Jim Cramer’s rule for investing: “Know what you own.”

Jim Cramer’s rule for investing: “Know what you own.”

Jim Cramer is the host of CNBC’s hit show “Mad Money”. I like his spirited delivery, but also I like that the guy knows what he’s talking about. He talks honestly about his own mistakes and learning process, and he shares his in-depth and professional analysis with his audience.

Jim has a list of rules for investing, and there was one that I particularly liked: “Know what you own”. Thestreet.com told the story behind Jim’s rule this way: 

Cramer's next life lesson: Start small and do your homework. He recounted how he started his career as a stock picker in 1979, making his first trade in an orange grower in Florida. He bought 10 shares for a total of $9, he recalled. A week later, an early frost wiped out the orange crop and he lost 50% of his investment.

Not to be discouraged, Cramer said his next trade was in Bob Evans Farms (BOBE) after eating at one of its restaurants and doing a lot of homework on the company's outlook. That trade proved to be successful as the company had a good quarter and shares split shortly thereafter.

Cramer's lesson learned: Know what you own and why you own it. He didn't know anything about oranges, he admitted, but a good breakfast made sense to him.

Cramer recalled an investment he made shortly thereafter in SPS Technologies, a company that made airplane fasteners, now part of Precision Castparts (PCP). He said a buddy had worked there and told him the company was hiring like mad. Cramer again did the homework and deduced that SPS was a win, especially with no news yet to be filed on the hiring binge. Combine what you know with what you can find out, he concluded.

I definitely agree with Jim’s rule (and how Warren Buffet and Charlie Munger are guided by a similar principle). Stock investing is not just a matter of going with a hunch – it’s about investing in businesses that you understand and have confidence in. If the business is no good, why would you want to own a portion of it?

Doing your due diligence before investing is important. Whether you use a special computer program or rely on news reports, follow Jim’s rule and “Know what you own and why you own it”. You will have much greater chances of success.

Read the whole article at: http://www.thestreet.com/story/12174875/2/jim-cramers-mad-money-recap-life-lessons.html

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