Consider that Procter & Gamble, for example, has traded for some time with a 2 percent and change dividend. But that’s because the value of the stock keeps going up along with the dividend. The same dollar amount of the dividend it paid in 2007 would have been a 5 percent dividend if the stock were still selling at its 2000 price. Dividends that grow are fabulous cushions; dividends that grow fast are trampolines.
If a stock can’t be saved by a buyback or a dividend, can it be saved by the multiple to earnings? You need to figure out if the company’s growing faster than the average stock but sells at a lower price-to-earnings ratio than the average stock (as expressed by the average of the S&P 500). If you have a company with a high price-to-earnings multiple and no dividend and a buyback that is not meaningful, to me that means you have a stock that could really gaff you if things go wrong at the company or things go wrong with the stock, even if the growth rate is high. Watch for stocks that grow at a double-digit rate, but sell at single-digit multiples, and have big buybacks and good dividends. What—you don’t think those exist? Consider that was precisely the situation of all the major oil companies before and during their remarkable runs in the past decade. Often a stock that has a limited downside will gain tons of adherents, letting the upside take care of itself!
6. Pros always look; they never avert their eyes from a downturn. Amateurs turn off their computers, stop watching CNBC, and don’t even read their statements! I have always thought that ratings should go up on CNBC when the market goes down. But usually they don’t. You know why? Because people don’t like to watch themselves lose money. But that’s a total loser, amateur reaction. When the market is down big, pros shine. When you see the market down a couple percentage points, I want you to turn on Mad Money with Jim Cramer that night so I can set you straight. Do you know how so many people lost money from peak to trough in 2000 to 2002? Because they put their statements in a drawer and turned the market off. If they had just paid attention anytime until the end of 2000 and sold their declining stocks, they could have saved themselves a fortune by sidestepping the even worse declines in 2001 and 2002. I know this because many gave up but did not sell—and lost considerably more. But they didn’t dare look! They didn’t want to see how much money they had lost. Pros, however, look at the market as a place where there is always mismarked merchandise, always something cheaper than it should be, and they shrug off the losses as part of the game. You can’t make big money unless you are willing to lose big money, and the time to buy is exactly when the amateurs choose to run.
I always say that the good stuff—the runs, the market highs—takes care of itself. But when you stop looking, you stop caring, and when you stop caring there is no way to make any money in the market. Steel yourself against the gloom and consider this: when I got into the game, the Dow Jones average was at 1,200. I have watched it go to 14,000. If you had gotten out after the stock market crash in 1987, you would have left 12,500 points on the table. If you had left in October 1998, another dark hour, you would have missed 6,000 points. What more evidence do you need that it is time to turn on CNBC, not turn it off, when things get ugly? And they always do get ugly.
7. Pros accept that not everything works or is going to work at once. The price of diversification is owning losers. When I first started trading aggressively for my own account, my old friend Jack Shepard, my partner at Goldman Sachs, used to hear me on an up-market day swear, “Why the heck does my Exxon have to be down?” He would always look at me and say, “Jimmy, they can’t all go up at once.” I have had it drummed into me so many times that I have recognized that the price of a diversified portfolio is that they can’t all go up at once. Yet I hear people kicking themselves that they own a stock that is down on an up day. They want to get rid of it, or curse it. But if you are running a diversified portfolio—and remember, I insist on it—you are going to have some loser stocks on up days. In fact, if they all go up at once, you probably aren’t diversified enough, and when the down days occur, you are going to get clocked something awful. You own insurance, right? Do you wish that the insurance kicked in along with all the other things going right in your net worth? I didn’t think so. I think that’s how you have to feel about your stocks. Something won’t be working if you are doing things right. Don’t kick yourself; take it as a badge of prudence that will propel you much higher than the other guys over the long term.
8. Amateurs are worried that they aren’t making enough, but pros are worried that they are making too much. I know it seems ridiculous to believe that you can ever make too much money. You can never be too thin or too rich, right? Wrong! Portfolio risk, the overall amount that your stocks can swing, is vital to understand and identify. If you are gaining 2 percent when the market, as represented by the S&P 500, is up 1 percent, you are taking on way too much risk. I am quite confident that when the market subsequently has an inevitable 1 percent correction, you will lose more than 2 percent. You can’t swing more than the market without risking too much. Given that we want to beat the market incrementally, not trounce it daily, we have to measure risk. The best way to measure risk is to calculate the reward on these up days. Use those days after the big swing—unless you follow the market intraday—to cut what we pros call “exposure,” that is, exposure to risk. That means raising some cash to swing less and cutting back on the number of stocks and percentage of stocks that are doing most of the swinging. Sure, you’ll be limiting your upside, but I never stop: it is the downside we need to worry about because if we do, the upside will take care of itself.
