my job knot just to entertain you, but to educate you. call me at 11 -800. 743-cnbc.

the whole business to manage your money is made more confusing and difficult because of the arcane terminology and wall street jib rush you hear every day. you've got to remember that there's an entire industry of people that want you convinced that investing is too hard. the safest thing is to give your money to a pro. now, maybe that is the right thing for some of you, but if you put in the effort, if you do the homework, the fact of the matter is that many of the pros are just about to your fees. more interested in taking your money than making you money. look, they're strong. they're like the wizard of oz. they don't want you to understand. if you did, ewe take control of your own finances, and not do

the things you're perfectly capable of doing yourself. pull back the curtain and explain everything. you can comprehend off the mythical categories as long as you have a translator, a coach like me who can explain what the darn words mean. think of me as the defector. someone who defected and is now teaching you. forget the davinci code. you have to break the wall street code and i'm here to help you crack it. that's why tonight i'm giving you my wall street jiberrish to english dictionary. words and concepts that many people don't want you to get

your heads around. that might make you feel empowered enough to pull your money out of your coffers and start handing over your fees and commissions. let's start with a couple 06 important ideas that go hand in hand. cyclical and secular. cyclical? nothing to do with the spin cycle in your washing machine. it's cyclical because it depends on the business cycle.

chemical companies, dow chemical, ppg. these companies are all hostage to the economy. when it heats up, they all earn more money. investors pay less for the shares. so you've got consumer stap.els, drug stocks like pfizer or america. why is this the first pierce of wall street jargon i'm translating for you? because it helps you determine how much institutions are going to earn.

the whole hedge fund play book is about when to buy and when to sell cyclical stocks or secular ones based on how the economies are doing. about 50% of the performance of my individual stock comes from its sector, which is a fancy word for a segment of the economy the stock falls into. tech, energy, health care, finance. much of the moves are determined by whether they fall into the secular or cyclical camps. cyclical means it's going to be a camp that in this particular market is going to get hammered when growth slows. secular, won't really impact you. their earnings could and often do fall apart. they can't make the estimates. as they have during every slowdown in the last decade and there's nothing you can do about it. by the same token, nobody wants to own those boring consistent

recession boosts. and you won't make much money in them during these periods, either. a rotation is when money flows out of one of these two groups and into the others. this is probably completely at electrical compared to what you've been told. a zombie ideology & that refuse toes die. and i explain that in a bunch of my books. those are all about getting back to val tile markets that show

where stocks stand up. once you realize the secular versus cyclical distinction is, you can see why buy and hold is silly. you need to be prepared to buy stocks and take that level of pain. you may be in the wrong sector at the wrong time. that doesn't mean you should play the rotation game and only own the group that's in style. to me, you're diversified when no more of 20% of your portfolio is in the sector. diversification, free lunch. investing isn't easy, but it doesn't have to be mystifying. know the difference between cyclical and secular growers.

recognize the sector rotation when you see one and always stay diversified. gary in indiana, gary. >> hi, jim. booyah. >> booyah, gary. >> caller: this is gary ward from indianapolis, indiana. i'm a first time caller and a long time viewer and i thank you for all your help. >> you're welcome. i'm glad you called. >> my question is when is it advantageous to purchase preferred stock over common stock or vice versa? >> preferred, i like to use when i see the yields be well in extreme, well in excess of what i can get from a risk free treasury and at the same time, it's safe. that's when i use preferred. common stock on, i'm trying to get capital appreciation and capital preservation. there are two very different things. preferred is a fixed income instrument where i can pick up extra yield than i can get from treasuries. dave. >> hi, this is dave in sunny california. >> excellent, dave. what's on your mind? >> how do you come across a

company that's a growing company, they're doing all the right things for investors to go from a nasdaq pink sheets to the otc market to the new york stock exchange? >> this is all an odds game, sir. they didn't get to the pink sheets or go into oblivion because they were doing well or because they were doing badly. i don't think the odds favor those situations. i pass off what could be some attractive opportunities to avoid the dozens of up attractive ones. it's a key to your financial future. mad money will be right back.

i'm jim cramer and welcome to my world. >> one man, one mission. >> i just want to make you mission. >> you need to get in the game! >> tens of thousands of miles traveled. >> this new rush is just getting started. it's the sound of american industry roaring back to life. >> hundreds of ceos. >> my life story can be your life story. >> thousands of dollars. >> booyah, jim bow! >> millions of your e-mails and tweets. mad money thanks cramerica for being with us for over 2,000 episodes.

does it ever seem like the ticker is speaking tongues? yes. so i'm helping you translate the cryptic and occasionally unpath yomble terminology that makes owning stocks so darn difficult.

