frank. >> thank you very much. that's it for "money in motion." your next trade is sunday afternoon. we will see you next friday. "mad money" is up next followed by trading the globe. have a great weekend, everybody. go on facebook. they need it.globe yt ." have a great weekend. i'm jim cramer and welcome to my world. >> you need to get in the game. >> go out of business and he's nuts! they're nuts! they know nothing! >> i always like to say there's a bull market somewhere. >> "mad money," you can't afford to miss it! >> hey, i'm cramer. welcome to "mad money." welcome to krcramerica. call me at 1-800-743-cnbc. what a week. can you believe it? the hoopla over facebook is hit last, behind us. and we saw how that turned out. not much action in the aftermarket. given all the frenzy, i thought

it was kind of boring, like the super bowl preparty was more compelling than the actual game. i still don't think it's time to get in. i would rather be a seller. we can put paid in the initial public offering of the generation. you know what i say? i say -- ♪ hallelujah ♪ ♪ >> because it is just one stock, one company and when we consider our game plan, facebook will no longer be the factor controlling our thinking. unfortunately, however, some things never seem to change. our game plan is, once again as it seems to be every year at this time, dependent upon what happens, not here, but in europe. fortunately, banks close over the weekend, as they do here. but if they fail to open monday or if we experience dramatic runs as greek citizens, justiceably, they're life savings are in jeopardy because of changing currency, we'll have a very dampbt scenario on our hands than if we have global

intervention to solve the dilemma of financial solvency that haunt not just greece, but spain and italy. look, i know you're probably sick of hearing it. i say, geez, do i have to talk about it again? i have to talk about what matters. as i outlined earlier this week, some of our companies are vulnerable to europe's woes. enough can pull down the s&p index which will calls all stocks to get hammered. before we figure out which shouldn't be hammered at all and should be bought into any weakness. i'd hoped we could have gotten past this moment, kept us at defcon 2 for months. the fulcrum moment might be at hand where it's just plain guilty. without dwins ive solution, all earnings next week, everything, is going to have to be put through a european prison as boring and as just discouraging as that is.

you know that blue sign? i am circumstance couple spekt on those. after that down reaction home depot got. i like that comp score. i'm worried because home depot said it picked up share. has to be from lowe's, doesn't it? somewhat immune longer term to europe. alas, i'd rather own home depot. campbell's soup is a quandary, 3.5% yield, usually a magnet for a guy like me but after speaking with irwin hyman, they might portend another not so hot quarter for campbell's pork and beans. i'd stay away. tech data, now it's a supermarket of tech wares. they were bullish when the ceo appeared on our show. tech slowed courtesy of europe and less government buying. we're going to find out, listen only please, no buy. tuesday's a high-risk retail

dade. first we have the stock with the most successful buy back i can recall, auto zone. i always tell you to buy this one on weakness because of that buy back which actually works and shrinking the float but we also have best buy which remains a value trap. executive makes me want to stay away. total battleground, holy cow, this may be the roughest of the bunch. it's ralph lauren. >> sell, sell, sell! >> buy, buy, buy! >> sell, sell, sell! >> terrific american story and huge initiative in asia which is super but it has european exposure. we know from fossil -- i shouldn't mention fossil in the same sentence as theed lord pierce lauren but we know any chi chinks will break the stock. we know we'll have a good read on tech from monday's tech data report. but tuesday we hear from dell. this is reconfiguring itself, this company. value-added solutions tech company which is far more value

bull than just a personal computer you may think it is. that's a terrific strategy. but it's happening at the same time as dell key customers, those in government and europe, are struggling. so the changes might not yet matter. that makes dell too risky but the hefty cash position will protect you on the downside. turn in housing has been one of the best themes of 20 12. of course, it's domestic security theme. i think it's going to be buttress by toll brothers, high-end home builder, they'll speak on wednesday. the company has been upbeat of late and the stock's taken off. you might want to buy toll if the market gets hit off europe on these days because toll's 100% domestic player, more levered to lower mortgage rates, which we have, a healthier consumer, which we do have, and cheaper raw materials. more levered than greece, spain or italy. acan i say about hewlett-packard? yeah, report wednesday and the bottom crawlers are out in full force once again in part because

