Friday, December 19, 2008
(Cont'd from above)...

Jim (cont'd):   

 

Rule #11 When Your Broker Stops Talking About A Particular Company, It Pays To Sell The Stock
Jim:      This one applies to anyone who uses a broker. When your broker stops informing you about a stock you own that he suggested, when you start hearing nothing from them about it. It pays to sell the stock. Especially if it hasn’t been performing well. I saw this all the time when I was running my hedge fund. Often your broker will be too embarrassed to tell you that you own a stinker, that the situation changed, that the analysts no longer likes it. Especially if it is a stock that your broker had been really positive on. When I stopped hearing things about the stock, and it was going down, I booted it. Here is a good one to remember, silence isn’t golden in the stock markets. Silence equals sell.

Rule #12:   After Your Stocks Have Had A Nice Upside Move, Get Defensive
Jim:      For those of you with an interest in avoiding losses. After a big one, get defensive. This one is so hard. It’s like you start feeling really great at the card table, and you think you can’t lose. I use two instruments to figure out if we have had too big a run, and it’s gotten where the air is thin. One is called the Standard & Poor’s Proprietary Oscillator, which shows you the swing of the market. This is available from their website, for a fee. That is why I don’t give the number at night, because I don’t own it. S&P does. And I pay for it. I also get the charts that shows the Oscillator hand delivered to me every Saturday. I have chartered the Oscillator since 1987, and every time it reads +5, it updates daily, and I would give you the phone number, but that would also violate the rules. It’s paid to sell. The Oscillator measures swing, +5, -%. The Oscillator measures how over bought or oversold, when it’s negative, that the market is. When it gets to +5, it is a signal that too many people are too positive. And their paying up, their reaching to buy stock, never reach. You want to sell before the flurry of buying ends and stocks start heading lower. As people take profits, and sellers take advantage of higher prices. Does it always happen at +5? No, it can go up to +10. But it has always made sense to me, because I don’t like to give away profits. Now if you sell when the Oscillator hits 5, you might miss the top. There is every chance, every chance that this can be the golden one. But believe me, my experience it has gone down. And, here is something even more important, it is going to go down hard when it is overbought. You won’t be able to get out when it is happening.

Selling when the Oscillator has hit +5 has stopped me from taking some really serious losses. I said I use two indicators, the second is the Investors Intelligence Bull Bear Ratio, that comes out on Wednesday. And again, proprietary to this outfit Investors Intelligence, so I can’t share it with you on the show. You have to look it up. I hate that. But you know what, these people work really hard to put together these things and I can’t steal them, it is not right. When there are two many bulls, when more than 50% of the investment professionals polled are bullish, even in the high 40’s, to me, that is another sign that it is time to play defensive. And take a lot of the table. Because if everyone is bullish, who else is there to buy stocks? Too many bulls spoil the pot. They already in. You are not going to find new guys to come in and take you out.

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Rule #13:   If You Own A Stock With A Dividend That’s Twice That Of Treasuries, Sell It
Jim:      If you own a stock with a dividend yield that is twice that of the yield that you would get for owning US Treasuries of the 10 year variety, sell it. I am going to repeat that. A dividend that you are getting that sells for twice the treasury, what the treasuries yield is, sell it. Dividends that have reached that level, have almost always lead me to believe that there is something wrong with the stock. And it will soon slash it’s dividend. We like high dividends on Mad Money, but a dividend that is too high, that is a warning signal. There are a couple of general exceptions to this rule, tanker stocks. Given this big front line kind of things, they pay dividends on the current rate of business, and also they have to adjust them each quarter. Master limited partnerships, trusts that do the same thing for oil and gas, it is okay. They can violate the rule. If you just use this rule of thumb, sell any stock with a dividend with twice the yield of US Treasuries, or greater, you would have flagged many of the bank stocks before they crushed you. You would have flagged the autos in late 2007 and 2008, before their enormous declines. Good rule, right?

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Rule #14:   If A Company Has A New CEO, Stay Away From The Stock
Jim:      If a company has a new CEO, in his or her first year on the job, I don’t want you to buy the stock. I don’t trust these stories. A new guy comes in, he is usually unseasoned, needs time to develop. Kind of like investing in a quarterback in first year after the draft. It is so rare that they are ready. Think of Eli Manning (i.e., starting quarterback for the New York Giants NFL football team)... he is fabulous right?  But he wasn’t ready. A few years later he is winning the Super Bowl.  All the greats spend the first year on the bench watching, or they take risks and get hurt. I believe you should do the same for CEO’s. Don’t relay on companies with rookie CEO’s. Yes, again, there will be someone who comes in and shocks you from the get go. There are always going to be exceptions to the rules, I am worried about losses. The vast majority, you shouldn’t own in the first year.

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Rule #15:   If You Bought A Stock For A Specific Catalyst, Sell No Matter What When It Occurs
Jim:      If you are trading, meaning you are buying a stock because of a specific catalysts, something that is going to happen in the future. You have to sell it no matter what when the catalyst occurs. No excuses here. In Real Money, staying invested... this is my handbook for people who joined me at my hedge fund... these are people I dictated over, okay... I call this rule, "never turn a trade into investment." If you don’t sell after the catalyst, the event, you are owning a stock for no particular reason. And I will guarantee you that there are better uses of your money than that.

Now the only time that I ever recommend trades on this show, is my weekly game plan on Fridays, of course, the media says I do it every day, it is not true. On Fridays I make suggestions for trades ahead of next weeks events, when the event occurs, whether I got it right or wrong, whether the stock is unchanged up or down, don’t create excuses for why you should hang out because the reason you bought the stock has come and gone.

Here’s the bottom line... to keep your investments as safe as possible, remember to sell when your broker stops talking about a stock. Sell after a big move, as dictated and indicated by the Standard & Poor’s Oscillator, go to their website to subscribe, or the Investors Intelligence Bull Bear Ratio, I get it from Investors Business Daily. Sell anything that yields more than twice what US Treasuries yield, unless it is a tanker stock or a master limited partnership. Stay away from companies with CEO’s in their rookie year. And never, ever turn a trade into an investment.

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The Bottom Line!:     Knowing The Rules Could Keep Your From Making Costly Mistakes...
 
[verbatim recap]

Read Jim's next Segment - Jim Cramer's Investing Rules - Rule No. 16 here