Cramer's 'Mad Money' Recap: How to Invest Like the Pros
This program last aired Sept. 17.
NEW YORK ( TheStreet) -- Individual investors can not only invest like the pros, they can beat them, too. Those were Jim Cramer's words to "Mad Money" viewers as he dedicated the entire show to detailing the methods to his madness.
Cramer said it doesn't take a lot of effort to invest one's own money, just a few hours a week for research, or "homework," as he so often calls it. But the results from that research will bear far more fruit than blindly dumping money into an index fund or, worse, a bond fund in a time of historically low interest rates.
Where can investors find their research? Fortunately, it's practically everywhere, said Cramer. It's on sites like CNBC.com, TheStreet.com, Yahoo and others, as well as on the individual Web sites of every publicly traded company.
When first starting out, Cramer recommended using the 52-week high list. The new-highs list shows stocks with true momentum, said Cramer, especially in a bad market. But that does not mean that investors should just blindly chase every stock on that list. Instead, Cramer said research will still need to be done to separate the truly great stocks from the ones that are just lucky.
After researching the new-high list and picking out the winners, the homework is still not done. Cramer told viewers to never chase stocks higher because the market will always sell off and provide a better entry point in the not-too-distant future.
Cramer said he always advises buying stocks on weakness, then trimming positions into strength. A broad, market-wide selloff provides an excellent entry point, he concluded.
Cramer's next trick for investors: Look for stocks with strong insider buying. Company executives are no dummies. If they're buying their company's stock, then maybe you should, too.
Cramer said executives can sell company stock for all sorts of reasons. But buying, especially in large quantities, should be a clear signal that execs are highly confident in their outlook and are putting their own money on the line to prove it.
This is especially true of stocks at or near the 52-week high list, said Cramer. If a stock is already at sky-high valuations and insiders are still buying, that is a powerful endorsement.
Avoid paying too much attention to small, token purchases, Cramer cautioned. Look for only large, meaningful insider purchases.
Continuing on the insider-buying theme, Cramer's next trick involves looking for a special type of insider buying, one that involves a stock with a huge short interest.
Cramer explained that short-sellers must have a lot of conviction in order to bet that a stock is heading lower. The downside of shorting a stock is infinite, while going long on a stock limits losses at zero. Short-sellers also risk a short squeeze, a bit of good news about a company that sends shares high enough that those who are short the stock are forced to cover their positions.