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.

In his book, Mr. Cramer gives some rules to trade and invest by based on why you bought the stock. The reasons can be classified as either trading or investing.

If trading the rules include:

never turn a trade into an investment. If you are buying for a trade based on a great reason to buy – when that material reason or something that will drive the price higher happens, did the stock price move? If nothing happens sell and move on. The reason to sell is if the reason you bought did not happen or did not move the share price, would you want to own the shares without the reason you bought it? Mr. Cramer says when he is trading – he buys more shares than when investing. Did you put in a small amount or large amount relative to your other shares you own? If you put in a relatively large amount, sell you position and try something else.

Your first loss is your best loss. If you buy and the shares go down, the market is telling you something. Listen to the market.

You do not have a profit until you sell. Paper gains are paper gains, gains taken can never be losses. When you have gains sell some shares or lock in profits.

Control your losses, winners take care of themselves. Concentrate on the losing positions for one bad apple can destroy the others.

Do not fear you missed anything. Discipline is the most important rule in winning investing, and sometimes that discipline means you missed the opportunity and it is too late.

Do not trade headlines. Read the headline, but learn the story before you trade it.

investing rules.

Bulls and bears make money, pigs get slaughtered. Do not be too greedy, take some money off the table. It is near impossible to get the high, There is no rule that you can not sell some of your holdings and still keep part as you determine where the price might go.

It is okay to pay taxes. Taxes do not trump the fundamentals of the market. If something is dangerously overvalued, sell some of your holdings or you will be left with much less. The reality is there are many methods to bring taxes down or avoid them.

Do not buy all at once, arrogance is a sin. Buy in increments, see what the market does and buy again. Mr. Cramer says he invest monthly into his retirement account, holding money in cash is okay, in some parts of the cycle it is a very good thing to be in.

Look for broken stocks, not broken companies. Your job is to find good companies with a bad stock. They will get better, ask why is it broken? and how is it getting better?

Diversification is the only free lunch. The market moves through economic cycles – take advantage of it. Prices do not only go up, they also go down.

The fundamentals must be good in takeovers. If you are buying a stock because you think it will be takeover, make sure the company is a good company without the takeover aspect. Would you buy it without the takeover aspect?

Never subsidize losers with winners. When the stocks go down, often the best stocks are sold because the losers are down too much. Sell the losers, keep the good ones and add to the good. Think of how much the losers have to come back, just to break even, why would it?

When high-level people quit a company, something is wrong. If a CEO or CFO leaves unexpectedly sell and go to the sidelines. After a time and you still like the stock buy it again but you will know the reason.

Be able to explain your stock picks to someone else.  Some of the questions are: what is going to make this stock go up? why is it going to go up when you think it is? what happens if you wait? do you like this stock more than the others you own and why?

Linking to dividend paying stocks, when stocks pay a dividend it is easier to determine why you hold them. The dividend continues to give you a return on your investment and the stock price tends to go up over the years. If you talk to those that put money into the market not selling and losing some money are stories you will or likely have heard. The key is search for quality, narrow the field and stick closer to the better companies, understanding no company is perfect.

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

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.

In part one the formula E x M = P or Earnings x Multiple = Price was introduced. All parts of the equation can easily change and people spend many hours trying to determine what numbers are the rational ones or where the market should be. If the rational price is different than the existing stock price, then there is money to be made. For example, if a company is trading at 10 multiple or (10 times the earnings) and the market is trading at 15, then maybe the multiple of the company should rise – the big questions are why and when? It is time to consider the macro picture or the big picture. The economy moves through cycles – which means most companies except for oil, defence, aerospace and telecommunications stock prices will go up and down as GDP goes up and down. Simply changing your allocation or following the cycle will make you more money than standing pat. As the Federal Reserve (Fed) eases and tightens interest rates it affects companies. As interest rates rise, those companies who depend on capital (money) will find business more trying, as interest rates lower they will have more money. Think about paying a loan – low rates, low payments, high rates – higher payments. Bring that thinking to companies – right now we are in a low interest rate environment, rates may go higher in the future – what companies benefit, what companies do not. The cycle is

GDP annual growth           Fed action                 Cyclical Investing and Trading

2%                                                                   buy high multiple tech stocks

1                   slowdown evident eases rates  buy banks and financials                                                                          retailers and housing stocks

0                                                                  buy auto stocks

-1                 more Fed easing of rates        buy low-multiple tech stocks

-1              4th Fed easing of rates

0

1             Fed is neutral                             buy paper and chemical

2                                                               sell medicine and supermarket

3                                                              buy ‘smokestack’ industries

Fed begins to tighten                 sell financial, housing, retailers and auto

4            More tightening                           buy metals and minerals

4 plus                                                      sell paper and chemical

3                                                             buy medicine and supermarket

2              more tightening                     sell smokestack

1               Fed is neutral                        sell metals and minerals

0              Fed begins to ease               cycle starts again

The above in general means that some stocks benefit more depending on where the normal economic cycle is. All stocks have highs and lows, by switching allocations, you will tend to buy near the historical lows and sell near the historical highs. Mr. Cramer recommends always try to buy the stocks which are the best in class.