When I was running my hedge fund I was most worried, most frightened, when I was making huge money. Anybody can make a ton of money all at once by taking on too much risk. There were people in 1999 to 2000 that were coining money daily, making more than they had ever dreamed. You never hear about them anymore, though. They don’t pay attention to the market. They don’t care about making money anymore. They’ve been blown out of the game. That’s because they were making too much money. Whenever I had a streak when I was beating the market, sometimes by as much as 1 percent a day, I knew I was doing something wrong. I knew I had too much exposure. I had to cut back. Almost every time I took money off the table after I had been making too much money, I was able to avoid a real debacle. It never cost me any money when I did that. The secret to great professional money management is to get out before you blow yourself up. Look at your holdings. If you are killing the averages, making much more than you ever dreamed, you are doing something very wrong. You are setting yourself up for a huge fall. Go take something off, and as my late mother always said after a particularly productive day at the ponies or the casino, “Go buy yourself a nice sweater!” Or put it in some stocks with higher yields that will not swing so much. You will sleep better and make more money.
9. Pros know that cuffing it without doing homework can reduce you to—well, no offense—an amateur! Not long ago, Barron’s, a publication that in my lifetime has made me no money, decided it wanted to find some way to discredit me. It spent weeks trying to find out if I bought the stocks that I mention on my show ahead of time, or if I have money in hedge funds that bought the stocks. Of course, neither is the case. Then it decided to focus on my performance, on the performance of the stocks I recommend. Of course, I thought I should be judged by the stock recommendations I prepare every night in what I call the “researched” blocks on my show. Those are the ones I work on ahead of time and have real conviction in. I also thought it would only be fair to include the stocks I constantly re-recommend, including some terrific ones like Apple and Research In Motion and Google. Nope. That would show me in too good a light. But what really galled me was that Barron’s decided to weigh everything I said equally, putting the Lightning Round picks on par with the research blocks. I didn’t even have to calculate it; I knew that I would not look good with those Lightning Round picks included. Those are snap judgments, where, as I said in the book Mad Money, I simply try to steer you toward what I
think is the best of breed in a sector. Sure enough, by including those stocks and by choosing to judge my research stocks from the day of the spike that occurs so often after I recommend a stock (even though I repeatedly say wait five days before buying), Barron’s said I failed to beat the market. What does all of this mean? To me, it is the empirical evidence that if you don’t do the homework, you will have an awfully hard time beating the market even if you are a pro. It is not enough to know the stocks, and I do know most of the stocks in the Lightning Round; you have to do the homework to beat the market. Come to think of it, I owe a debt of gratitude to Barron’s. Although their goal was to drive me off the air, as befits a News Corp. publication taking on a program on CNBC, they did prove, once and for all, that even pros need to do in-depth homework if they are going to beat the market. So how can amateurs possibly stand a chance if they don’t do their homework?
10. Pros understand the upside, but they know that things can go wrong. Amateurs go full-bore and think it wouldn’t be a stock if things could go wrong. Perhaps the widest gulf that I see between amateurs and professionals is a belief among home gamers that a company wouldn’t have a stock if it weren’t the real deal. Amateurs don’t have any concept that there are whole periods, like the one from 1999 to 2001, when almost every single stock was no good. Pros recognize that there is a lot of crummy merchandise that should never have been created. The fact that a company comes public is not a Good Housekeeping seal of anything. There is no endorsement by the government through the SEC, nor by the underwriter, which typically wants to take in the fee for bringing the company public, and certainly not by the company, which just wants the money from issuing stock. Worse, amateurs think that when a company comes public it is as good as any other company that comes public. Pros are much more skeptical.
Take the case of Crocs versus Heelys. When Crocs came public, the company had a vision. It wanted to create a whole new category of shoe; it wanted to brand it, take it worldwide, and make it so that it would thrive for years and be a moving target to the competition. It turned out to be a fabulous stock and one I am glad I got behind early. Soon after, Heelys came public. This is the company that makes the shoe with a wheel in its heel. Because of the excitement around Crocs, the public bid the Heelys stock way up. It looked like it was the next Crocs. But the professionals I know and those who watch my show called it a short from the get-go. There were no plans to make Heelys big, to take it global, to make it a moving target. Heelys went public only because of its shoe, and the popularity of the shoe was just peaking when the stock was issued. I had person after person call me in the Lightning Round about this one, wanting me to bless it. They wanted to hear that it was the next Crocs. They were not skeptical. They thought it would not have come public if it were going to be a dud. Of course, what really happened, and what pros understood, is that Heelys took advantage of the Crocs halo to come public. Unseasoned individual investors couldn’t believe that anything could go wrong. But the pros know that many, many stocks should not have been created, let alone been bid up. Heelys is Exhibit A of this era’s lack of skepticism.
It took me years of hard work and emotional agony to learn how to invest like a professional money manager. You can have the same experience, or you can skip a lot of it by taking my advice on doing these ten things right, and let the amateurs keep doing them wrong.
8
FIVE BULL MARKETS AND TWENTY STOCKS FOR THE LONG TERM
Watchers of Mad Money know that I end my show every night with the mantra “There’s always a bull market somewhere and I promise to find it just for you.” Most people think of the stock market as one big market, a monolith. Nothing could be further from the truth. The market is made up of numerous submarkets and sectors, some good, some bad. At all times, something’s working, something’s making you money. The trick is to find out what that something is and stick with it, exploit it, and build a diversified portfolio around it.
