Happy New Year to all.

Watching from the sidelines will not make you a great investor. Being willing to get in the game and stay in it is the only way to become that investor. It can be hard to keep your head in the game, but there are three “forces” Jim stated that keep people out of stocks, they were: “boredom, bummers and brokers.” Boredom was called a big problem. A recipe for disaster is when the market players are not interested in the stocks they own, and when attention is not being payed unexpected losses will come. If people invest and stay interested they can make a fortune. Speculation was called a cure for boredom as it makes them feel like they are good investors when successful. Speculation can be considered “foolhardy and more immoral than gambling” but Jim has made some of his biggest gains speculating and he called it “good for investors.” He told us that it is “OK and necessary to speculate.” When talking diversification, Jim is referring to it across sectors, and unless you own some high risk stocks you are not really diversified. A few ground rules of speculating were laid out. The first was “never invest retirement money in speculation.” Second “do not ever have more than 20% of non retirement portfolio in speculative stocks.” A tiny bit of money should be put in speculative stocks, “make 1% to 2% of the portfolio if you are that conservative” he said. Speculation is small cap stocks with a market cap of between $250 million to $2 billion. These are usually less expensive per share, selling from $2 to $10 per share. A catalyst should be lurking and often speculative stocks are unprofitable. You should never buy a stock with no revenue or sales, but a stock with accelerated revenue growth. Two ways to go about speculating is to either pick an individual stock with which to speculate or they can speculate on a sector trend buy putting together a basket of stocks. With the whole industry, people should not miss out by buying the one stock from that group that gets left behind. Cast a wide net and spread the risk around. An industry that has been knocked around and beaten up should be sought. Speculating means always trading too. These small stocks will generally move up or down a great deal. You should have an exit strategy too as to not endanger all of your gains. A good investor should be “excited, interested and careful” Jim says. Worse than boredom is losing a lot of money. If Jim were to quit every time he lost money he would have never gotten anywhere. A magic formula against losing money he does not have, but giving up is not the answer. Two rules for damage control were: expect corrections and do not fear them. The S&P was used as an example as a correction when it had a decent run and then fell in May through June of last year. After bottoming the first half of June it came roaring back all the way through December. People who lost money would have been tempted to give up on stocks due to where the market had climbed and giving up would have been a bad idea. Investors need to understand that sometimes stocks go down and keep going down. They need to be psychologically prepared for big corrections like the one that started in May so they’ll develop a “superior attitude” and stay in the game, he said. The next rule is about preventing losses, Cramer continued. One of the best ways to try to avoid losses is to “watch out for multiple contraction,” which means that the market will start paying a lot less for the same amount of earnings, he said. If players see a “marketwide nosedive” or a “big, ugly downturn,” especially one that’s caused by interest rate hikes, they should identify and sell their high-multiple stocks, as they are the only certain types of stocks that are “truly vulnerable” to multiple contraction, Cramer said. As severe multiple contractions usually won’t occur a stock until the company reports earnings, people should sell their high-multiple stocks before the companies report, unless they want “a world of pain,” he advised. Lastly, Cramer urged his viewers to place limit orders instead of market orders. “Limit orders keep you in the driver’s seat, they keep you from being totally ripped off, and they’re really easy to execute, he said. “Please, if you listen to nothing else I say, use limit orders instead of market orders.”

Today’s show was a continuation of Jim sharing the new rules from his new book. Investors has to follow rules to make money and all this week he has been sharing ones that work for him with us. These aren’t about beating the market, they are so we can understand how big institutions work. Once again we were told there is no market, just a bunch of funds that control most of the money that goes into stocks, and these people that run funds think the same way. The rules shared today were:

• The Fed controls business cycles and the first rule discussed dealt with “resisting the business cycle.” When the economy is going strong, players should buy “dirty, smokestack stocks that make things like machinery, cars and minerals.” When weak, health care companies, food, drinks and consumer staples are the play. People shouldn’t fight the economy. If it stinks stay away from cyclical stocks and if its stronger stay out of consumer staples. UnitedHealth Group (UNH) was recommended by Jim not long ago due to the fundamentals, secular growth and Medicare drug benefit. UNH dropped regardless of these things as the economy was steaming and the economy was about owning cyclicals at the time. What he thought of the company didn’t matter is was all about the cycle.
• The next rule has to do with the stocks that analysts cover and the he told us that they are “never bullish enough on good stocks, and never bearish enough on bad stocks.” Following the Street’s lead can make money. Analysts are never bullish or bearish enough because they do not cover individual stocks but cover and entire sector. The move over the entire sector might be terrible for analysts, but for investors it is great. This indicator can make people money.
• “Do not be a snob.” In personal lives being a snob doesn’t matter but with investing if they are looking at a company like Neiman Marcus rather than Target (TGT) an this could mean missing money. The Street will always be late in picking up trends because everyone lives in an upper class bubble. Analysts covering the restaurant industry will not understand a casual dining play like Darden Restaurants (DRI) as they will Morton’s (MRT) or Ruth’s Chris Steakhouse (RUTH). However big players missed about a 50% gain with the big DRI move due to being snobs.
• “Heavy hype and heavy shorts on a stock means it is time to sell the stock.” Hype was called analyst recommendations, celebrity endorsements and much touted facts in the media. To find how much a company is shorted go to a big website and look up the stock. With both of these things going against a company makes them “dangerous.” It was called a war on two sides with analysts talking the stock up and the other side betting a lot of money that the stock will go down. People that short are well educated investors who have done their homework. This happened with NutriSystem (NTRI) and they had a problem with a distribution model that the shorts knew about well but was not emphasized.
• “Past performance is not indicative of future success.” Every investment is different and success should not make you “overconfident” or to “feel invincible.” One stock that has made you money should not influence your decisions in the future as you could lose big.

“A handful of extremely important rules are needed to beat the market and to be successful people need to unlearn some of the worst, most harmful myths they believe about stocks and investing,” Jim told us at the start of his show today. As a money manager he made every mistake in his new book. We were told that the single worst and most common mistake people make is buying and holding stocks. Buy and hold isn’t a strategy but an ideology which allows market players to be lazy, and it will lose you money. Doing homework after the buy not buying and holding will make you money. 30 or 40 years ago buy and hold was a winning option with high taxes and commission. It is important to know when to buy and sell, and doing homework is the only way to know when. A second mistake was pointed out when investors harbor regrets. It was called unproductive and bad to dwell on missed opportunities, yet people still do it. The time you waste worrying about these misses, is time you are not making money. Instead of dwelling on the past, think about the future. The next rule is “tips are for waiters.” People love “hot stock tips” but there is no such thing as a tip so never take them seriously. The only way a tipster could know for sure about a stock is if they were an insider and if they are an insider and tip you off they are breaking the law. An investigation from the SEC is pure hell even if you haven’t done wrong. Tips do not exist, and Jim says “if you get a tip, it is either illegal, incorrect or straight up manipulative.” In theory you want to be diversified but often when you pick stocks you do not think about being diversified because it is “boring, conservative and totally unsexy.” While no fun, diversification is “essential” for those serious about investing. Throwing money into one hot stock can ruin you. Lastly people want to be good investors, but they need to refrain from getting too arrogant. The rule here is “arrogance is a sin.” The most arrogant thing is to place your whole position in a stock at once, as this is something you should never do. Buy incrementally, and be patient for good entry points to build position.

Discipline is needed to make money in this market. Fans of the show should be familiar with Jim’s books and a new one lays out rules to help individual investors beat the big institutional money managers. In the new book Jim gives us 20 brand new rules, and today’s show went to explaining five of those 20 rules.

