When you first the see the video I know you’ll have mixed feelings. This is because Cramer’s personality is fairly divisive. People tend to either love him or they hate him, with not a lot of in-between. However, regardless of your personal thoughts, I have to admit the guy really knows his stuff.
The video at the bottom of the page essentially covers two topics, diversification and “doing your homework”, both of which are equally important, but for different reasons.
The concept of diversification is fairly simple, but can trap those who try for a cursory understanding. Diversification is merely owning a variety of stocks across several industries so that your risk is not entirely concentrated in one sector. So, owning Spring, T-Mobile, AT&T and Verizon is NOT a diversified portfolio. You merely own four telecom stocks. Owning telecom, aerospace, bank and retail stocks would be an example of diversification.
Doing your homework refers to engaging in proper research before, during and AFTER you own a stock. Research being reading analyst reports from S&P, Morgan Stanley or any of the other many analyst companies. And then also listening to EVERY recent quarterly conference call held by management.
You want to do this before you buy, for obvious reasons. Then you also want to do this when you own the stock because this keeps you well informed. Then, surprisingly, you’ll want to stay informed after selling the stock. Given you know the company pretty well, there could be the chance to buy the stock again, or even short it, depending on what occurs after you sell.
Before finishing, above I mentioned that diversification throws people off. This is because diversification is not the same as the concept of asset allocation. Yes, the above portfolio would be a diversified holding of stocks, but all you still own are stocks. You don’t have other assets such as gold or bonds, which tend to be uncorrelated. So, you are protected from general market gyrations, but are still fully exposed to the vagaries of the market.
- Do your homework
- Diversify your portfolio
- Own more assets than just stocks, and protect them too!