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tv   Mad Money  NBC  September 4, 2012 3:00am-4:00am EDT

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hollywood. hollywood. have an awesome labor day. -- captions by vitac -- www.vitac.com i'm jim cramer and welcome to my world. >> you need to get in the game. >> he's going out of business and he's nuts. they're nuts. they know nothing. >> there is a bull market somewhere. >> mad money. you can't afford to miss it. i'm cramer. welcome to mad money. welcome to cramerica. my job is not just to entertain you, but teach and coach you. call me. in recent years, stocks have become more hazed than anything i can remember. you know what, i still believe anyone can turn a profit in the stock market as long as you are willing to put in the time and effort to keep track of what you
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own. i wouldn't come out here every night to educate you if i didn't think it was theoretically possible, but feasible for the vast majority of the people to succeed at managing their own money. if that's the case, why is investing so darn difficult? people struggle to make money in the stock market. how can i believe it's possible for you to beat the averages, the big benchmark when so many people and mutual fund managers refuse to do so. you can do it. but you have to do it the right way. one of the biggest obstacles is a lack of clarity about what investing is supposed to mean. i have seen countless people try to follow wisdom about money management to have their investments wiped out because conventional wisdom is wrong. they had no idea they were
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making a mistake. they thought they were being responsible. if we had cool hand luke -- >> what we have got here is failure to communicate. >> that's what i'm saying, boss. i want to demystify the concept of long-term investing, an idea that has been misinterpreted so often it's more of a hindrance than a help. listen up. tonight i am setting you straight. this is about long-term investing. there is a serious problem with the notion. it goes like this. too often they let the concept of long-term investing get in the way of investing. if you think long-term is about making boat loads of money over years or decades, i'm on board and i can teach you thou do it from my already rich partners where a ran a half billion. there is a darker side.
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all too often i have seen invoke long-term investing as an excuse or alibi for poor performance or not paying attention to what they own. you often hear you shouldn't worry about the losses or the profits you are missing and it's okay to take short-term pays because you will make it up with long-term gains. losing month after month or year after year is not a good recipe for making money. a bunch of short-term losses don't translate into long-term gains. simer and boil here. making money is the old excuse, the alibi for short-term losses and believe me, that kind of thinking will make you i worse investor or a better one. before i can teach you for the long-term, i have to get you for the long-term alibis for ages and still are today is. what are the sirens leading you
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astray? at what point do you need to cover your ears? so thaw won't listen to the conventional wisdom and steer on to the rocks. first and most important, long-term investing is not the same as owning stocks for a long time. don't confusion being a good investor for an ideology of buy and hold. versus buy and forget. buy and hold is the conventional wisdom. this lost people more money than the last two financial crisis combined. just because you have a long-term horizon doesn't mean you can afford to take loss after loss and they are unrealized. that doesn't make them into gainers. losses are losses. real live or otherwise. the notion of being in something for the long-term doesn't justify owning damaged goods. in the misguided hope they will
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recover is damaged goods. the idea behind buy and hold is once you purchase the stock, you just wait. i never liked waiting and it happens to be a terrible strategy. you keep track of your investments and you have to keep track of that time consuming homework. it's not that hard. it's what i tell you about. the quarterly reports, you have to listen to the reading transcripts and faster sometimes. it used to be available in the millions of commissions. yahoo finance has everything. they don't got it. it's worth the reading. it's your money. invest the game. they act like investing for the long-term means you have a license not to pay attention. i can buy a stock and that allows me not to do homework. the moment you stop is the moment you start losing money. that's why people under perform. you will never recover until you
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engaged with your portfolio. you are not stupid. you can get engage and do this. sometimes company guess into secular decline and the stocks never recover. in that case you can't afford to wait for a turn around, just get out before the damage is too horrific. polaroid and kodak. research in motion, nokia, radioshack. that was a good one or super value. all the way down we were told that long-term you are buying. being an investor is lazy and apathetic. anyone who owns stocks with the misery and the horror of the crash of 2008 knows it doesn't work. investing for the long-term does not mean owning stocks forever. if they did something, it's that you can buy and hold stocks for eternity and bank of america comes back. as long as you don't pay too much attention or try too hard,