On Mad Money, we have spent a great deal of time trying to find those bull markets. I want to reveal now, for the first time, the ones I think will last, maybe not for life, but certainly for the next five years. These are sectors that have some tremendous secular growth trends behind them, meaning that regardless of what’s happening in the domestic economy, regardless of all of that chatter you hear endlessly about what the Federal Reserve might do or what the growth of the nation is or what the next quarters look like, these bull markets will hold up on their own. They are all different sectors so you can pick a stock in a sector and be sure that you have my blessing for the stock, as 50 percent of a stock’s performance is its sector. Or to put it another way, you want to buy a house in a good neighborhood, because even the worst house in a good neighborhood is better than the best house in a declining neighborhood.
So what are those fabulous neighborhoods? What areas do I think will be great, not just for this year but for many years to come? I have five of them, and I will tell you why you can buy stocks in these sectors regardless of the chatter and how they will stay strong for many years to come.
I always say that I am a tease on TV, that I make you wait the whole show, including the Lightning Round, before you find out what I really like. But I don’t want my Stay Mad readers to be mad at me. So here we go: (1) aerospace and defense, (2) agriculture, (3) oil and oil service, (4) minerals and mining, and (5) infrastructure.
Before we take them one by one, I want to let you in on the secret behind why these bull markets can be bought regardless of the U.S. economy and the Federal Reserve’s attitude at a given moment: these are ROWers. That’s right, they are Rest of World stocks, meaning they don’t depend on the U.S. economy to propel them higher. We no longer want to be hostage to the U.S. economy, because our nation has entered a slow-growth phase that I believe will last for many, many years, certainly the period that you can count on this book to help you in. Believe me, I wish it weren’t the case. But I have to be realistic; we are not in a position in this great country to grow at the pace of other countries, particularly less-developed countries, or countries in the Middle East that are linked to oil, or countries with high-growth populations that need to put money and people to work in order to keep civil order, such as China, India, and most of Latin America. The ROW category is what all of these bulls have in common. Given the growth paths outside the United States, I am highly confident that American companies in these bull markets can compete with and beat foreign companies on their home turf.
Now that you know the secrets behind why these mini-bulls keep stampeding, let’s explore why each market has “legs,” as we say in the business.
Aerospace and Defense
When we think of the airlines, we think of companies that seem to go in and out of business, companies that have labor problems, companies that fight each other for routes and gates and can’t seem to make any money unless the planes are full to the gills and jet fuel is low in price. That’s why American investors have such a hard time understanding the bull market in aerospace. They are too U.S.-centric.
Around the globe in every newly industrialized nation, there is a booming airline company, often state-run, that is growing the way our airlines grew in the 1940s and 1950s, when this sector was hot, hot, hot. This growth can go on for years. As is so often the case, the epicenter of this bull market is China, where many of the major cities, cities that in the United States would have two or three airlines serving them, don’t even have airline service. China could use ten times the number of planes it has and still not offer airline service to cities of millions of people. That means there will be demand for planes just for China that could fill order books for generations.
The countries in the Middle East, flush with oil money, want to expand their airlines. So do the newly wealthy nations in South America. Same with Central and Eastern Europe. That’s where the growth is coming from. When I list twenty stocks for the future, you will read my case for Boeing, but there are only two major aircraft companies
capable of meeting these worldwide needs: Airbus and Boeing. Right now only one of them, Boeing, can produce the planes. As with all bull markets, the components of the bulls, the suppliers to the end markets—in this case, Boeing and Airbus—can boom right alongside the customers. That means a company like BE Aerospace, which makes seating, and Honeywell, which makes precision instruments, and Spirit, which makes wing assembly, and Precision Castparts and Allegheny Technologies, experts in the “skin” of planes, can all boom right along with their clients.
On Wall Street, we often group aerospace with defense. That is done because the analysts who understand planes can follow the defense plays that have an aerospace component. In this particular case, there’s more than just convenience to the marriage. The United States is home to most of the world’s major defense contractors and we have become a giant exporter of the tools of war. We are arms merchants, financing billions and billions of dollars to arm Saudi Arabia and Israel and Egypt for many years to come. Plus, in our own country post-9/11, both political parties have remained committed to military spending, something that will continue even if we eventually wind up our efforts in Iraq. That means Raytheon, Lockheed Martin, General Dynamics, Northrop Grumman, and L-3, the major defense contractors, have what is known as “visibility,” meaning they can see orders many years out. Oh, and don’t forget that Boeing is one of the top five defense contractors too. Boeing could stay in bull-market mode just from defense for years to come. There are lots of smaller defense plays, such as Alliant Techsystems, the nation’s largest bullet maker, that will make sense as long as the Iraq War continues, but I prefer to go with the larger defense contractors that have far more overseas business than the smaller ones, which are almost entirely dependent on the U.S. military.
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