of reports about a major restructuring we got earlier in the week. i think new management is struggling with the same issues dell is being hurt by. and i've got to tell you, they also have a faltering consulting business. given the furious competition of the likes of accenture and sap. i am not going there with hewlett-packard. what's my worried about crop of dotcoms coming out? pandora. maybe they're more focused on profitability but it's a bust and it will be a bust until it puts together several good quarters. we think the ceo, we believe anyone can navigate troubled european waters it's this one. might best be played with deep in the money calls to cut off downside and give you upbuy but only after ralph lauren reports, not before. thursday's costco day. we already missed jim senegal as

new ceo, craig gellinik, don't know the guy. remember, costco put through membership dues increase. we also hear from tiffany. they just gave you a 10% dividend boost yesterday. that's terrific sign of a company's prospects, but tiffany is in the penalty box after the last quarter. we have to wait and see. typically i don't care about popular sentiment indicators but as we get close to election this is different. we have -- we need to stay focused on the may michigan sentiment index. a strong one and domestic retailers that did report good numbers might get another pop. i also want to know if europe is beginning to infect the psyche. will it get americans down? we'll parse through that data. we're trying to figure out who is vulnerable to europe and who isn't. we pick away, as we lighten up to companies without european exposure, as we have every other

may fort last two years. let's go to ruth in washington, please. ruth? >> caller: hi, jim, how are you? >> real good. how about you? >> caller: great. i thank you so much for all your help. >> thank you. >> caller: but my question is, with many of us missing out on the facebook ipo today, i'd like to get your recommendations on some secondary plays that might benefit from the facebook success. >> okay. this is tough because the kind of thing that benefits from facebook's success, analogies are linkedin, that's too expensive and salesforce.com. i think crm is good buy because they reported a sdeenlt quarter earlier in the week. let's and go to brett in michigan. >> caller: booyah. got a question about chesapeake, any possible benefit from energy because of mismanagement or a takeover? >> you can't buy a company when you can't figure out the

financials. it's hard to figure out what chesapeake is worth. it's opaque. i'm literally meaning every time we keep finding out new things about chesapeake we didn't factor in, so in the end i throw my hands up and say, there are better fish to fry. once again next week depends on, yes, i'm sorry, i'm sorry, i'm sorry, europe. but look for those companies that are less vulnerable, that have what i'm now calling domestic security and we'll snap them up on any european decline. "mad money" will be right back. miss out on some "mad money"? get your "mad money" text alert today. text mm to 26221 to get cramer right on your phone. for more info, visit madmoney.cnbc.com. or give us a call at 1-800-743-cnbc. hey, did you ever finish last month's invoices?

sadly, no. oh. but i did pick up your dry cleaning and had your shoes shined. well, i made you a reservation at the sushi place around the corner. well, in that case, i better get back to these invoices... which i'll do right after making your favorite pancakes. you know what? i'm going to tidy up your side of the office. i can't hear you because i'm also making you a smoothie.

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every night i come out here and help you find high quality companies with stocks that are worth owning. meaning stocks i believe will

reward you by going higher or paying you juicy dividends or often both. ♪ hallelujah >> we analyze companies, but we don't trade companies. we trade the stocks of companies and you should never forget that the company and its stock are not the same thing. i know that might sound real obvious. the kind of thing that should go without saying but people constantly make the mistake of equating a company with its stock. and it's the kind of mistake that can absolutely derail your stock portfolio. especially in volatile markets where many stocks trade off a big picture, so-called macro data about the broader global economy, the european market, chinese interest rates, rather than what's known as the micro, meaning information about the actual companies that stand by the stock. the fact is, it's all too easy to assume a company and stock are synonymous and i hear this mistake constantly.

a stock gets crushed, just object land we assume something must be wrong with the underlying company, or the flipside when a stock surges. we presume the company must be doing something right but that's not how markets work these days. they used to. but they don't now. often shares of a company's stocks move up and down have nothing to do with the actual underlying business entity. it happens all the time now. doesn't mean the market is crazy or irrational, sometimes stupid. what's irrational is believing there will always be a straight line between the performance of a company these days and the performance of its stock. why is that wrong? shouldn't stocks trade based on changes in the prospects of the underlying company? isn't that the way the market should work when it isn't broken? don't we spend lots of time on the show analyzing companies, showing you ho you to figure out what makes some businesses better than others? teaching you how to identify situations where companies are improving or at least doing better than most people think,

right? that's called the upside surprise. i'm always telling you the most important determine ant of a higher stock price is increases in the earnings estimate for underlying company. nothing correlates more strongly with a rising share price than estimate increases, although they do equate future success with dividend boost perform why isn't it enough to study companies and buy stocks of ones that look like they have the most ability to earn, if that's the holy grail? because we can't buy companies themselves. we can't buy companies unless you have hundreds of millions of dollars like warren buffett to throw around, that's not an option. instead, we have to buy shares of stock in those companies. shares that trade on an open market. lots of buyers and sellers who might have very different motivations from you. when you find a high quality company with seemingly excellent prospects you can't just assume anymore shares of that company will go higher since you also need to take into account the way the stock trades and a lot of other problems that have to do with mechanics of the stock

market that are far worse than when i broke into this game. don't get me wrong, over the long haul, the best way picking winning stocks, identify winning companies. ones growing faster than anyone else expects or increasing dividends or improving dramatically. on a day to day basis, those stocks can trade wildly with very little relation to what's happening at the company. very little relation to the fundamentals. if you assume every move in the stock market makes sense vis-a-vis underlying business you'll under up passing up incredible opportunities to buy merchandise that's been marked down for bad reasons and you'll miss moments when you should sell, sell, sell, stocks that have run up too much courtesy of market mechanics. rather than anything it relates directly to the company you think you own. in recent years we've witnessed the rise of a ton of factors that can cause a stock's performance to differ even more radically from the performance of the underlying company. at least in the very short term. over the longer term, of course, they tend to converge, right? but over days, weeks and these days even months you have all sorts of things that can make

the stock of an underperforming company fall or stock of a deteriorating company rise. these days many investors use exchange-traded funds. they're pervasive. etfs. they use them to get exposure to entire sectors. they can give them double or triple or selling buck for triple. they mean stocks in the same sector can trade in lock step with each other. the good companies moving in complete tandem with the bad and mediocre. it's like just one soup to nuts buffet, nothing's different. now, a business sector has always been an important determine ant of a stock's performance. if a stock is a house, say, right, then it sectors the neighborhood and nobody wants a good house in a lousy neighborhood. but these days the influence of these etfs has made the is sector more important than ever when it comes to the dait day to day action in a stock. so -- >> your house of pleasure. >> could be right in a neighborhood with --

>> the house of pain. >> plus you also have high frequency traders. they can hijack entire market causing massive moves that make no sense. especially at extreme moments of volatility. flashback, any good stock held up in the flash crash? these new waves all distort the stock picking beach. remember the flash crash because i think another can happen. when times get tough, sometimes can get tougher for their stock. i talked about forced selling on this idea, stocks can get slammed because the idea hedge funds that own them are in trouble. maybe they need to sell everything in order to raise cash not because the companies aren't any good. you see that when a hj fund makes a bet and bet doesn't go their way. they lost when the eurozone sovereign credit crisis began to dominate the headline. didn't just sell european assets, they had to sell totally unrelated stocks and even sold

gold, especially if investors were clammering to get their money back. this is what happened when we crashed in 2008 and 2009 when they began forced selling which ultimately took most stocks down to absurdly cheap levels back at generational lows in march of 2009. look at those prices. a lot of great stocks hit 52 week low. nothing was wrong with those companies. you also have to take into t the -- into account short sellers. when shorts pile into a stock and then get hit with unexpected piece of good news from the company, you can get what's known as a short squeeze that propels the stock to absurd high. short sellers have to buy in order to admit defeat and close out positions and they do it all at once. that's what happened when netflix soared over $300, exacerbated by their small share capital. there weren't enough shares to cover and moved it up. the market is -- a market in the end, right. it's a market. dominated by supply and demand. when there's not enough supply

of a given stock or kind of stock to satisfy that demand, you'll see stocks rise beyond what you'd expect based on fundamentals of the companies. when there's too much supply of stock, shares get hammered well beyond what you thought they might go. we saw this a lot with super hot areas like the chinese internet ipos in 2010 and 2011. first returns from these deals were staggering, but the gains became smaller and smaller as we got more and more chinese dotcoms, flooding our market with supply. the same thing that happened at the end of our own dotcom boom a decade ago. no chinese deal was worth participating in as supply was way too heavy. demand well oversaturated. bottom line, recognize that what's happening with your stocks doesn't always necessarily reflect what's going on with the underlying business. and use that fact to your advantage. when a company that's in terrific shape sees its stock smash for reasons unrelated to fundamentals of a business, that's an amazing buying opportunity. remember it can take sometimes a

very long time for the action in a stock to sync up with the performance of a company it represents a tiny piece of. that way you won't be frustrated with what you thought should happen immediately after you heard fabulous news and you can wait until the market gets smart and reward your stock with the move it deserves. dave in wisconsin. dave? >> caller: booyah, jim, and greetings from wisconsin, home of green bay packers, baby. >> who could not like that team. what's going on? >> caller: not much. i wanted to ask you during times of high volatility i like to employ a dollar cost strategy and i was wondering if you could share with home gamers tips and tricks we could use when implementing that stralt i go. >> that's my strategy. people have to find the strategy they're comfortable. i like the pyramid strategy, buy first and hope the stock takes a mark down so i can buy lower, buy more lower than that and buy in large fashion on the way down. it's called scale buying i talk about it in the book "real

money." i want to buy lower than my earlier basis which i what i do, i get a better bays as market goes down. it may seem silly but the stock and the company, they're not the same thing! you have to keep them separate in your mind. what's happening to your stock, good or bad, does not mean the company has the same fate. and it often takes time to sync up with reality. make sure you're patient in order to get rewarded by the moves you should have gotten to begin with. stick with cramer.

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let's solve this. when we got married. i had three kids. and she became the full time mother of three. it was soccer, and ballet, and cheerleading, and baseball. those years were crazy. so, as we go into this next phase, you know, a big part of it for us is that there isn't anything on the schedule.

welcome back to tonight's getting back to even edition of "mad money" where i'm giving you a look at insights from personal economic recovery plan amidst all this volatility. i just talked about the need for investors to become just a little bit more like traders. not a sin. the need to watch for term moves in stock prices to take advantage of them rather than pretending, like so many pundits do, that short-term gyrations in stock prices are beneath their noses and their notice and will somehow pollute your gains -- >> boo! >> so how do we square the idea when you buy a stock its price can become unglued from underlying fundamentals of the company? the facts about the business.

with my insistence that you always do your homework and keep track of the fundamentals by reading quarterly conference call transcripts and filings to keep current with the company. if a stock price going to bounce around anyway. if they're often at the mercy of so-called macro economic factors, big picture economic stuff that companies can't control, sound familiar? what do you do? is it just a waste of time? how about stock held hostage by big institutions like hedge friends that trade them. this relentless focus on learning as much as you can about the underlying company can be neutralized by their own movement. why, given homework is by far the most onerous and least interesting part part of investing, why do it at all? the fundamentals still matter and they are knowable. the reason we focus on fundamentals on this show, anyone that tries to understand them can do it. the information is all public and readily available. in short, while you may think the homework is tedious and boring, it's also compared to -- it's much better than trying to

