively not literally contrary to what you may have read on X formerly know as Twitter I do not hear voices although periodically I think that my left Muller Crown does indeed play music but that's not what we're talking about here I'm conly listening to the tape not music to get a read on what the big institutional
Money Matters are up to and to do that I need to separate the signal from the noise what do I mean by that okay On Any Given Day there might be monster moves in individual stocks it's temp to assume that all these swings are equally significant but some are a lot more meaningful than others so when you see the cloud stocks for just getting killed for example the natural conclusion to draw is something must be wrong with the cloud when a really Lo group bounces it's not much of a stretch to assume that the pain
must be over the house of pain but that's too easy the truth is some of these moves are a signal and some of them are noise signal means something it tells you that the stock will probably keep moving in the same direction noise on the other hand well it is noise to borrow my favorite line from MC Beth noise is a poor player that struts and Frets his hour upon the stage and then is heard no more it is a tail toll play an idiot full of Sound and Fury signifying nothing in short while signal
carries a message there's no real takeaway from noise in another life Shakespeare would have been even a dynamite investor distinguishing the signal from the noise is as much an art as a science so how do you tell when a major stock swing hurled something larger before we get into what makes a move meaningful you need to understand that we get major single day advances and declines with no real significance all the time good stocks can get ahead of themselves rallying too far too fast for selling off the technical term for this is overbought and Charter
measure it with the slow stoke castic oscillator or the Williams percentage R oscillator named after the legendary Larry Williams we talk about a lot when we go off the charts when something's overbought it means pretty much everybody who wanted the stock at a given level has already purchased it even the highest quality company can have an overbought stock and when you run out of buyers you almost always get a pullback but this kind of overbought sell off doesn't tell you anything except that the stock in question need to take a breather and digest its gains
at the same time even bad stocks can rally and for similar reasons if they get oversold because they've come down too quickly you tend to get a nice oversold bounce once again though this is the sort of rally that doesn't convey much information it's noise a stock gets oversold it bounce and unless something else changes it can go right back down once the works off the bounce I bring this up because when you see dramatic swings in individual stocks your mind will try to draw connection to the fundamentals the real world facts up about how
the underlying company's actually doing sometimes that connection genuinely exists other times the action in the stock is noise not a signal and you'll end up feeling very foolish if you take your Cube from that kind of action those who want to know more about this can go back to the cannon on stock markets and that's Confessions of a street addict where I describe how easy it is to see a stock move a point and convince yourself something's really happening underneath it's a really funny part of the book all that really happens is that you have
more buyers and sellers at a given moment in a way that might be totally unrelated to the actual company I demonstrated that with a long time ago with the stock called stride R it's pretty funny hey by the way this is something we're constantly walking you through with this CNBC investing Club of course it's not just the technicals there are plenty of other reasons why a stock might explode higher or melt down that have nothing to do with the fundamentals sometimes the market simply makes a mistake and then the mistake gets rolled back no greater
significance maybe people misinterpret a good quarter is a bad one something that happens quite often during earning season because there's so many things happening at once maybe money managers are dumping stocks in one group purely to raise money so they can buy it in another yeah one that's high so what kind of action carries real significance how do you know when a big moves for shadowing something even bigger down the line all right there's a lot of signal that's pretty obvious a company reports a blowout quarter and it stock worse obvious an analyst Cuts estimates
and the stock plummets obvious that's just bus as usual now I prefer to look for the unusual company catches an analyst downgrade and the stock goes up interesting signal counter intuitive in my experience when the stock refuses to go lower on bad news it often means that's putting in a bottom and it's ready to rock it higher by the same Tok about a company reports a fantastic quarter it gives you great guidance a bull com and the stock get slam well look that's the kind of signal I'm looking for too it means Wall Street believes
this company's looking at its last great quarter when your stock falls on positive news Well you may be looking at to for the most part though you can't decipher hidden messages in the way stocks are trading except in some rare cases you probably shouldn't even try it's important to know what's working and what's not working in any given Market but you can't let your money management decisions be completely Guided by what's in or out of style in the Wall Street fashion show otherwise you end up owning stocks just because they're going higher and that is
a terrible place to be because you won't know what the heck to do with them once they nly start coming down here's the bottom line when you're evaluating a stock take your Cube from the fundamentals of the underlying company don't put too much significance on day-to-day gations in the share price sometimes you can extrapolate a great deal from a big move in an individual stock but more often it's telling you something you already know or it's just noise that means nothing let's take calls let's go to Howard New York Howard PLL you Jim this is
Hoe from the Bronx first time caller and Club member excellent thank you my friend thank you Howe what's going on every time I visit with my grandson he looks at my portfolio because he knows I'm always watching mad money every day and thanks to your 10: a.m. conference calls and your intraday alerts he sees gains of anywhere from 60 to 200% the Su of my stocks now my grandson he wants to be an investor too here are my questions okay threefold when do I start to trim how much should I trim and more importantly because
I like these stocks so much and I believe in them when can I get back in okay these are really great questions and they're fundamental because what happens is is that we believe in discipline and we believe in conviction discipline must always Trump conviction that means that we like to start trimming 20 at 20% up we'll trim between 5 and 10% another 20% same thing if we really want to be able to be in shape to be able to buy some back we must do that and that's how we play it otherwise we let it
run if we got our cash out holy cow Ned in Ohio Ned five star Professor Kramer it's good to talk to you today sir how are you I am good n thank you for calling in how can I help you yes sir well uh a couple months ago I was listening to Warren Buffett and he talked about uh high growth rate companies that eventually forg their own anchor he said the company keeps expanding and its shares kept Rising would you explain that to me and does it is NVIDIA an example of that well okay Nvidia
is a really great let me tell you why because when you look at Nvidia on forward earnings or the estimates it always looks expensive and then it so far trumps those estimates that when you look backward it turns out that the stock was selling at a remarkably low price Journey Bull and that's been the secret to Nvidia literally since 2012 incredible it just keeps doing that right please don't put too much significance on day-to-day gyration in a stock share price you have to know when something is a signal and when it's all just sound and
Noise always signifying nothing once where made money at I'm highlighting one of the key pitfalls that many investors falsely think of as an opportunity I'll explain why you should be more cautious than you think and I'm taking all your investing questions with my investing Club partner Jeff marks so stay with Kramer good evening Mr Kramer thank you thank you for everything you do you've been such a wonderful source of information with your teachings I have to say thanks thank you for all your advice and saving us from ourselves your advice let me quit a job
that I hated I love you to death thank you for everything you do thanks for making us money and more importantly thanks for keeping us from losing [Music] [Music] money all night I've been warning you about the danger of being a follower when everybody expects the same outcome in the stock market there's very good chance it won't play out as expected because it's already priced in that's what we call priced in and that's why you need to be extra wary of the IPO cycle let's go over this we've seen the pattern over and over again
we get this Deluge of New Deals it at first many of them explode higher but at the same time they're flooding the market with New Stock Supply and that Supply ultimately drags us down I've said it a million times the stock market is like any other Market it's all about supply and demand tooo much Supply and prices are going to be lower the problem is when IPOs are making people fortunes you tend to get a palpable sense of exuberance and then when the deals start attracting less interest the exuberance turns into hostility and then the
whole Market not just the IPOs tends to get slammed we seen this happen so many times in 2020 and 2021 we got this wave of new IPOs and spack mergers as many people invested their government stimulus checks in the hottest looking stocks in the market just in 2021 get this we had roughly 400 traditional IPOs and another 200 SP mergers which originally were meant to be blank check companies that would make a bunch of Acquisitions over time but in 2020 lots of startups began to use spack mergers as a way to come public while evading
the strict regulations that the SEC Comm you know the Securities Exchange Commission places on IPOs now initially there were some very exciting ones that really caught fire for example Zoom video this one came public in 2019 and then sared to the Stratosphere in 2020 once the pandemic made its platform essential at least during the co era At first she you get a bunch of hot deals to get people excited 2020 we also had a ton of electric vehicle and charging station related IPOs and spack mergers at first these stocks were Unstoppable although most of that
was because this was a period of highrisk speculation where people were willing to give anything with the right buzzword the benefit of the Dow mistakenly of course reminiscent of the dotcom year in the late 90s when anything connected with the internet was beloved until the market was flooded with excess Supply and the whole group collapsed in the year 2000 I'm going to give you a really concrete example from 2020 it's a company called Quantum space Quantum space which in retrospect was basically a science experiment looking to develop better battery technology for electric vehicles anyone can
develop better more efficient batteries with the ability to charge very quickly and you can make a kill it even in a world where electric cars have lost some of their luster but quantumscape was a long way from having anything they could actually commercialize and they could sell even four years later these guys still didn't have any meaning ful Revenue back in 2020 and early 2021 Wall Street was still giving the benefit the doubt to anything connected to electric vehicles quantumscape came public via Spa deal and you have to be mer you remember you have to
be really skeptical of those and when that merger was announced the spa it was merging with saw it stock more than double in just two trading sessions putting in the 20s now during this initial period of Maximum hype this stock I know this is going to be crazy but the stock shut shut up to nearly $132 and that's where it peaked in December 2020 then we started seeing short sellers coming out of the woodwork arguing it was a scam and Wall Street gradually lost interest in companies with zero profitability let alone super speculative names like
quantumscape no Revenue in the end the stock got obliterated by late 2022 as a single digit since only been able to bounce both those levels at times thanks to what I regard as an occasional short squeeze and look Quantum escapes hardly alone don't mean to pick on it all sorts of electric vehicle play that came public during the IPO frenzy of 2021 got crushed Riv although ended up coming back Lucid Nicola canoe the lion electric lightning Motors Lordstown Motors Faraday future intellig electric all saw their stocks plunged more than 90% from Peak to trough many
like Nicola turned out to be well had some fraudulence their founder and coo was even sent to prison again though we had roughly 600 companies come public just in 2021 and by the second half of that year many of these deals were blown up in your face because we already had far too many newly mted stocks the moment the FED started talking tough about raising interest rates in November 2021 the entire edifice collapsed and these new issues spent pretty much the entirety of 2022 getting eviscerated that's why I came out and warn you about the
dangers of the IPO Mania in late 2021 I said there was one Surefire way to wound a bull market and that's by flooding it with lots of Supply New Supply again when tons of companies start coming public we basically get a supply glut in the stock market I also warn you that eventually the IPO bubble would burst and then you might be left holding the bag don't forget hundreds of really lowquality companies that came public in the 2000 year ultimately went bankrupt 2021 was just as bad in fact you could argue it was worse because
so many of these were spack mergers and that could make absurdly overconfident long-term forecast that the SEC would never allow in a traditional IPO the other big problem when portfolio managers get excited about putting a lot of money to work in new IPOs they often need to raise that money to by selling something else and when there are a lot of large Deals they need to do a lot of selling 2021 was a little different thanks to the FED zero interest rate policy and all the stimulus checks that people got from the government but in
a normal IPO cycle the new tends to Trout out the old that's what happens you sell to buy remember the bulk of the new money that comes into the market goes into index funds and they can't participate in IPOs because those stocks aren't in the industries yet the actively managed funds that participate in these deals in the aggregate don't have enough cash coming in to get in on a bunch of big deals without selling something else there's the mechanics of it so the next time we have a big wave of upcoming initial public offerings I
need you to remember that it pays to be cautious when the IPOs are coming hot and heavy the bottom line as much as I love anything that generates enthusiasm for the stock market of course nothing does that like a few massively successful IPOs you got to be careful when we get a whole wave of new issues the IPO cycle tends to start out strong generate a lot of euphoria then it burns out and all the new Stock Supply can really weigh on the market please just keep in mind that concept the next time you get