Linking to dividend paying stocks, those stocks that have paid dividends for many years stock prices go up and down, however due to the dividends and good management the prices have a floor and will bounce back faster. If you do not rotate your stocks, the important aspect is for the dividend to be paid. If you do rotate pay attention to the normal economic cycle chart.

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

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

Thomas Stanley has written a number of books on the millionaire next door and Stop Acting Rich, John Wiley & Sons, 2009 is one of the books he has written. When we think of billionaires and millionaires, for most of us the billionaires are in a different group than us. However, the ability to become a millionaire is within reach, what it really means is living a good life, but living below your yearly income to have savings. When you have savings, then you can invest your money into things that produce an income and overtime your money will grow. When you live slightly below your income, while it is possible to buy in the premium areas of housing, clothing, etc. the practical step is to look and find great value first. It can be in the premium area or it could be in the non-premium goods.

Mr. Stanley believes where you buy your home is a good indication of how much your spending will go up or down. If you are a normal person, you are influenced by your neighbours. If all your neighbours tend to adopt a certain lifestyle, then you will to. Perhaps not at first, but slowly and you will soon be spending most of your income on upkeep. If you bought in a different neighbourhood, but still a good one, your neighbours may have different spending habits and you would not have to spend as much money. The classic example is a vehicle – to many it means something, to others it is a transportation device, what kind of vehicle you buy or what your neighbours have will influence your other shopping habits. There is nothing wrong with spending your money, there are many people who get paid trying to figure out how you can spend even more.

Linking to dividend paying stocks, when you have savings you can have investments, if the investments have a cash flow or dividends over time the investment will grow. The dividends help ensure management of the company does not do anything to rash to upset the payments and to keep making a profit. Making a profit every year will push the price of the stock upwards and although it will go up and down, the long term trend is upwards. The stock will go fluctuate because the market rewards different strategies at different times. In a low interest market, having some debt is good, in a high interest market having too much debt is not good. With the dividends, the company tries to retain a balance approach.

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

Over the National Holiday celebration similar to many people after spending extra time at home and with the warm weather in place, considering home renovations was in order. After reading some guidelines the first step was slow down. If you are planning a renovation the work cannot start today, it takes time. Time to consider what you want done and costs to considering what else that means. Learn first, figure out the money you want to spend or willing to spend. Many renovations start relatively small and then things are added as discoveries are made. Determine who you are going to hire, after looking at least 3 companies, gain the permits and let the renovation begin. Whether it is big item or smaller item the steps remain the same – slow down, take your time and start planning first. If you go through the steps there is greater possibility to enjoy the finished renovation.

Linking to dividend paying stocks, similar to renovations which take time to plan, time to figure out what you want, it takes time for dividend paying stocks to outperform for you. The continued dividend which ideally increases allows for the total stock performance to out perform. While you may have heard a hot tip over the holiday, if you take your time, your money will likely grow faster. The old adage of trying not to live beyond your means is true and many savers have enjoyed the power of compound interest, if you do it through stocks and dividends it is a powerful combination.

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

The most powerful investment tool is compound interest. If you have a mortgage or a loan, you know the cost of compounding. For your savings and investments you want compounding to work for you, The higher the interest, the more money you will make in the long run. In the stock market while many focus on increasing prices, the other part of the market is interest (bonds) and dividends.

There is a website which allows individuals to look at how compounding dividends has grown the value of the stocks. The website is longrundata.com. A simple example is Johnson and Johnson – some of you know the name for household products including Johnson Baby Haircare, Band-aids, Tylenol, Reactine and a host of other products. The company has paid dividends for years – if you had invested $1,000 in the stock in 1970 and reinvested the dividends, the value would be $213,375.  If you had used some of the savings from Wal-Mart and invested since 1977, your return would be 23% and the 1,000 would be $1,864,750.

Linking to dividend paying stocks, buying a dividend paying company which has consistently raised its dividends and expects to continue is a great investment. The stock price will go up and down, but the compounding is where the stock receives its extra boost. There are great examples of good companies all over the place, with compounding it does not take a lot of money to get started but does take a number of years to see the results. If you want overnight riches try for growth stocks, if you want long run proven returns dividend paying stocks is a good path to take.

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

Below is a list of companies on the exchange and the type of returns for a low risk investment from the website longrundata.com. Starting or adding to companies such as these has proven to be a good investment.

The S&P 500 Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

In this case the Money Makers is a book written by Ben Tarnoff, Penguin Press, 2011  is about counterfeiters. Mr. Tarnoff wrote about the portion of American history from 1876 to after the Civil War focusing on the notes people used to exchange goods and services. If you look in your wallet, you will likely find a bill or some amount, what exactly is the history of that note? When people started coming to live in urban settings, there is a need for some sort of exchange of bills or something was used. Over time many different things have been used – corn, tobacco, sea shells, barter (Jack and the Beanstalk) something that facilitated the exchange. In the United States, the constitution did not directly deal with the printing of money, so for many years it was the states’ responsibility. The states gave the responsibility to the banks and some were outstanding and some were not. In every business there is some element of fraud and although fraud hurts, it usually does not kill anyone. Since it does not kill, law makers have traditionally put it down on the list of priority crimes. With such as an opening between ability to produce notes and very few consequences of penalties – counterfeiters stepped into the opening and produced many notes.