compare -- to predict whatever is out there, right? that is stoelgtsly unknownable. investors are looking for an edge, some kind of leg up that provides them with an advantage over everybody else. that's never going to change. not all advantages are of the same scale. by following my standard homework regimen, you should have an edge over most of the other people who trade the stocks you follow. how on earth is that possible, you ask? your homework involves looking at publicly available information. anyone can check it out. what's the edge? according to some economists and arm chair investors the fact information is out there means it should be baked into the stock, meaning share price fully reflects what you know from your research. we know that's not how the market really works. that's just on paper. lots of people are lazy, money managers or technicians look at chart, dismiss fundies or those who don't get do you into the nitty gritty of a quarrel early conference call. if you keep up with the information you'll know more than professionals. if that's not an edge, i don't know what is. homework is about taking control

of your own financial destiny. that's why i focus on it because i know it will get some results. not just any results but the factual, objective kind that gives me comfort when a stock goes down. maybe the homework won't give you enough information to tell which direction a stock will ultimately head. maybe it won't protect you from the whims of the children in washington, d.c. who play with the economy willie nilly or the data issues affecting rogue nations in europe. learning about companies isn't an all or nothing proposition. i don't think familiarizing yourself with a company should ever be dismissed as less than useful because it doesn't immediately translate into a quick profit. remember, ultimately stocks do tend to drift back into line with where they deserve to trade. given how the underlying companies are doing. so, in addition to knowing a lot of pertinent things about a business, you can also assume your stock will probably end up with a certain price range if you wait long enough. on top of that, as long as you keep up with the homework, get a clean way of deciding whether or not to cut your losses if a stock isn't working.

if it isn't working, that's incredibly valuable tool. you can sell. especially when you're trying to claw your way back to even. on the other hand, it will give you conviction to stay in a good stock hammered by the stock market for the wrong reasons. that's my favorite reason enough to do homework. either way you always know why you're buying or selling something. you won't be beholden to anybody but yourself when it comes to your investment decisions. you can use downdrafts as a way to buy high quality stocks. now, the better are you at avoiding stocks with a risk reward changing from good to bad or bad to good courtesy of homework, the better position to take calculated, intelligent risks and be more aggressive with investments in order to rebuild capital more swiftly. these skills are useful no matter what but they're of paramount importance when dealing with central dilemma of getting back to even by investing in stocks. the tension between needing to protect your already diminished capital, i respect that and needing to risk that capital in order to make more money. but even though -- even though these skills are handy, they aren't what most people call interesting. and they may not give you the

total picture you need to get to where you need to go. as for board dredom factor, i've anything to keep this interesting and i'll do anything to keep investors engaged. i've come out and filmed in a hazmat suit to compare hasbro. i've driven on a lawn mower to get to you look at john deere. i can't tell you how many expensive gizmos i've wrecked. one hit wonder rappers as well as biggie small and usher. i'm not concerned that too many of you will skip the homework because you lack the proper motivation or enthusiasm. i will make this stuff entertaining for you. we have ways of making you motivated. bottom line is that it's important for you to know why you're doing all of this work, what the point is. it's a way for your build conviction in stocks when the market goes down so you can get an edge, one totally legal, in

the most volatile or calm of all stock markets. jason in new york. >> caller: hey, jim, giving you a west indian booyah. >> i'll take that in a heart beat. >> reporter: my question was about speculative stocks. what's the criteria you use when using speculative stocks to trade in. >> very little research, so i might be able to do my own homework and be surprised as other firms pick it up for research. i like a clean balance sheet so it doesn't go to zero. i also like a company that frankly has the sky's the limit market opportunities. if they have a product that everybody might want to use and no one's using it yet, i may have the home run. nick in california, please. >> caller: booyah, jim. >> booyah, nick. >> caller: question for you. stock like apple, seems counterintuitive to judge its peak even when it has so much cash. it's like they would have a

better pe if they gave their money away. do you have any way to advise investors about how to look at that or should we -- how should we take that into consideration? >> my good friends who own apple often when i ask them about their price to earning multiple what it trades at versus earning they often back out the cash. they say cash is neutral. forget that. if it didn't have cash, this is what it would be selling for. that's the way they come up with the price earnings. i like the cash. i like to just use the normal numbers. i like it at the big earnings models that i create myself. i've always had higher earnings estimates for apple and everybody else and then i look at multiple and say, boy, that stock is cheap. it's cheaper than the average stock has been for years. ho hum homework. no! it's about conviction. if you're looking for an edge in this business, the homework is the way to get it. stay with cramer. [ male announcer ] when this hotel added aflac