excited about a bunch of red hot deals and mad money is back after the break booah for the Emperor of kerica honorable James J Kramer you got me jumping around my office right now thank you so much for all you do for us I enjoy your show and I find it very entertaining and informative I watched your first ever episode of mad money back in 2005 and I've been watching every single episode ever since don't miss mad money every night at 600 p.m. Eastern plus join the CNBC investing club and stick with Kramer Around the
[Music] Clock when you're picking stocks you need to be very careful about doing the right thing for the wrong reasons this happens more often than you expect let's say you find a great company well managed strong fundamentals good dividend you buy that company stock and it goes up so only n will conclude that this Stock's rallying for all the reasons that you liked it in the first place that's not always true you might think a win is a win but sometimes it's more complicated than that if you don't understand why a Stock's moving up or
down you're probably going to be very confused when it stops doing that and goes in the opposite direction and when we're confused well guess what happens we make really lousy decisions for example there are a bunch of excellent well-run consumer package Goods they call them cpg companies maybe you want to buy Proctor and Gamble longtime favorite there are lots of logical reasons to like them but like I told you earlier logic is rarely what drives the stock market on a day-to-day basis so let but let's follow through here suppose you pick up some Proctor gamble
because you really believe in management or you like the div or you think that plastic and fuel costs are going down which will boost the company's gross margin that's a huge part of the expense so you buy the stock and then explodes higher what's next well you have to ask yourself why is it rally it's very easy to tell yourself I nailed it this Market's finally given Proctor the credit it deserves when you buy a stock and it goes up that means you were right why would you second guess your yourself when you're right well
the answer is simple because maybe you were just lucky as I've told you before it's better be lucky than good but either way you need to be able to tell the difference so when you pack yeah let's say you rack up a nice win in Proctor you should ask yourself if you were right or if you simply happen to be in the right place at the right time what do I mean by right place time rotation rotation rotation there are times when the consumer package good stocks Roar higher for reasons that have nothing to do
with the underlying companies Proctor like all the conser package Goods place is a recession stock because its earnings tend to hold up during a slowing economy its stock Roars when we get lousy economic data if you buy these stocks because you believe in the business but then they go higher as part of a sector rotation that has nothing to do with the business you still got to win the bank isn't going to tell you that they can't take that money because they don't accept profits from rotations but you don't want to get caught with your
pants down because the market suckered you into believing the Proctor game was going up based on the fundamentals when really was benefiting from rotation into the whole consumer pack is good stock sector you know the col gug JJ this is what I meant earlier about filtering out the signal from the noise and it is hard to do why because of something called confirmation bias when you have a thesis and new evidence seems to prove your thesis correct the natural thing is to believe you were right all along you should prot that feeling with skepticism maybe
you're right people are right about stocks every day but maybe it's just a coincidence darn it and you should bring the register before that coincidence goes away so okay let me give a concrete example the residential Solar stock soared in 2020 and 2021 and kept running into 2022 even when most growth Place were getting pulverized if you owned it maybe you thought you were winning because people were embracing renewable energy and the government was subsidizing it heavily but in 2023 the residential solar stocks they got obliterated why do you know it had nothing to do
with the popularity of renewable energy and it couldn't be stopped by generous Federal subsidies instead it turned out that people can't really afford residential solar systems without borrowing money meaning the whole industry was actually built not on solar but on financing and once people realize long-term interest rates would remain elevated for quite some time the residential solar stocks they all got crushed it's not a coincidence something like n phase was roaring in 2020 and 2021 when people could borrow money for next to nothing so let me give you the bottom line on this it's very
helpful to understand why a stock you like is going up or down when you have a win don't lazily assume you simply got it right think about what it means if you were merely in the right place at the right time and please proceed with caution stick with [Music] [Music] PR tonight I've taught you all about man omics 101 but now it's time to turn to you my viewers are smart which is why my favorite part of the show as I always tell you is answering questions directly from you now tonight I'm bringing in Jeff