It was not until the civil war, because many in the Washington (government)  believed bank notes should be backed by gold or silver, however during this time, the government printed notes as a temporary measure to pay for the cost of the war. After the war, the temporary measure became permanent and the Treasury prints the greenbacks today. Also to go after the counterfeiters, the US Secret Service was created. Prior to the war, the lesson of when two levels of government fight over jurisdiction, little will be the result and the opportunities to step around the regulation never change. In the case of the Civil War, because the bank notes are backed by the confidence of the people, the north printed counterfeit notes to undermine the confidence of the South or Confederate money. It worked as inflation and the devaluation of the dollar happened. This was a government knowing about the counterfeiters but liking it because of the effect it had. The canary in the mine is the networks the counterfeiters built up are typically not shut down just because the war is over.

Linking to dividend paying stocks, similar to the government, after a company becomes successful there will be many imitators, some illegal to trade of the dividend paying company’s good will. Counterfeiting happens in all industries that is why sometimes it is best to go with the name brands as least there should be quality as well as good margins. Part of the job of the dividend paying company is to ensure its goodwill remains high. When it does not, it is a sell signal.

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

Barton Biggs wrote columns to allow for people to help understand how he was seeing the world. For many years he was connected with Morgan Stanley helping to run its research, investment management division and the firm; later he left to manage his families money and others in a hedge fund. His columns from 2010 to 2012 were put together in the book Diary of a Hedgehog, John Wiley & Sons, 2012.

After you accumulated a number of stocks, you worry about asset allocation. Is it the right mix? the correct diversification allowing the markets to go which way they will and for you to continue to make money. Jack Bogle of Vanguard said, “Asset allocation should be based not on choosing the right mix, but on the consequences of choosing the wrong allocation.” Mr. Biggs agreed with him.

Mr. Biggs writes if the valuations of your portfolio has shrunk, and if you are convinced the fundamentals of your investment thesis are still intact (why you bought the things you own), why should you be bullied by temporary falling prices? Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving. In an ideal world, when the market is deeply distressed and offers to sell his share of the business at a huge discount, that is a buying opportunity. When share prices are high and the market wants to buy an exorbitant premiums you should sell.

In investing, everyone has perfect vision looking back to history and can wonder why you either did something or did not do something. It is the normal course of events – we all have a tendency to fight the last war. The moral of the story is to know thyself and know thy foibles. Study the history of your emotions and actions. At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of the crowd are tremendously important psychological influences on you. It takes a strong, self-confident emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming you are both mad and wrong. Ensure you are obsessive in making sure your facts are right and you have not missed or misunderstood something. One method to do this is keep an investment diary of your actions and emotions and have the occasion to re-read it from time to time particularly when there is extreme panic.

The other part of life is to ensure you do something you enjoy on a regular basis to keep balance In your life. For panics eventually do pass.

Linking to dividend paying stocks, all stock prices go up and down, that is a given. If you have well capitalized stocks that have paid a dividend and increased it over the years, then the affects of the market going up and down is lessened. The dividend greatly enhances your return as well as good profitable stocks will increase in value over time.

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

Barton Biggs wrote columns to allow for people to help understand how he was seeing the world. For many years he was connected with Morgan Stanley helping to run its research, investment management division and the firm; later he left to manage his families money and others in a hedge fund. His columns from 2010 to 2012 were put together in the book Diary of a Hedgehog, John Wiley & Sons, 2012

What does it mean to listen to the market? There is always different reasons why people are  buying and selling stocks. Companies can be purchasing stocks as part of the buy backs, there are regular purchases for company purchase plans, options come due, new products being introduced, the company continues to make money, general themes change, new management, new plans, the weather affects the business, people selling to reduce holdings, to cash out, and a variety of other reasons. Many of the reasons have to deal with is the glass half full or half empty? Sometimes the analysts write glowing reports and the crowds react.

A popular book about crowds is Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, Broadway, 1995. One of the more famous lines is “Men it has been well said, think in herd. It will be seen that they go mad in herds, which they only recover their senses slowly, and one by one”. Crowds tend to be late comers to the party, which means the early buyers tend to reap the biggest rewards. To avoid the crowds, is trying to figure out the contrarian point of view and not be a part of it.

Tacit knowledge is knowledge that is intuitive and instinctive, it cannot be easily summarized or communicated, for it is gained by people derived from a particular place, job or way of life. A stock market brings the information that people have gathered and its prices reflect all these hopes and fears and judgements.

The stock market is a wise and farseeing thing. Its wisdom is not on the little things, but it has tacit insights on the ebb and flow of great events. It consists of a very diverse, motivated, engaged, reasonably intelligent crowd.

Linking to dividend paying stocks, when the crowd jumps on the bandwagon, at some point there will be a correction. That is a natural thing and depending on what you have your money invested in, you may want to take some actions. If the bulk of your funds are in dividend paying stocks, and the companies continue to earn profits to pay for the dividends then allow the crowd to do its thing.

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