i'm giving you the phrase book of navigating your world through investing, the michelin guide to fine dining. control it the cramerica encyclopedia. the process of picking stocks shouldn't be as difficult as people say. it's not like conducting triple bypass surgery yourself. although with the way a lot of the pros talk about stocks, i'll bet even einstein would have had a tough time figuring out what they were saying. i just explained the difference between cyclical companies and businesses that need a healthy economy to grow earnings versus the secular companies, growth all over the world and they need more tooth baste and cereal, consistently expanding at the same pace. how you have to sell the cyclicals and buy the secular as the economies start to flow.

if you want to outperform, you do it. even though these hedge fund committees behavior like herd animals, their play book nevertheless works. the reason for that has to do with another piece of wall street jib rush lexicon that you absolutely must know if you're going to pick your own stocks. that's the price to earnings multiple, often heard of as the pe multiple or just the multi e multiple. they all refer to the same thing and it's one of the cornerstones about how they value stocks. they're talking about the multiple. when you hear someone say the pepsi cois more expensive than coca-cola, they aren't using just the share price. the share price tells you nothing about a stock appears valuation vis-a-vis another stock. you have to take a step back. when you buy a stock, you're paying for a small piece of the company's earnings streak. to value a stock, you have to

look at where it's trading relative to the others in the earnings per share category. that's what the multiple allows you to do. here is the basic algebra. not even math, that any fourth grader can do. the share price, p, is equal to the earnings per share, e, times the multiple. the multiple tell us tells you how much investors are willing to pay for that company's earnings. we care that it sells for 15 times earning. we care that it sells for 14 times earnings. to put it another way, the multiples in a special sauce of valuation. the main ingredient in that sauce? growth. how much bigger the earnings will be year after year and so on. the companies with faster growing stocks tend to get more multiples. the error rapidly a business growth the bigger its future earnings will be. let's say chipotle has a higher

growth rate. 24%, say, versus pepsi co's 8%. multiples aren't static. when they pay more, we call that multiple expansion. when they pay less, it's called extraction. that's what hedge funds are trying to gain when they play a sector rotation. they don't want to be in a earnings rotation. alternatings aren't static, either. what goes into the e, or earnings? how do you make sure you're increasing and aren't about to collapse? here is more vocabulary. when you hear people talking about net profits or bottom line, that's the same thing, that's the earnings. to figure out how quickly a company's earnings could grow in the future, you have to look for clues when it reports quarterly

results. that means you need to look at the top line, totally interchangeable with revenues or sales all means the same thing. you want to see strong revenue growth, which tells you there's demand for the company's product, this is the key to ability to sustain their earnings long-term. that's why it's especially important for younger, smaller companies to have a fast growing revenue stream. investors will pay up for accelerating revenue growth, which means it should be able to turn its revenues into profits by cutting costs. dividends are much more attractive because they put money directly into your pockets, beyond the top line and the bottom line. it's crucial to consider the growth margin, which is in no way discussing the growth margin. the growth margin tells you what percentage of every dollar of sales becomes profit. and it's super important to

figure out how much money a company can make. you have to consider the cost of production, the cost of doing businesses in general. businesses tend to have terrible margins. while a virtual monopoly has margins that are down. in some industries, the margins can vary widely. here is the bottom line. you need to know the vocabulary before you can evaluate a stock. consider the growth rate, the top line, the bottom line and most importantly the growth margin. after the money, i'll try to make you more money.

i'm demystifying all the gibberish that you hear all the time but might not understand. translating into language that you can comprehend. more importantly, the tough

sounding terminology that keeps people out of stockes and scares and buffalos them. all this terminology sounds difficult because the wall street gibberish, they want you terrified and feeling incompetent when it comes to managing your own money. let's just say those managers are winning. ern you can do better for yourself than the professionals. who mostly want your fees or commissions. i don't want that at all. i'm not managing anyone else's money, and i don't own stocks, except in my charitable stocks, so i give away my winnings, more than $1.8 million i'm proud to say. you can't own them if you can't understand them. knowing what you own is a must. it's one of my cardinal rules.