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in the face of crushing declines and uproar rallies alike, i'm opening up the "mad money" tool box to teach you how to be a better investor and

wealthier even in this whacky times. and i want to tell you about a tool that can help you make money pretty quickly but also carries a certain amount of risk and can be trouble if you don't know how you're doing it. very topical, investing in ipos. it's impossible to grow the ipo opportunities that have presented themselves the last couple years, including some that have gone to premium and red hot from the moment they're born. led in particular by technology and social media names, which have been met with exceptional hype. hype doesn't even begin to describe the buzz, almost hysteria around the facebook ipo. that was super hype, maybe hyperhype. ipos are sexy but you're hardly ever told what to actually do with them. that's one of the things i wrote about in getting back to even. this has been a big theme for me because i used to gain and play into -- it's one of these, believe me. mostly importantly, this is something i did very, very well

at my old hedge fund. even -- and i'm going to teach you the basics right now. because when you know how to tell the difference between an about to be public company that will soar and one that will go down in flames, you have the potential to rake in some serious profit. the lure of ipos is that when you nail it, when you get it on the right one, when you're in there, you can get gains of 20%, 30%, even 100% in a day or a few minutes. the nature of these profits makes them attractive but they can also often get in the way of your better judgment and cause you to invest in ipos that end up stinking up the room. as helpful as profits can be, don't let brokers trick you into believing buying every ipo is a great way to make money and the real challenge is making sure your broker can fa neagle you shares. some initial public offerings aren't worth investing in at all. the banks try to slip in clunkers. after they lulled you into thinking all the deals work, that's when you really get

hammered. partially because the performance of newly public stocks tends to be all over the map, and partially because there isn't that much available information about newly public stocks beyond prospectus. >> buy, buy! >> sell, sell, sell! >> i think you can figure out to write off which are uninvestable and some are buy, buy, buy. it's not about luck, it's about analysis and the homework professional money managers do all the time and which i do on the show. i know the pros have it right because every day i would analyze stocks the exact same way at my old hedge fund and that's how i do it. i made a boat load of myself and clients by investing in ipos and i want you to know how i did it using the method i lay out in "getting back to even." here's inside baseball you need to know about ipos. i think investment banks that underright the deals have their

own agenda. bringing regular investors back into the game as it is about helping their clients raise money on the equity side. in other words, you're trying to help the buyers and sellers. one of the things i learned in my many years in wall street, hawking stocks and bonds at goldman sachs and managing money for myself and for rich people, my hedge fund, is that when the market turns south, becomes difficult to make money and people are starting to leave the market entirely and given up on stocks, i think the brokers like to throw investors some easy wins. lay up ipos intentionally underpriced that will pop when shares start trading. why do i think they underpriced the deal? because it's just as important to the brokers that their other clients, ones that pay them commissions, keeping interested in the market. for most investors the gains from a sweet underpriced ipos or offering with small float to boost the shares are a great reason to feel good about owning, trading in stocks. the anatomy of a fabulous ipo,

links linkedin. it signaled and no doubt the issue was artificial the way it was priced, putting out little stock, knowing it would cause a big stock and crazying a pop. they knew it would be hot because of the values thrown around for social media names and they offered a limited number of shares and set the price below the hyped valuation levels, demand would be huge, even though linkedin is a well-known company. brokers tightly control the supply. parcelled it out to accounts they believed it would not flip the stock and gave out just enough to large funds they would be able to start but not finish their position. that's really important. the mutual fund's appetite is whetted, come into the regular market and bid linkedin up to get the rest of the position and they take advantage the sliver. get some on the deal, average up

in the aftermarket and they have a pretty darn good basis, better than can you. never forget the trick to a successful ipo is the rationi i process. the as i understand cat desk which allocate the stock know how much the big mutual funds ultimately need to have in order to affect their performance. in other words, if you have -- if you're running billion dollars, you get 10,000 linkedin, you're not interested, you need 100,000. they give them a third of half of what they need and that forces the client's hands. those clients could flip the positions themselves but the brokers have ways to monitor who takes that quick money and they will not be allowed to get big allocations the next time around. there's a penalty. you benefit because the sink indicate desk save a lot of stocks for retail investors knowing they'll more than likely to hold onto stock and not play the flipper game. i am indifferent to whether you own the stock, trade the stock, sell the stock.

i just want to you make money. but the only thing i don't think you should ever do is go into the after market and buy stock, particularly with market orders. meaning buying the new ipo on the open market after it started trading, which is often at inflated valuation levels. if you don't get in on the deal, take a pass. forget about it. i have staggering statistics which show you're a sure loser if you buy a hot stock after it trades with only a couple stocks allowing to make money after several months and most gigantic losers that could destroy your nest egg. we play the odds on "mad money." if the odds favor you will not make money in the after market, i don't make an exception. you are in a better position than mutual fund. y you can pick and choose provided you do enough service with that full service broker. if you're not in the know, you can be a very treacherous path. keep these ipo mechanics in mind and remember that the big guys don't necessarily have you, the home gamer, in mind as i do.

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today is gonna be an important day for us. you ready? we wanna be our brother's keeper. what's number two we wanna do? bring it up to 90 decatherms. how bout ya, joe? let's go ahead and bring it online. attention on site, attention on site. now starting unit nine. some of the world's cleanest gas turbines are now powering some of america's biggest cities. siemens. answers. we're back and we're talking about the investing tools and opportunities you need to take advantage of in order to rebuild

a better portfolio or grow an already healthy one. we went through the basics of how an ipo works and now it's time to teach you the process of separating the worth while ones from the duds. something i explain in length in "getting back to even." dealing with ipos can be difficult and dangerous because of the prospect of instant gains is so enticing that the euphoria can cloud your better judgment. that's why you need a consistent method to make sure you don't get torn to pieces by something that you don't understand. a deal you can't fa thom or make heads or tails of. here's your primer on analyzing hot from cold and safer from more danger krous. first and most important thing i look for in an ipo isn't what the company does. no. it's the company's pedigree. what do i meep mean by that? i care about who the executives are, investors, more importantly, the brokers doing the deal. the cohort, managers, can be a relative unknown and strangely the least important part of the

whole pedigree equation because so many of the best deals represent technology companies, including these social media companies. those companies revolve around an invention much more than a management team. if you looked at google's management, for example, you would have voided the ipo like the plague. who the heck were larry page and sergei brin? a couple of 20-something wild men. those relatively new kids on the block have proven themselves and the bet on some of the new young innovators is that they will, too. my second check, who are the investors? it's more of a negative check. a disqualifier than a positive one. looking at investors in a company coming public, i'm concerned about you getting caught up in another kind of investment, one funded by private equity companies. anxious to cash in and get out in a better market. let's talk about private equity firms like black stone, kk thomas lee, carlisle, they

bought dozens of companies in the last few years. in many cases, paying far too much for them at the market top. now, they need badly to offload some companies into the open market so they can get them off the books. some of them will be barely profitable, others will be stinkers that the brokers will try to entice you to pick up with the hope a rising tide could lift all boats. the way i see it, these private he can quit ipos as as a rule cannot be trusted. and this brings up another important aspect of analyzing ipos. recognize just because a company can be publicly traded doesn't mean it isn't a piece of junk. there are plenty of public companies that would be qualify as travesty of a mockery of a sham, what i call stocks that shouldn't be stocks in the book. some social media fit into this category. they can make companies disclose, as many facts and financials as possible and they

let you judge for yourself, sunlight, disinfect ant, they say, and brokers dealing with private equity firms are deeply conflicted because they do so much business with those firms, they're hard to say no to. the brokerage houses get immense amounts of money from private equity firms when they take the money private and even more fees when they spin off as a public entity. that's why investment bankers will bend over backward to favor the prooiflt equity firm issuing shares rather than the broke ridge clients, you, who are buying them. you know, as with the awful rail america deal fortress, if you want to see the private equity firms or main investors in a company going public, you may have a big red flag there. third, i always look at brokage houses making the deal, morgan stanley, goldman sachs or credit suisse. am i a snob? no. they still have some reputation,

