Many people have seen or heard James Cramer’s Mad Money and it makes sense every once in a while to reread his books. The process typically does not change, the names of the companies often do. In rereading his book Real Money, Simon and Schuster, NY, 2009, it provided very good lessons to write about.

If you invest in the stock market, which can be an excellent place to invest – the only stocks that you can buy and hold for a long time are ones that pays a dividend. If you hold stocks in your portfolio that are below what you paid for, remember selling is an important part of investing. There are only three reasons for buying stocks – either you except the stock price to go up (capital gain), you expect the price to go down or short the stock (to get a capital gain) or you gain income from it (dividends). If it is the dividends then the price you pay for (as long as the dividends continue to be paid) is less important. When you hear equities has been the best performing asset class over the past 20 years – over 40% of that gain was credited with collecting dividends. In other words, if you did not collect dividends there were better performing asset classes.

In order to ensure you have a capital gain, an important thing to do is if you have a loss you have to sell and try something else. Most people start into the stock market to buy a stock, it goes up and then they sell at a capital gain. That is good, but before you can do that you have to know a few rules. If you went shopping for clothes and noticed two different brands at the same price – likely you would know which one is overpriced and which one is underpriced. You would know because you have put time over the years and determined relative prices, values, you may have spent time researching the clothes on line or you did you homework. The same principle applies to the stock market – there is homework to be done.

The stock markets use the past information to forecast what the growth of the stock will be in the future. The stock market loves growth and the best measure is the future earnings of the stock.  Stocks trade at different prices which means the first step is to use a formula to be able to compare the stocks. The best formula is to  take the earnings Earnings (E) divide by the Price (P) of the share to get the multiple (M) or E/P = M or M x E = P.  Now you can compare different companies on the basis of multiple and start asking what is the difference? If you change the M or E, the price changes which is another set of questions based on why would the M or the E go up or down? In that fashion you can determine possible up and downside prices. After that you want to look at debt – just the same as an individual, if a company has less debt it has more options if the plan does not work. Starting with the basics allows you to weed out some of the alternatives. As you weed out the alternatives you then have a better possibility of not losing your money, for if the M or E has changed you can either buy more, sell or hold. Mr. Cramer always recommends if the price goes down, to take your losses, if the price goes up, then you have more time to take gains.

Linking to dividend paying stocks, given the bulk of equity increase has been and is in dividend paying stocks, ideally with dividends that have increased over the years, to decided which one, you still need to do your homework. With growth stocks Mr. Cramer believes your homework should be a hour for each stock you own. However with dividend paying stocks, unless the dividend is in problem you do not have to spend as much time. If you own something that is within your weekly life events, then you can easily watch it during the time. For example, if you own Wal-Mart and go to the store you can determine if people are buying and which rollbacks are popular.

There are more questions than answers, till the next time – to raising questions