Book Review: Jim Cramer’s Real Money

Most investors have heard of Jim Cramer, host of CNBC’s Mad Money and co-founder of TheStreet.com (TSCM). If you watch his show and never read any one of his books, you might want to reconsider. Cramer writes this book like he talks and does not try to use “smart financial terms” to prove his point.

This really is a book for all kind of investors. Investors that enjoy trading a lot will find chapters “Spotting Bottoms in Stocks” and “Spotting Tops” very useful. Beginners to the stock market will find the first one-third of the book (the first five-chapters) to be a good way to get their feet wet in understanding Cramer’s way of trading. For those who already have a grasp of how the market works will find “Spotting Stock Moves Before They Happen”, “Stock Picking Rules to Live by” (which includes his 10 Commandments of Trading and 25 Investment Rules to Live By) , and “Creating Your Discretionary Portfolio” very helpful. Cramer says things that investors may not want to hear, but he’s lost millions of dollars and made millions of dollars as a former hedge fund manager so he has the experience to back up his claims.

In the chapter about spotting stock moves before they happen, Cramer has a very interesting chart on cyclical investing and what sectors you should be investing in depending on the GDP annual growth. This chart also includes where the Federal Reserve stands with respect to lowering, raising, or keeping interest rates steady. Two points that Cramer made that I really enjoyed seeing is:

1) Emphasis on the view investors should have on P/E ratios regardless of the stock price because it allows you to compare and contrast between companies in the same sector to find out which ones are overvalued or undervalued. A lot of times, people are too concerned with how much the stock is trading for and think it’s overvalued just based on the stock price. Low priced stocks do not mean that they are any better of an investment compared to a stock price at $50/share or $125/share. You need to look past the price and look at the earnings, foward P/E ratio, cash flow, and other statistics that will help you determine if a stock is worth buying.

2) You don’t have a profit until you sell. A lot of times people will hold their stock for at least a year so they can take advantage of the reduced capital gain tax. What Cramer says is that if you have a stock you don’t believe will perform well after you’ve made a certain gain, then you might not even have a capital gain to pay tax on when that year comes around. Take your gains while you have them and don’t worry about paying taxes because if you’re paying taxes, it means you’re making money, and that’s all investors should care about.

For the investor’s who understand most of the investing foundations and want a little more insight, you may want to check out chapter 10 (advanced strategies for speculators). Cramer says, and I believe it, that even the most experienced investors don’t always understand the pros and cons of shorting and options. He outlines situations where he bet big on options and won and how you can get royaly screwed when messing around with puts and calls.

One thing I disagree with Cramer is with the emphasis he has on small-cap stock speculation. In his chapter on investing basics, he says “you can and must speculate with at least a portion of your money, perhaps as much as 50 percent when younger, in your twenties” and “I want you to seek out small-cap speculations, provided you follow my rules of good speculation.” I don’t believe you need to speculate and seek out small-cap speculation in your portfolio. I don’t mind speculation and I don’t believe it has to be with a small-cap company. Small-cap companies generally get hurt a lot harder in bear markets and even though you want stocks with great returns, you want to avoid stocks with large losses. Apple and Mastercard are great examples of stocks that returned great returns and weren’t small cap stocks with Apple returning 8x in the last 4-years and Mastercard returning about 4x in the last 2-years. These were semi speculation stocks that didn’t have market capitalizations less than 1-billion dollars. At the same time, you didn’t have to do as much homework and commit as much time as you do with small-cap companies because everyone already knew of these two companies.

Pages: 286
Release Date: March, 2005
Target Audience: Everyone
Overall Grade: A

Bottom line: Great for all levels of investors and he tells the truth. At the same time Cramer has a lot of confidence in his investment themes and methods, he also is able to point out his flaws and mistakes. He is cocky but reserved at the same time. If you can’t find your flaws, then you don’t know how to improve and the investment tips that he gives in his book will limit your mistakes in the stock market and allow you to be a more comfortable trader.

Advertisements

3 Responses to Book Review: Jim Cramer’s Real Money

  1. Anonymous says:

    lol I got here looking for the cramer’s rule, the math one ^^

  2. bumscientist says:

    Cramer’s Rule is used for solving a system of linear equations. A x = b, where A is a n by n matrix and x and b are vectors of length n. It is helpful if you want to solve for x by hand for an analytical expression, because you can solve for x by computing two determinants for each element of x. The effort needed however grows as O(n^3). For large matrices and numerical solutions, I recommend MATLAB or LAPACK.

  3. […] Cramer’s Mad Money Mad Money is a follow up to Jim Cramer’s first book entitled Real Money.    On the inside cover of his book, he states “Investing well isn’t easy, but it is […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: