“Jim Cramer’s Twenty-five Rules for Investing” teaches and suggests investors the effective ways and attitudes for investing. Some of the rules are practical experiences while some are psychological strategies that investors should have in mind. The following ten rules are the ones that I found best interested me:
Rule 2: It’s OK to Pay the Taxes. Investors are feared for the taxes they have to pay on short-term gains from their investments. Thus, they tend to hold on the investment for long-term and ended up with nothing. It certainly helps them avoid taxes on the short-term gains while they have the stocks for a long period of time. However, what they do not realize is that they got taxed on those gains because their investments brought them money. If they did not earn anything from the stocks they owned, or if they had losses on the stocks, they could avoid those taxes on the gains. I found it interesting when I first read this rule saying that it is OK to pay the taxes since most people are not in favor of such things. However, if we think about why we have to pay the taxes, it is because we have a gain on our investment, rather than losses. It also shows a successful investment that investors made. What investors should really worry about is the losses, rather than taxes.
Rule 5: Diversify to Control Risk. This rule simply refers to the idea that “ don’t put all the eggs in one basket.” Diversification is a good way to control risk. It prevents investors from potential losses in a single industry. When stock price in a particular industry drops all of a sudden, it is very likely that all the companies in the same industry will drop in its stock value. For example, buying Microsoft and Dell stocks are not diversifying the investor’s portfolio. Investors might think of diversification as buying stocks from different companies but neglect the fact that the stocks they prefer to buy are in the same industry. Personal preferences might hurt an investor just by putting all his or her money in different companies within the same industry without noticing it. The true meaning of diversifying is actually telling the investors to invest in different companies and spread out among different industries instead of putting all the money in one industry.
Rule 8: Buy Best-of-Breed Companies. This rule works the similar way when investors are buying a car. Consumers tend to purchase automobiles that are well known in brand. The rationale behind this is that a good brand not only stands for good quality, good service, but also reliability. Therefore, it is worth the money to buy a car that is reliable in its quality. On the other hand, it is also worth it to own the best of breed stock as an investment strategy. Best-of-breed companies are more likely to have stabilities in their stock values. These companies might appear to be more expensive to invest in because of their brand, just like some cars are more expensive than others. However, investors should still try and invest in these companies rather than the ones that could possibly drop in its value all of a sudden because the brand is not strong enough. It is worth the money to invest in good brand stock rather than investing in a whole bunch of cheap stocks that are unstable.
Rule 11: Don’t Own Too Many Names. Besides diversification, investors sometimes get the wrong idea of the number of stocks they should own. It is not uncommon to see the mistake that investors make from having too many stocks. Having less or only a few stocks helps investors concentrate on the ones that are really worth keeping. Investors could own many stocks but all of which are doing poorly because they are not focusing on maintaining them. There are too many stocks that they have to take care of. By narrowing down the number of stocks they own, however, the investors could start owning the ones that are really compatible in the market. Whenever the...