You may have heard I have a new book coming out, “How to Make Money in Any Market.” It’s got a simple premise. To save well you should own index funds, but, in addition, you should own five individual stocks. Why five? Simple, no matter what period I examined over the last 45 years — my time in the investing business — there were always a handful of stocks that generated outsized performance that I am confident you will find. This stock-picking probability was well-known until Wall Street fell prey to the “all index fund, all of the time” dogma — an acceptance of mediocrity that I find arrogant, high-handed and empirically wrong. You and I know that there are always companies with superior fundamentals mixed in with other stocks in the S & P 500 . Why can’t we isolate them and invest in them for the long-term, using downturns to accumulate more of them as part of a consistent savings program? Regular investing, putting money in every week or month, will assure you that you can make much more money through the stock side of the ledger than the index-fund side. I make the concession to the index fund as a designed diversification ploy. I accept that you might pick five losers, even as I advise that some of your selections might be vetted by Jeff Marks and I as part of the CNBC Investing Club’s portfolio, and I am confident we will have plenty of winners to share with you. Will we have clunkers? Absolutely. But my research method over the years also has revealed many winning stocks. I also have an ulterior motive, intended to improve your own financial health. I have learned from talking to thousands of people during my time hosting “Mad Money” — we’re celebrating its 20th anniversary this week — that a person interested in stocks is much more likely to save than someone who is not interested. There’s an important conceit at work here. I believe the index-fund crowd, cheered on by several influential financial writers and major investors, including Warren Buffett, have open and avert disdain for your abilities. Recommending most investors just own an S & P 500 index fund — and suggesting individual stocks are too risky for most people — comes across as denigrating your abilities. In short, they think you are buffoons, which I find rather ironic given that if you chose to invest in Buffett’s Berkshire Hathaway as one of your five stocks, Berkshire would have helped you crush the index. That’s subtle duplicity in itself. Unlike these snobs — you know I call ’em as I see ’em — I know you have the twin powers of observation and curiosity, which allow you to put money to work in what you see. Of course, that comes with first doing the requisite homework into companies’ financials to minimize the possibility of picking a real loser. We have long preached homework and long-term investing, not frequent trading, as the best way to build a solid hand of five companies. Those five stocks accompany the embrace of the S & P 500’s diversity/mediocrity to give you the ability to be a little out there with some of your picks, especially those of you who are young enough to risk money on the moonshots. After all, those who are in that advantaged situation to take on a lot of risk can do so because they have their whole lives ahead of them if something goes wrong. They have time and paychecks still coming in to make the losses back. Stay in the market The secret sauce of the individual stocks is an insistence in regularly staying invested — no matter what. You need to be sure that you are in the market for the roughly seven days where most of the performance occurs in a given year. A considerable amount of my forthcoming book is to devoted to how to do the homework so you can do it yourself if I am not around. I advise on how stocks relate to their underlying companies; how to judge a price-to-earnings multiple; and how to spot hero stocks yourself. Then there’s the desire to think long-term, letting ideas percolate over time, with special emphasis on buying stocks when they’re down, as long as you have done your homework at least on a quarterly basis. I am, at last, defining homework and giving you the tools to do so without me. One goal of the Investing Club is to make that whole process easier simply by reading our stories each day. We believe they are vastly superior to a lot of what comes out of Wall Street, which is typically designed to satisfy the thirst for “models” by investment firms that are simply trying to beat the S & P 500 by small increments and nothing more. We are playing a new game; we know that you are already prepped to get it right. We don’t think you are frauds and pretenders. You are more likely to get it right rather than just surrender to the index fund. Otherwise, you wouldn’t be managing your own portfolio in the first place. Ultimately, my premise is consistent with why I started “Mad Money” 20 years ago, something I have longed to flesh out for years: How can I help people become millionaires through the stock market? I can no longer say that’s hyperbole. I have met too many Club millionaires over the years — stretching back to my time running my Charitable Trust portfolio at TheStreet before moving it over here to CNBC. Many of the millionaires are of the Nvidia varietal. It is now inconceivable to think that what I am doing is so-called cherry picking, designing some claim to demonstrate winners without including losers. It’s the stock side, not the index side, that can make millionaires most easily, especially when relying on the power of compounding. I don’t know a lot of S & P 500 millionaires. There’s an underlying premise. If I can help you be a confident investor, if I can keep you in the market for the time needed to make things percolate, then it is likely that you can catch a very big run. Remember, in the time since I have started investing, the Dow Jones Industrial Average has gone from 1,000 to 44,000, and yet there have been a gazillion “experts” who have come on TV and have helped advise you to “get out now” so many times without ever telling you to get back in. That included dozens of billionaires who are always cautious and really can hurt you. They are your enemy when it comes to investing. I don’t play that game, either. Your confidence will take you to where you have to go. I can’t express how important this is. I wrote this book, my first in 12 years, because I am sick of people advising you to trade like banshees — to go in and out of stocks. I try to steer you from that and instead toward staying the course. Empirically, there is no other way to great wealth. No other path. For most people, their paycheck will never do it. This book is the long-term investing manifesto, with an allowance for a mistake or two or three or four, but with a recognition that failure is an option. Without failure, there can be no great successes. It seems fair to ask why aren’t there more millionaires from stocks. I will tell you why: selling out fear. Taking perfectly good stocks and throwing them away because you are scared out of them. We are way too often persuaded to sell by people who think they know better but don’t. Given its often pernicious outcome, selling isn’t taken seriously enough. It should be done sparingly. You need to be patient and to have a little foresight. Consider some real-life examples. At this moment, I am flummoxed by the performance of Bristol Myers Squibb . Management had been certain that its new drug Cobenfy will eventually be used to treat all sorts of brain-related ailments, like the incredibly undertreated schizophrenia. Their certitude attracted me to the drug, which last fall secured U.S. regulatory approval as standalone therapy for schizophrenia. Last week, Cobenfy failed a key trial examining its potential as an add-on treatment to other schizophrenia drugs. The disappointing results rocked our world and brought the stock down to a level that infuriates me. That said, I am willing to give management, which I have known forever, one more benefit of the doubt to see if the medical community will work with Cobenfy. That’s an example of patience that I think will be rewarded over time, but I accept it might not be. There could be a failure here that eventually causes me to sell the stock. That would be an admission that homework shows not everything works out. The case of Alphabet Which brings me to a far more troubling example of the danger of selling the stock of a great company: Alphabet , the parent of Google. We had owned this one forever and made a lot of money doing so. A couple of weeks ago, I sold it — regretfully and with great remonstration. It’s an excellent lesson of how I should re-read my book so I have a better understanding of what a terrific company can do for you as long as you leave it alone. What caused me to sell it? Believe me, I was the driver of that decision, and I want to detail my reasons because among them lay the chief mistake of selling — something judged as wrong already after rising 7% last week in a darned good period for the easily maligned “Magnificent Seven” stocks. First, I fell prey to the “too much Mag 7” chatter that has gripped commentators and traders this year and created a toxic mindset for the group, which also includes Apple , Nvidia , Microsoft , Amazon , Tesla and Meta Platforms . We own all those for the Club, except for Tesla. Somehow the cognoscenti decided that it was time to own 493 other stocks, and that all of these big tech stocks would destroy your performance. It was like these companies, with very successful managers, suddenly lost their ability to navigate the era and outperform. The absurdity all started with the concept that these stocks should trade together anyway despite the companies having plenty of differences in their actual businesses. Nevertheless, the drumbeat of doom got to me and put the Mag 7 into the penalty box, ex-Tesla, which was never in the fund to begin with. So, call me swayed by the crowd that we had too much of the Mag 7 even as you could never have too much of any good stock. Second, I started hearing from many people that there was an abrupt move away from Google Search toward AI chatbots, including Google’s own Gemini application. Why limit yourself to Google Search when there is so much more available with the chatbots? And if that’s the case, then what happens with the nearly $200 billion in annual revenue that Google Search generated last year? On top of that, I don’t even think that much of Gemini. I am much more of a user of Perplexity, xAI’s Grok and OpenAI’s ChatGPT. Cannibalization. That was the real fear, and I couldn’t figure out a way to defeat it. Third, the Justice Department. In a huge win last year, the government persuaded a federal judge that Google illegally monopolized the internet search market, which therefore gave all future cases against Alphabet a leg up. I found the “monopolist” designation brutal and potentially lethal. Sure enough, not long after we exited the stock, the government on April 17 appeared to win a case that claimed Google maintained illegal monopolies in online advertising markets. I say “appeared” because the judge’s ruling was more mixed than you might have read, although it still created a premise that Google could only be on one side of advertising, the sell or buyside, and not both as it currently is now. The previous monopolist charge was dreadful in my eyes — and it still is — because it centers on the ability of Google to pay companies like Apple to make it the default search engine on devices such as the iPhone, done to keep out Microsoft’s Bing, among others. Even as I always thought Google Search was superior, so we would naturally choose it, I thought the government had a very good case. After all, Alphabet is now doing the same thing for companies to take Gemini, perhaps exclusively. Could that take rate be reversed later? It would allow other, superior sites, to sneak in and hurt Google’s future. Through these decisions I became increasingly convinced that Google is a so-called