since if you don't have a good grasp of how your holdings makes their money, what stocks, what the companies do of the stocks that you own, you won't have any idea what to do when their stocks turn against you and believe me, at some point they will turn against you. you can't know when to hold them and when to fold them unless you know what the heck it is that you're actually holding and what might make you want to fold in this case sell the stock along with what would make you in the story if it's intact -- >> bye, b buy, buy, buy. >> the terminology makes it harder to know what you own. let's continue our vocabulary lesson with another important piece of verbiage that's hardly explained to you even though it's used constantly 37 risk/reward. the risk/reward analysis pretty much defines the pick stocking that all use. what does it means? let's break it down into two component parts. it's about figuring out the downside. how much you stand to lose on

the down side. assessing the award, on the other hand, is about figuring out how the potential upsides look. too many people, when they analyze the stock only focus on the potential upside. that is a grave, grievous error. it's more important for you to understand the risk side of the reward. because the pain from a big loss -- >> the house of pain. >> -- hurts more than a pleasure from an equivalent size gain. >> house of pleasure. >> tess are determined by two different cohorts of investors. they create tops. the risk to downside is created by what value oriented money managers would be willing to pay on the way down. they create the bottom. to solve, you have to think about where even the most bullish of growth guys will think about selling. when asked, i consider five up, three down. how do i get there? how can you know where growth

managers will start selling and value guys will start buying? to do that, that requires translating another piece of esoteric growth at a reasonable price. we call it garth. growth at a reasonable price, or g.a. g.a.r.p., it's comparing to its growth earnings multiple. you need to be able to look at the world according to garp. the two most inspirational books facility fundamentals for my own investing philosophy than what i have ever read elsewhere. beat the street by peter lynch, amazon. here is a quick and dirty rule of thumb that has hardly ever let me down. figure out what -- help us figure out when a stock is overvalued or undervalued based

upon what money managers would be able to pay. listen, if a stock has a price earnings multiple lower than its growth rate, that's the definition of cheap. any stock selling at a multiple twice the size of its growth rate or greater is probably too expensive and should be sold. so if a stock is trading at 20 times earnings, then it probably won't go much higher than that. it's reached the two times growth ceiling. here is another piece of gibberish, the peg ratio, price to earnings to growth rate or the multiples divided by the stock rate. a peg of one or less is extremely cheap and two or higher is prohibitively expensive. from 2004 to 2007 could sell for 30 times earnings and still be expensive. why? because it had a 30 times growth rate, giving it a peg ratio of

just one. at the cheap end of the spectrum. that's how that happened. where do they observations come from? the value investors who would be attracted to selling stocks of peg of one or less they create more. you usually can find a i booer if the stocks multiple is at its growth rate. the growth investors hardly ever pay more than twice the growth race, a peg of two, which means will say almost no way those stocks can go higher except for the cold stocks. but you stick with the example of fwoogel with a 30% long-term growth rate, it would become a sell, just too darn high and as i've learned over and on over and over again since the show began oh, so many years ago. with my message, this one is a rough approximation. a lot of times the stock will get cheap based on its earnings

estimates simply because those need to be cut. or it will be cheap he relative to its growth rate because the growth is selling. in these cases, the stock could trade well below the one times growth. and the fact that it looks cheap is not a boy signal. on the other hand, the best time to bicycleal stocks is when the multiples look outrageously expensive because alternatings estimates are way too up and need to be raised. one other thing about risk when you hear the terms risk on or risk off, please ignore them. that was some sort of gibberish from 2010 and went away in 2012. periodically peaks up its head and i like to bash the thing. it is poppycock. i'm glad it got debunked early on. circa 2011/2012.

really hurt people when it was being done. the bottom line, know what you own and know what others will pay for it. that means you need to understand the risk/re waward. jim in new hampshire, jim. >> mr. cramer, greetings and booyah from the live free or die state, new hampshire. >> new hampshire rocks. go ahead. >> caller: yeah, hey, i got a question about top sorts. i know you're big on stop orders. one of the things that i played with is trailing stocks. say you've got a stock at a hundred. one of things that i've done is a three-tiered approach so i don't get stopped down all at once. seems like something like that strategy works. i'd love to hear your thoughts on that. >> that's a pretty good idea. as you know, i think this idea that you get stopped and it just hits it and the next thing you know it comes right back up, that's bad for me.

but if you're going to do it in pieces, that's kind of like the stage that i like. i like that method. i'm not going to endorse it for my own, but i can if it makes you comfortable, i think it's good. jim in new york, jim. >> caller: jim, i'd like to know what the what's the drawbacks of owning stocks held by a holding company. >> well, i mean, it's very hard to bring up the value of assets that are in a holding company. we don't necessarily know what they are. things can be opaque, sometimes they're not opaque. if they're not opaque, we can make a judgment, berkshire hathaway. if they are opaque, i don't touch them. john in texas, john. >> caller: thank you. greetings from austin. i have all your books. watch the show every day, live and record and admire your energy level. >> thank you very much. >> caller: no problem. my question about your ongoing suggestion to buy stocks here is in increments. >> right. >> caller: i understand why, but doesn't that eat up commission

