Cramer's Mad Money- How to Invest in a Bear Market (11/25/08)
Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Tuesday November 25.
While Cramer usually advocates buying low and selling high, there may occasionally be compelling reasons to sell in a down market. However, discipline is required to avoid panic-selling, and investors should leave at least a portion of their money in stocks. Cramer has been urging people to sell stocks to raise cash if they will need those particular funds for paying for tuition or buying a house within the next five years. However, one of the best reasons to sell stocks in this environment is to buy them back even cheaper, since the extreme downturn provides a valuable opportunity to pick up good names at low prices. However, stocks held for retirement should be left alone.
Even in the worst market, there are stocks worth owning, and Cramer outlined three criteria. First, recession-resistant stocks such as food, toiletries and drugs can be owned. Second, stocks with strong fundamentals that are trading at or near cash are good investments. Their abundant cash helps support their prices. In the third category are Cramer’s “accidental high-yielders” stocks whose yield has jumped as their stock prices have fallen. Cramer likes high-yielding industrials Nucor and Caterpillar because he believes their yields are safe. He would buy accidental high-yielders on scale based on their dividend rather than their stock price. For instance, he would buy a portion of a stock while it yields 4%, more at 5% and so on.
“Cheap” can be a dangerous word in a bad market, because almost every stock fits that category. “Do we want to own stocks that look cheap or stocks that can go higher?” Cramer asked. Valuation does not work in a downturn and the old formula of looking at a stock’s multiple is no longer relevant because earnings are so uncertain in a bear market. In addition, cyclical stocks are too risky because their estimates may be too high. “Think Bethlehem Steel in the 1980s,” said Cramer.
Cramer cautioned viewers “Know thy fellow shareholders.” If they happen to be hedge funds, your stock could be driven down as redemptions force selling to raise money. If a stock is owned by one hedge fund, that is risky enough, but if it is owned by several, a selloff can be lethal.
Cramer says most of the time, it is not a good idea to try to predict a bottom, because it is quite difficult to get it right. However, he gave viewers three indications of a bottom in the market. First, the worst should have already happened. If there is still bad news happening, it can’t be priced in. Second, there should be complete capitulation; “You don't bottom with a lot of bulls out there; you bottom when most of the bulls are converted to bears," he said. Third, all the buyers should have become sellers to the point where there is nothing left to sell. Any bottom that doesn’t fit these three criteria is actually a false bottom.
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This article has 5 comments:
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ralpht
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7 Comments
Nov 26 06:55 AM-
BadCompany
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4 Comments
Nov 26 11:28 AMHe should know!
"Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday, July 30.
“It smells to me like something, in fact many things,” he said, “have at last changed for the better.” “I am indeed sticking my neck out right here, right now,” Cramer continued, “declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15.” With earnings coming in strong across the board, except in the financial sector, Cramer said the markets may finally be leaving the bears behind. He said the negativity in the market is striking. He cited an investor intelligence survey, which indicated that only 30% of investors are bullish, while 50% are bearish on the markets. "It's always darkest just before the dawn," he said."
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goingbankrupt
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5 Comments
Nov 26 11:39 AM1) First, the worst should have already happened.
How do you know something worse isn't about to happen? You don't.
2) Second, there should be complete capitulation.
Complete capitulation would mean there are zero buyers in the market.
That won't happen. So how do you know when capitulation is complete
enough? You can't.
3) Third, all the buyers should have become sellers to the point where there is nothing left to sell.
That won't happen either. If someone is selling, someone else has to be buying. Duh.
Great Advice. He's basically saying the market will keep on going down until it starts going up.
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waiting
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1 Comment
Nov 26 04:14 PMZero buyers? Then who bought those last shares that turned out to be the market low? (goingbankrupt said the same thing).
Everything is relative. The question is, "Relative to what?"
Actually, I'm sure he's right about NUE and CAT. And as long as you don't buy everything at once (which I did and I know and knew better than to do), a cheaper price means you get a better bargain as you scale in. With good stocks in essential industries, diversification by time is a great way to go. Too bad I (and most of us) don't take my own advice!
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toolate
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2 Comments
Nov 30 03:40 AM