marks my portfolio analyst partner in crime at the CMC investing Club to answer some of your questions and Jeff I me don't get a swelled head some of these callers have been calling in saying you do a pretty great job you know keep your head so we can get through the door here thank you for those of you are in the club Jeff will need no introduction for those of you who aren't members and soon I hope you will be je insight and our and our back and forth really are what we think is a
major part of being part of the investing Club thank you very much all right now let's get started first up we have a question from Jimmy who asks how can we best and we identify the best companies within an industry now I have a way that I like to do I like to see who has the highest gross margines because that means they've got the biggest moat that means they can make the most money and it's something that people don't look at enough the gross margin yeah that's a great way to do it you could
also look at who's growing the fast as well revenues but another way I I think is really important is read the conference calls of of the companies and and and their peers and their customers see who's partnering with who that will give you a good tell about who's best of breed who has the best products who's doing the best by their customers that's a really good point because I find that uh in the conference call you get a real sense of by the way of whether the analysts hate it or like it you can often
see by their questions whether they are in all or they think that there's something that's suboptimal so it's great great point to the conference schs now next up we have a question from Ian in Pennsylvania who asks you've stressed The Importance of Being Diversified and also doing your homework is there a point where one individual can have too many different stocks to be able to keep up with the homework while staying Diversified I used to discuss this question with pop my father he had usually like to have 40 or 50 stocks and I would say
to him dad why do you have 40 50 stocks because you know Jimmy I I work a couple hours a day and then I spend a lot of time just looking at the market so I like to look at a lot of stocks now he had time on his hands most people don't that's why I usually say that try to keep it to 10 don't be a mutual fun yourself yeah I think the benefits of diversification they start to diminish uh at a certain point if you keep adding and adding and adding stocks but that's
five to 10 that's what we generally say for the club start pick the ones you like use your out power of observation curiosity and and as you can do more of the homework that's when you can start adding more yeah and I think that's a perfect perfect situation next up we have a question from Dean also from Pennsylvania who asked I'm considering either an S&P 500 Index Fund or a total stock market index fund for purchase both seem to have very similar expense ratios and historical Returns what is the primary difference between the two which
you feels better do you know that John Bogle personally told me Jim I want you to put in your 401k I want it to be in the total stock market return fund of Vanguard and that's what I did and I wanted why did he want me to do it he said over the long term you'll get a little bit better performance because you'll be Diversified away from the S&P and you'll end up up picking some really good young growth stocks that are in the total stock market return yeah that's exactly the difference right S&P 500
that's going to be more of the large caps while total stock is uh you'll have the midc Caps some of the smaller caps as well but I I think if you look over the long run the turns the returns aren't going to there's not going to be much a difference between the two and I did TSM either right but I ended up doing it because the father of the index fun is John ble you know and Jack said Jim this total stock return will beat it now there was a very long period where it did
but it's really kind of anyway I'm just doing out of homage to the to the late chn Bole who is amazing guy right now let's go to Miles and New York who asks what are your stages in cutting bait now I'm presuming cutting bait means when are we doing some selling up 20% we like do a little sale then up another 20% we've been very uh let's say uh diligent about letting our great stocks run and cutting off the ones that aren't that's the key thing you let your great stocks run but if you can
minimize your losses and be more aggressive in cutting you will outperform the market right and you always have to remember when your original thesis when it's not playing out as as expected that's when you may have to uh make an adjustment and and I know in in some of those cases we've often learned that our first sale is the best sale when when trying to get out of a struggling game yeah and I think that there's nothing wrong with admitting that you have a loss what matters as we were talking about the other day with
Roger feder is you just win uh more than you lose that's what you need to do all right now oh you know what we're going to have to save the rest of the questions for next time so all I can say is I like to say there's always a will Market summer and I promise try to find it just for you right here mid money 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 madmoney disclaimer please visit cnbc.com madmoney disclaimer