bad actor and would have to be broken up and stripped of its ability to dominate, which meant that it would be worth less either untouched or broken up. I would call this entire bill of particulars a paean to the prosecutors. I put a huge emphasis on their prevailing, and it was quite disconcerting. Finally, I was worried that I had too much on the line when it came to advertising with Meta, Amazon and Google. If advertising spending dried up in a slower economy, then I would be hitting 0 for 3. There was no sign that it was drying up, except for the possibility that the Chinese sites that had put a lot of money to work on Google would pull back as part of the trade embargo. We just saw Shein raise prices dramatically this weekend. It could happen. So, in late March, we sold. I eagerly awaited the quarter and with it came everything I feared. First, advertising revenues came in better than feared. I should have guessed this. It’s increasingly obvious that the promise of TV ads, outside of live sporting events, has become minimal. We are about to go into a winner-take-all situation on digital ads with the three big sites, plus TikTok, as the de-facto way of reaching people. Amazon, Google and Meta remind me of ABC, NBC and CBS when I was growing up. What a three-headed juggernaut. Second, far from disadvantaging Gemini, it’s obvious that Google Search actually brought more visibility than thought to a site that would be rather hopeless in challenging ChatGPT. It’s a winner, not a loser, because of Search. So far, no cannibalization whatsoever. Boy, was I wrong to think that. Third, YouTube is insanely popular with people, and I would argue very unmonetized along with the scantily monetized NFL Sunday Ticket package. There is so much upside to YouTube that I think that we will soon believe that it could be worth the price of the company minus the cash, which remains considerable at $95 billion at the end of March. Fourth, and most important, I forgot that the government is rarely a factor after it has vetted an acquisition and found it anti-competitive. Google has made a number of acquisitions that, when taken together, have given it lots of power toward control of pricing. But there are plenty of companies nipping at their heels. The cases won’t hold up at the appellate level, I believe, because they are out of sync with all the inventions and competitors that have joined the fray. Yes, it is true that Google pays Apple an immense sum to be the default search engine for its devices. In 2022, the last figure that is public, Google paid Apple $20 billion. The government will try to get rid of that, but that would only help Google as I don’t think that people would opt for another search site anyway. (Yes, losing that payment would certainly be bad for Apple). I am now of the opinion that Alphabet shareholders will win, even if certain businesses, such as the Chrome browser, need to be divested as a result of the antitrust cases. To put it bluntly, I was too concerned about the fallout from the cases, and I let the headlines get to me. In the meantime, Alphabet is not standing still. Waymo, its robotaxi service, is expanding to even more cities across the U.S. On last week’s earnings call, CEO Sundar Pichai made it clear the company, in addition to using its own custom AI chips, also is committed to partnering with Nvidia, which means getting enough of the latest and greatest chips. Take that Nvidia naysayers. Alphabet continues to build out data centers and recognizes that in order for Gemini to be competitive, to stay in the game, the best of Nvidia is needed. Plus, Alphabet’s new CFO Anat Ashkenazi, formerly of Club name Eli Lilly , is terrific. There’s a big bench here. Which bring me full circle to the mistake I made. Google was a hard-fought position to keep, although it wasn’t expensive at roughly 16 times forward earnings. I am using it now, though, as a reminder: Do not be so quick dispose of shares of a company you know to be great because of a series of issues that could all be resolved positively. Alphabet is no Constellation Brands , Danaher or Estee Lauder — and, certainly, it is no Bausch Health, to name some of our biggest defeats to date (though Danaher did show signs of life in its earnings report last week). Alphabet is a premier company that I too easily jettisoned given how successful the company’s been since the days when it first came public. I think that Alphabet is a pertinent reminder of the lessons of homework as a defense against mediocre decision-making. It’s a personal upbraid after a remonstration post-sale. I could have done better. I was helpful getting into the stock many years ago, but not so helpful on the decision to leave it, based on ill-considered thinking. (Jim Cramer’s Charitable Trust is long NVDA, BMY, AMZN, DHR, MSFT, META and AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Jim Cramer at the NYSE, June 30, 2022.
Virginia Sherwood | CNBC
You may have heard I have a new book coming out, “How to Make Money in Any Market.” It’s got a simple premise. To save well you should own index funds, but, in addition, you should own five individual stocks.
Why five? Simple, no matter what period I examined over the last 45 years — my time in the investing business — there were always a handful of stocks that generated outsized performance that I am confident you will find. This stock-picking probability was well-known until Wall Street fell prey to the “all index fund, all of the time” dogma — an acceptance of mediocrity that I find arrogant, high-handed and empirically wrong. You and I know that there are always companies with superior fundamentals mixed in with other stocks in the S&P 500. Why can’t we isolate them and invest in them for the long-term, using downturns to accumulate more of them as part of a consistent savings program? Regular investing, putting money in every week or month, will assure you that you can make much more money through the stock side of the ledger than the index-fund side.