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i get it. the stories i read, the lessons are being forgotten. i can't have that happen on my mad money watch. i have been one of the loudest proponents of buy and hold. men have tried to change their tune or have been discredited. still others know, doesn't mean you should write off the idea. doesn't mean stocks can't make you money. that's what many of you think if you confusion long-term with buy and hold. buy and hold was always bogus. stocks are still the best way to make money for your retirement to send kids to college to afford the big ticket items. stocks that are growing and allow you to get down the wealth by reinvesting. getting back even that good investing. you will never get any of those things with the concept of an excuse or alibi and holding stocks that can't afford to pay
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their debt. something you won't even know about if you just buy and forget. you feel it's a license not to find out about. long-term investing got mixed up over the years and it doesn't mean it's impossible or doesn't mean trying. this can allow to you build long-term wealth. saying hey, come on. i'm a long-term investor is no excuse for not doing the homework f. anything, the stocks in the long-term requires more diligence and patience than the short-term. don't throw away all the lessons i teach you. you are going to need them. to paraphrase the amateur investor and beauty gert rude stein, a loss is a loss is a loss. don't you forget it. bill in florida, bill? >> yes, jim. nice to talk to you. >> thanks. >> i'm a retiree and on a fixed income. i'm concerned about the future.
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so much uncertainty in taxes and uncertainty in the elections and inflation is a big concern. is there anything i can do to protect myself from the uncertainties coming up? >> i have to tell you unless you are a person that has to heed my 20% in gold bullion, that will be your best defense. the defense is right to have. i am not going to tell you to buy bonds that yield 2%. i think gold is going to be the best defense you have against the worries that you just outlined. let's go to anthony in virginia. >> washington redskins booya. i got to ask you a question. >> have you thought about that at all? >> caller: i have a quick question. >> sure. >> caller: when the market is -- do i have to stay on the sidelines? >> when it's overbought, i use
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the s&p. we are plus five and very overbought, take a path. another time will come. however you can get started small and hope it comes back if you can't resist. sam in ohio? sam? >> caller: big glass city booya to you. >> loveing it. what's up? >> i have a question. i have been looking at a couple of utility stocks and going with preferred instead of the common share, i wanted to get your opinion on what might be better. >> we went upside. we don't want to cap at the upside. we are in a gross economy. let's get them out right and we will go do just fine. i want you in the market for the long run. you can't beat the traders. give me a break. i want long-term investing. that doesn't mean buy and forget. when you hold them for the long haul. keep doing the homework.
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let's talk the price is right. not the game show with bob barker. i'm talking about the stocks. we want to make money from your stocks and it's critical you buy them at the right price. that's making a short-term trade or purchasing if everything goes right. you expect to hold for years and years. when you pay too much, you make it more difficult to rack up the big games you and i want. you can have fantastic inside, but if you get the price wrong, you may not make any money. tonight i'm giving the power of price its due. how do you find the best price to pull the trigger given how important i think it is? when you are investing for the
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long haul, they have an advantage over people using a short-term horizon. i'm talking about time. as a longer term investor you have all the time in the world. when you want to buy a stock because you like the company prospects and no near term catalysts, you can drive it up sometime soon. that's a recipe. you don't have to pay that price. you can be patient and wait for the stock to come down to your price before you do this. you are never going to get an all clear saying it's time to buy. you won't hear this and say i know. how exactly are you supposed to know how long to wait before you pull the trigger. simple. don't know. this is an area where you have to embrace the fact of ignorance. i tell you to buy your stock in increments. lowing up gently and overtime. we don't when the stock or market will give us the ideal
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time. bet you will get the wrong one first. you know what could happen? you will feel like an idiot and bump the position and using it to buy more. i studied thousands of prays and this is a common problem. if you build up in small inc. rems picking up shares, you can avoid paying the wrong price. finding currently, you can follow us and play with an open hand. not a lady gaga style poker face. i like wide scales on the way down. translated into cramer can english. stock that you are afraid to go down while it approaches a bottom. you top the get the right entry point for the long-term investment and this is the way to do it without getting discouraged. i am stopping human nature here.
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i rarely ever see this. we don't try to buy all at once. the odds are too high. the way the pros do it and the way you should do it, insurance against the bad judgment thinking you know the stocks and you want to be in because you are so sure, so darn sure you are getting in on the ground floor. you have to presume there is a basement and not several bases. there is a scaling into a position that gets you around the difficulty of time. it is a trick. it's something that i have used overtime that has given me better prices. say you want four shares of caterpillar. it trades down to 85. the dreaded chef. and worse, you lost $2,000 in the binge of an eye. that's why we don't do that.
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caterpillar, start small at 100 shares at $90. you wait for the market to bring it down. if cat comes down to $85, rather than planning the suicide, you have a better entry point where you have the shares at a lower price. you buy the next 100 shares, you put on a final 100 and the stock sinks below 80, you have a good basis. basis is price. the worst case, they go higher to the first 100 and you make money. even if you don't have the shares you wanted. that's high quality program. you should unload it incrementally into strength. i sold it all and get the big move. you know about buying incrementals. you are buying a stock that is sink lower every day and that's okay. the company could be good. you can buy with strict scale or wide scales. what's the difference? let's stick with caterpillar. buy 1,000 shares every time they
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lose a point. each time you buy more. the essence of strict scales is that you buy in the increments. whatever decline makes sense, you purchase the same amount of stocks. that's responsible. sometimes i have a problem with that. i like to use wide scale. typically involves a stock like caterpillar. you buy larger and larger positions as the stock goes lower. i used to think a pyramid of buying. another point is 1500. when you are solo, you can hardly believe how low it's trading, you double down. it's a pyramid structure of the best investors i have ever seen. let's don't talk about it. the lower it goes, the larger the buy comes. they leave with you lots of room to maneuver. when it bottoms out you want to pour your money in and allows you to buy the greatest number at the lowest price.
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you can afford to be patient. when you like the fundaments, you can wait for a sector-wide sell off and that company stock goes down. just make sure the story is intact. do the homework. the stock never will be a bargain no matter how low it falls. in that case you may need to abandon ship and find a better to follow in. you have the wrong stock. few things are more important than price. as a long-term investor, you are waiting for a good one. be patient and wait for the right pitch. never buy all at once and buy it with wider scale to get the best possible overall basis. io joe in massachusetts. >> caller: i have a quick question for you on stop loss orders versus stop limits and how an investor can use that not
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only to minimize losses, but to ride the ups and downs of individual stock. >> look, i don't condone these. if you are going to own stocks and try to get the right prices, you have to stay on top of it. it's too important. it's your money. you get these crashes and you bought a stock at 80 and it's 70 immediately. the market doesn't work well to do that anymore. it's too crazed. you have to protect yourself from the market. any market that acts as badly and strangely because of high frequency trading. those are out the window. price matters. basis matters. don't buy or sell all at once. keep an open mind and stay with cramer.
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the only way to generate strong returns year after year
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is by putting thought and effort into the process. anyone who said you can make money without keeping track of developments like a personal trainer promises you can get in shape without doing exercise. that's a pill that doesn't work. i think a substantial majority of the population believes this works. i read about it in the papers. no wonder stocks are so hated. if they buy blue ship stocks and wait long enough, they will get higher. that's some reverse gravitation that they subscribe to. you can call it that. in recent years, let's say it's really horrific. think about it. the last of the five years, middle of 2012, s&p is 9%. things have gotten better, but if you look at the performance over the first decade of the new millennium. everything was down 24 pors
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percent. you did lose 9% when you factor in the dividends. that's why i tell you to own the high dividend stocks. even with that, you were better off hiding your money in a mattress than the market. let me give you advice that could have spared you a great deal of pain on a subject you almost never hear from the paternal order of buy and hold. i want to talk about a forbden term. i want to talk about selling. selling. every stock you buy, you should consider comes with an expiration date. radical. knowing when to sell the stocks is every bit as important as knowing when it buy. it's more critical. so many people make a huge number of selling related mistakes either by panicking or getting greedy and not selling at all. no one talks about selling except for me. if you pick the right stocks
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with the stories, get in to right prices, you will have winners that are up and maybe big. the trick is not going all in. greed is not good. it's dangerous and horrible. remember bulls make money. short sellers or bears can make money, but pigs, slaughtered. baked. when you have a serious winner, maybe with the years of gains, we want you to take promise. period. no discussion. the only time you let the winners ride, you have some of them. it's a mistake. you have to ring the register and want a partial portion of e or position or they can be winners and losers. the best of luck. that's why you have them. believe me, you haven't won until you have taken something off the table. i'm making a lot of money. don't use the term making.
