In late February, we gave Inside the Market readers the opportunity to ask questions of Jim Cramer, the host of CNBC's Mad Money and former hedge fund manager who has just published a new book, "Get Rich Carefully." We posed several of these questions to him. The following is a second and final instalment of questions and answers. See the first instalment by clicking here.
Q: Big fan of show. Thanks for your insights...especially like segments when you pit two competitive stocks against each other, for example Coke and Pepsi, and analyze relative merits of each. My question. TransCanada pipeline is my biggest holding as I can't imagine keystone not being approved by your government. Is the good news already baked into this stock or will it take a severe hit if keystone is not approved. In other words, do I have relatively small upside potential vs. my risk potential. Marc Pinkus1
Jim: I've been a huge fan of TransCanada (TRP) and think that it has terrific growth prospects. But I wouldn't count on Keystone at this point because as terrific, safe and important I think it is, both for domestic security and for jobs—I don't think you can bank on the President's backing because, in the end, it is fossil fuel, and, alas, considered dirty fossil fuel. To me the Keystone pipeline would be a blessing. The oil's going to go somewhere, the United States has the refineries to deal with the impurities—Honeywell's got the chemicals to do that by the way—and pipelines are a lot safer than trains. You want to own TransCanada, though, because it is a proven bread winner and a very well- run company. I can't, for the life of me, figure out how we in the U.S. could look at such a Canadian gift horse in the mouth and not just say thank you, my good friends, let's start the building!
Q: Watch your show as often as possible and have read most of you books. Generally when a stock splits, is it a good or bad move to buy, before or after or is it company specific. Squid47
Jim: Now we have to be sure, first, that we understand that stock splits don't create any value. As you know from watching the show, I always like to take a pencil, crack it into two and say "this is a stock that has split—you have two pencils but you aren't creating MORE pencil." That said the history has been, at least of late, that you want to own a stock until right before it splits and then sell it because people tend to cash in on some of their stock when they get the additional shares. It is an ephemeral issue and I wouldn't get too caught up in it. I actually favour stock splits because individuals don't like owning just a few shares. I have lobbied for them because of the liquidity they bring: VF Corp and Salesforce.com, for example, have become much more accessible to shareholders because of their splits. But I never recommend a stock based on a split itself. It doesn't create value and I want value creation.
Q: I have been playing with what I call the "Cramer Effect" for day trading. I buy something you recommend early the next day, and sell it before the end of the day. This gained me a 10 per cent return approximately in 6 months. Can you comment on this strategy, as I wonder how many other people use it? Effijoyc
Jim: I am glad that works for you but it isn't something I would recommend doing. The show is more about education than it is about stock tips and when I do recommend something I am not doing it for a trade but for an investment. Only on Speculation Fridays, as I call them, do I recommend trades and that's because I want people to have all weekend to think about them. I like to buy low and sell high. If you are buying after traders jump all over a stock you are more likely to lose than to win. So congratulations that it is working for you but it sure isn't my intent.
Q: Often on your show you will tell viewers to play a speculative stock or growth stock with "deep in the money" calls. What do you mean by this and can you give an example. Dennis Braun2
Jim: In Getting Back to Even, the book previous to Get Rich Carefully, I spent a great deal of time talking about a strategy I pioneered at my hedge fund called "stock replacement." Basically I would buy an option on a stock that is "deep-in-the-money," meaning that it got you almost all of the appreciation if a stock went up, but cut off your downside at some predetermined price, say down 10 points or 15 points using a call option. That way in the event of a crash you were stopped out at the "strike price" of that call, something that wouldn't happen in a regular common stock which can fall much further than the strike price. It's a complicated strategy but it is a conservative one and I have to refer you to Getting Back to Even because I can't distill here what took me about 100 pages to say about it, other than it's a lot safer way to invest in high-fliers than owning them outright with common stock.
Last word: I am a huge long-term bull on the Canadian dollar because your country is a remarkable, fabulous place to live and work and raise a family. Canada has the most responsible fiscal policy and its decision not to sacrifice its own welfare of its citizens on the altar of the Kyoto accords is both brave and sound. The fact that we have not approved the Keystone pipeline is something I feel like personally apologizing to the Canadian people about. We appreciate your patience with us and I hope we don't let you down in the name of shipping oil to China, where it will be refined poorly and hurt the world's atmosphere, which is exactly what will happen. Thank you so much,
Jim Cramer
(To read the first installment of Q&As, click here.)
Darcy Keith