caveat there, and that will avoid them to bring a company public to avoid fees. you can take the brokage name underwriting the deal as a fairly good seal of approval. why do i think this? i'll tell you a story. in the '80s broker, goldman sachs, right? i personally helped work with the finances of people behind a dazzling young company. started by some brilliant people out of m.i.t., intimidating minds. called thinking machines. this company's claim to fame is that it had the fastest computer in the land, in the world! one capable of calculating more data faster than any other computer. i had done so much work with the principles that when they decided to bring the company public, i was able to convince them to use goldman sachs as their deal manager. there was only one problem. i couldn't convince goldman sachs to put their name on the deal. despite the immense fees that an ipo brings to a firm. the analysts at the time who would are followed the company

for goldman sachs, dan benton, poured over financials, looked at the product and he made a judgment that the company, while having short-term momentum, would not have any staying power. i was aghast. i stood to make a big six figure ticket for bringing this deal to goldman sachs, young guy. man, this is it. the analyst wouldn't budge, reminding me this was goldman sachs, not some firm that would put it's name on any company because it was hot. sure enough, goldman passed. within a couple years the company failed. a victim of better technology and poor financial management. take it from me, that's why the brokage pedigree matters. i would pass on deals done by firms that you've never heard of or that have little or no track record with successful underwritings. doesn't mean every ipo brought by a high quality brokage won't fail, far from it. only after eye gone through the three-step vetting process, would i then consider what the company does or what it makes or

how it's done in the past. in part because it is so difficult to judge these issues. i would -- and i would rather just use the quick filter i went through above before i even crack the books on the company. excitement is we asked total strangers to watch it for us. thank you so much, i appreciate it, i'll be right back. they didn't take a dime. how much in fees does your bank take to watch your money ? if your bank takes more money than a stranger,

you need an ally. ally bank. no nonsense. just people sense.

let's get mad mail here. from vance. cramer, faithful watchers of the show and it's helped up tremendously in our investments. thank you very much. some time ago you did a segment

on when to buy and when to sell 37 and i think you laid down guidelines for percentage increase to take profits and percentage decrease to purchase. could you review these again? vance, these are called scales. i like to be very careful about this because on the way up, i like to take a little off after 25%. and take a little more off after another 25%. ultimately my goal is to make it so you play with the house's money. that's what i want to do. so, you can judge accordingly when you keep taking stock off. by the way, if the stock comes back down, you can rebuild the position. on the way down, i like to scale it down -- let's say it's a $20 stock, first purchase $20, second, $17, $18, third maybe $15, even bigger than that. obld a pyramid on the way down. i go over a lot of this in "real money" my book used as a handbook if you joined my hedge fund way back in the day. here's one from steve in michigan. hi, jim, i've been reading "getting back to even" and i'm more interested in using deep in

the money covered calls you covered in chapters seven and eight. why is it necessary to have two separate accounts? i don't use covered calls. i want to be precise with that. to me that capture top. i never want to cap my upside. i always want to cap my downside, never cap my upside, which is why i use this strategy because you know if you're buying a stock like google, you're stopped out at the level of the bottom strike that you oep. you buy the 4.50 strike you won't lose more after it goes under 4.50. that's what matters. why two account? this is very important. when i worked at goldman sachs where i was a broker and trader, what i liked to do is put my buy in what's known as long account, at that point type 6 and my sell in type 7, the short because what i like to do is have short stock or ammo against the long. they have to be in separate categories because i don't want them to net out when the option expires. in other words, you're

automatically netted out unless you put it in two different accounts. i like to continue to roll out my position. that's why. it's a technical term but important you know that you don't flatten the trade. that's what would happen, is you would flatten the trade if you don't use separate accounts. ♪ [ piano chords ] [ man announcing ] what we created here.

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