money even though it can offset capital gains or losses? what's your take? >> my feeling is very strong on this. when i got in, commissions were quadruple about what they are now but i still recommended that strategy. so it's even better now with the commission rates low, so no, i'm not going to back away from my view. commission rates are low enough that you can do that trading and not hurt yourself. nick in new jersey, nick. >> big booyah from hoe boekin, new jersey. >> caller: i want to give a shout out to my brother who is overseas in the navy. >> thank him for serving. knowing i might be limited as to when i can -- >> you cannot trade. you've got the to find long-term investments. sounds like you're a young fellow. find stocks that have a

tremendous upside that are very risky because you've got your whole live life to make it back. go for the riskiest stocks that you can find and let her rip. talk the talk. i'm translating tonight, wall street to english. risk/reward, the trick, know what you own. more importantly, know what others will pay for it. stay with cramer. >> i want you to know that you have transformed me. thank you, cramer.

jim cramer, you're one of my heros. >> when you talk about the market, i think you're spot on. >> oh, i love it. every night i watch you. i have earned and learned.

>> lost in translation, managing your own money is a lot less daunting when it seems you have a translator, someone like me who can help you decode the arcane and what the pros use about stocks. so you can see through the mystery and understand the essentials of investing. so far i've explained the complicated piece of jargon. but the difficulty goes in two different directions. just as there are many concepts that seem complicated, also in terms that are much less simple than they appear. take the notion of a trade versus the notion of investment. a lot of people say they're interchangeable. couldn't be further from the truth, people. you've got to keep them separated. isn't this just splitting hairs, that's something not recommended for the folicly challenged like myself.

a trade is not the same as an investment. if you teach one like the other, breaking the first commandment of trading, in true mr. t. fashion, my prediction for your portfolio is pain! when you buy a trade, you're buying it for a specific catalyst. maybe the company is about to deliver its quarterly results. i don't recommend trying to gain earnings. it hasn't worked well. there's too much chaos and confusion. the catalyst can be news about something you're predicting. if you're dealing with pharma techs or stocks, when the fda decides whether or not to approve a given treatment, these are data points that could send a stock soaring higher when they

go your way. you need to know there's a moment to buy before the catalyst and a moment most importantly that seem to get wrong, too, after the catalyst happen. sometimes the event won't work or maybe the data point you're speccing turns out to be less. when you buy a stock as a trade, it has a limited shelf life. once the window passes, you must sell, sell, sell. if you rack up nice gains, there's no point in sticking around. ring the register. but if it turns out to be wrong -- >> the house of pain. >> you still need to -- >> sell, sell, sell. >> when you buy a bottle of milk, you don't drink it after the expiration date. you throw it away. and you never, ever should own anything without a reason.

people fool themselves into doing the right thing. more often than not, they get crushed. without a catalyst, you don't have a trade. if you find yourself in that position, you had better sell and cut your lows. an investment, on the other hand, is based on a long-term thesis. the idea that a stock has the ability to make serious money for you. you're expecting many good things will happen in the company's not too distant future. we don't like that nonsense. investments can go wrong, too, which is why i'm always telling you to do the homework. it could be great if you can spend an hour. i know you can't any more. you have to be sure the story is intact. but it does mean when a stock you like as an investment goes down in the short-term, it makes more sense to buy than sell. you don't ring the register after the first time the stock jumps in price. you're looking for larger gains over a smaller period of time. i made this mistake with apple before the iphone was barely a

glimmer in steve job's eye and the eye pad was a distant dream. i turned around and sold it after a five-point gain. here is the bottom line. not all wall street gibberish is complicated. some of it is simple. like the distinction between a trade and an investment. it's a mistake to turn a trade into an investment. stay with cramer. >> mad about mad money? immerse yourself into cramer's world while you watch the show with zbox. on the phone, tablet or on the web, get sneak peeks, go behind the scenes and download the conversation. download the free app today.

welcome back to the wall street gibberish, the plain english translation guide edition of mad money. all night i've been explaining overly arcane financial jargon to help you become a better investor and help the whole process of managing your money easier. it's the correction. what a euphemism. a correction is when after the market has been roaring it turns around and gets crushed, making you feel like the world is endi ending, the sky is falling and you never ever want to own a stock again for the rest of your life. it may feel horrible, but stocks can come back from corrections. think of it like this. when the market goes on a 56-game hitting streak and doesn't get on base the next day, it doesn't mean you never make money again. it's just what happened when you go up too far too fast and

that's why you should expect corrections. they can happen to an individual stock, to an index, to a whole market. and you will most likely never see them coming as people didn't see them at various times in the last few years. so you shouldn't beat yourself up for not anticipating that. sell-offs are a natural feature of the landscape. we don't have to like them, but we need to acknowledge that they will happen no matter what. you must never panic. when they inevitably smack you in the face. finally got one last piece of investing vocabulary that you can master and that's the idea of execution. this is a tough one because ice comparably subject i. we mean management's ability to follow through with its plan. the number 06 ways a bad manage team can screw up are practically infinite.