1. “There is a market for everything, pay attention to how it works.” There are many reasons a stock is traded in a stock market, also there are submarkets. It is rarely kept in mind by investors, an example is there is a market for oil stocks, a market for newly public stocks and a market for small cap value stocks all that are governed by supply and demand. One can not ignore supply and demand or you will be perplexed. The ethanol trade in the end of 2005 and 2006 was used as an example. The end of 2005 saw a low stock price and demand was intense making people “truckloads of money” in Archer Daniels Midland Company (ADM) and Andersons (ANDE). The ethanol game was said to have changed when VeraSun (VSE) came public and added supply. Other IPOs with worse fundamentals came public also causing people not paying attention to be caught off guard by the downturn in ethanol. When VSE came public Jim called for the end of ethanol and he was right.
2. “Make sure the stocks actually fit the bill.” We were told not to be bamboozled by the sector your stock belongs to. Know precisely what you own and the reason you bought it. Homework is always advised and it is important to recognize that “sectors don’t always matter when it comes to giving stocks momentum.” A rally within a sector should never be confused with a rally of the entire sector. People tend to skip doing their homework before buying a stock, but you should do at least the hour per week per stock.
3. “Latin America is always a trade.” Here and there a huge wave of interest moves to Latin American stocks and those involved believe that Latin America is an “amazing, long term growth story.” The key to remember is that no matter how good the stocks may look is that these stocks “will always be a trade.” The rule has nothing to do with the company’s fundamentals as every institutional investor on Wall Street treats Latin American stocks as a trade not an investment. They are the ones who move the market, and when the trading starts be prepared to move out. August 2005 saw Jim get behind BanColombia (CIB) and in March of 2006 after almost doubling he made the mistake of treating it like an investment. Those who stuck with the stock lost all of the gains by June when the trade was over.
4. “Be a lemming.” Do not be original or unique, but “follow the Street’s lead because most of the time it works.” Don’t stop thinking, but after doing your homework it should be clear that the big institutions are correct in what they are buying and should be followed. Never feel bad about getting in late or being called a poseur, it is about making money. Following the momentum was warned against, but follow it as long as there is momentum.
5. “Do not be afraid to say something is too hard.” Some things are too difficult no matter the amount of homework. The same store sales growth at restaurants is sometimes hard to gauge and almost every time Jim has tried to game these sales he has gotten burned. Too many factors, too many things going on and if you get it wrong you will get crushed. Do not take this as, you should never invest in restaurants, but do not buy on an expected spike based on a positive, better than expected same store sales number. Since there is always a bull market somewhere do not beat your heads against the wall trying to make money on a thing that is just too hard.

I would like to wish everyone a safe and happy holiday, good luck trading in the year to come and thank you for reading.

Bullish

Bank of America (BAC), Level 3 Communications (LVLT), ConAgra (CAG), Quest Software (QSFT), ConocoPhillips (COP), Denny’s (DENN) and Brinker International (EAT).

Bearish
CBOT Holdings (BOT), FedEx (FDX), Scottish Power (SPI), Smithfield Foods (SFD), American Oriental Bioengineering (AOB ), Yum! Brands (YUM), Winn-Dixie (WINN), Skyworks Solutions (SKWS) and Harrah’s (HET).

Today we were given four “stocking stuffer stocks” that pay good dividends. U.S. Bancorp (NYSE:USB), National City Corp (NCC), Asbury Automotive Group Inc. (ABG) and United Online (UNTD) were named as they “keep on giving.” Companies that pay big dividends that are paid for with earnings. USB has a 4.4% yield and has consistently raised dividends for 35 years. There is also a “magnificent buyback” and a “pristine balance sheet.” NCC brings a 4.2% yield with a big buyback, and Jim finds the company interesting because it is in transition. The recently sold the mortgage business and are now in the process of trying to establish a position in Florida. The move from a current Ohio base to Florida is smart according to Jim. ABG sells cars and has a 3.3% yield with good earnings growth with the money to pay and raise the dividend. UNTD was called the “big one” by Jim, with a 6.1% dividend along with “serious growth.” The stock should also move higher. These stocks should keep on giving and they should stuff your stocking with dividend dollars.

Over the last week Jim has named four “hot” stocks. Among them Omniture Inc. (OMTR), InnerWorkings Inc. (INWK), and Riverbed Technologies, Inc. (RVBD) were called “not too hot to buy.” DivX, Inc. (DIVX) was the hot stock worth selling. The first three should be worth owning for the next six to nine months. A fifth stock, Acme Packet, Inc. (APKT), hasn’t started to run as of yet. This company provides session border control, or Internet telephony, and is similar to RVBD. This is not a here today, gone tomorrow company and they have reported four straight quarters of profitability, with massive revenue growth. Along with five analysts that cover it giving “upgrade potential.” With APKT shares lockup expiring April 10 there is still time to run, but the expiration will hurt the stock. This stock is “too cool not to handle, and is far from being too hot.”

Dynergy (NYSE:DYN) Chairman and CEO Bruce Williamson joined the show today. Jim asked what LS Power has done for the company. Bruce said “it adds shareholder value by increasing cash flow and increasing assets under management by more than 70%.” When asked about how this will effect exposure to natural gas and Bruce feels that LS Power will “stabilize the platform” and Jim called them a “winner.”