they're much less likely to make these what i call unforced errors. that's why it's important for you to pay attention when i bring ceos on the show. this notion of execution is crucial when it comes to understanding why it's worth paying up for what i love, the best of breed companies. the top players in a given industry, almost always with proven exacts. they're worth every penny. a good managed team is less likely to make mistakes, more important and less likely to get buried by more problems and more likely to figure out how to solve them. a sharp sell-off after a big rally is something you must build in and expect. even though it's hard to quantify, execution is as crucial a factor when it comes to picking stocks. you want companies with proven seasoned managed, teams less likely to fact ter ball.

when we get the correction, you'll probably do better than most. russ in new jersey, russ. >> hey, it's summerville, new jersey, strong booyah to you, jim. >> what's going on? >> caller: i have a question about buying a good stock that's as high. you say to wait for a pullback, down turn, a market correction, 5% or so. >> right. >> what's the time horizon on that correction? a day? week? month? quarter? how do you identify when to pull the trigger? >> i often taum about team and price. i like to stay 5% to 7% to where you start, 10%, 12%, you buy a little more, leave room, don't worry about the time, just worry about the price. words, words, correction.corrections can be scary, people. but expect them, don't fear them, and execution, it's critical. stay with cramer. >> announcer: it's a brutal, full contact sport.

>> the last play of the game. >> markets absolutely getting hammered today. i know it's not easy, but i promise to keep fighting for you. >> jim cramer, leveling the playing field for all. >> the road is a tough one, but the payoff can be your greatest win of all. >> join mad money's training camp week nooip nights.

we have got to get to some of the tweets that you've been sending me. here we go. our first tweet comes from mbiker25 who writes, hey, jim, when did you start investing? >> that's easy. i started in 1979. i got a couple of bucks and i decided, you know what? i am going to go buy a stock that i read about in foeshgs magazine. so i bought american agrinomics.

the next week, they had a big frost, lost almost everything. our next tweet comes from @mollycane3. i'm a teacher and i use your it is time for the lightning round for math facts time. aim violateling any trademark laws? only if you say if you ready skedaddy because that is patent pending. next, i'm 53 years old. maxed out on 401(k), what to do best with my personal mad money fund? taxes are low, they used to be really high. don't fear the tax man, make money. discretionary cap. now a tweet from @invisible brand. the cb.com. they have a great site 37 everything you need to know and learn is on that site. it's a remarkable resource. here is a tweet@jtweets5.

thank you, jim, for always looking out for us. you're the best thing that far happened to mom and pop investors like myself. where are the grassos of our day? we don't have any. annoy i'm like an army, a force of one, a force of ten? no, just one. hey, just to let you know the people in new orleans have such nice things to say about you. i hope to meet you one day. i go down constantly. why? because my daughter goes to tulane which is an amazing school and i'm a very proud dad. let me leave it at that because she'll be really embarrassed. another tweet, what is better, buying a diversified etf or a diversified closed end mutual fund? etf trading, we're done with them. no more. they're too dangerous.

we like the spx for an etf. we just want you to have exposure to the market. the s&p 500 etfs, just everything you need. stick with cramer. i'm jim cramer and welcome to my world. >> one man, one mission. >> i just want to make you money. >> you need to get in the game! >> tens of thousands of miles traveled. >> this new rush is just getting started. it's the sound of american industry roaring back to life. hundreds of ceos. >> my life story can be your life story. >> thousands of dollars. >> booyah, jim bow! >> millions of your e-mails and tweets. mad money thanks cray mashg ka for being with us for over 2,000 episodes. [ male announcer ] for every late night,

every weekend worked, every idea sold... ♪ ...you deserve a cadillac, the fastest growing full-line luxury brand in the united states. including the all new 2014 cadillac cts, motor trend's 2014 car of the year. get the best offers of the season on our award winning products. like a 2014 ats and srx. hurry in, offers end january 2nd.

ensign low peat ya cramerica strikes. i'm jim kraker and i will see you next time.

well, good morning and welcome to a special post christmas boxing day edition of "worldwide exchange." >> we are here with you from 5:00 to 6:00 a.m. eastern standard time. >> welcome to viewers across asia and australia, antarctica, south america. we start today where we left off on tuesday with shopping and the retail