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why am i putting so much stress when you unload the stocks? they run and never touch? you don't need me. when you run the stock and the company leads you down, maybe they are not selling out. maybe the economy takes a turn for the worst and the stock belongs to the sector. don't get sentimental. sell. better act quickly. give a small loss and get the second chance to burn you. lots of people hang on to the losers because they are waiting to get back to even. the worst kind of mistake they have with buy and hold. these people know they are losers and deserve to be sold. they want to sell. they are waiting too long for an unrealistic price of getting the downturn with the actual company. they seem to make perfect sense. selling the winners is counter intuitive. you have to at least trim the biggest gain.
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the first is diversification. when you ride the position, it can get too big. say you want to double and double. maybe you bought apple. that stock is represented 15% of the much larger piece of the pie even if they have gone up a decent amount. they have too much to the best stocks and too much exposure for what that stock is in. you never want that more than 20%. keeping all your egg nosone basket is dope. they don't become too large of a piece. i am not saying sell them. that is what is going to be interpreted as not true. if you are investing and you have time to do this, you do it gradually. not all at once. should you sell off parts of your position. like i told you earlier, never sell all at once. try to wait for moments of strength and get better prices
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as it goes up. you don't want the portfolio to be weighted towards any one group. one more concept when you sell the best performers. playing with the house's money which i explain in one of my rules. when they had a huge result year run, you want to trim to the point where all the money you have invested comes from profits you already made and not a penny from the original investors. then you can afford to take more risks. that's the holy grail of investing. you can't lose. you are in a can't lose position. that's fine with me. that you can buy and hold. it's bought and paid for. one last thing. younger investors can afford to let them run and why is that? those of us who are older and closer to retirements cannot afford turning them into losses. it's less important that you
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preserve the capital. you make up for money you lose. those of us in the older demographic, if you are well-preserved like myself, who would guess that i'm a limber 60 something. trim your winners and ringing the register more regally than a young investor. when you invest for the long-term, you can't just hold stocks forever. you have to take profits. trim back the winner so it diversifies. try to take all of your capital out and play with the house's money. that's the only time i say you can buy and hold. nick in kansas? >> caller: hey, jim. i was wondering should we embrace the increasing population of ets as a way to mitigate market volatility? if so, which would you recommend? >> the only etf i would recommend is gld. why is that? that's gold. i want to own the best.
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etf gives me the opportunity to own the worst with the best. one of the things i learned is being able to pick which are better and which are worse. that's what i want you to do. i know you will do it. let's go to daniel in texas. daniel in. >> a big booya to you. >> what's up? >> caller: well, i was at a real money portfolio management class with the peg ratio to find the most valuable stocks. specializing in it and looking more towards the price and the cash flow and the free cash flow to find the more valuable it stock. the cash flow for -- >> look, i happen to like the peg ratio, but i look at myself when i'm analyzing a company and operating cash flow. that's the one thing that no one can really do. operating cash flow is growing and you are a student in business and you know how to look for it, it's a great way to
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measure a company's worth. with apologies, greece is not good. you have to lock in the profits. you can't hold them together unless you are playing with the house's money. the best position is all that's left is the profits that the market is giving to you. then you can let it run forever. stay with kramy. what does fall smell like? head north, to someplace pristine like acadia national park. there is nothing like the parks this time of year. the falling leaves,
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if you want to invest for the long-term, like it or not,
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that means planning for retirement. we you will retire. that may not sound technical, but putting enough money to be financially independent is what we do here. i am sure you heard the basics of retirement planning. you have to contribute if you have one and you have to contribute to your ira. that is the wisdom and while not exactly right, it's helpful. i will give you suggestions about what kinds of stocks you should buy. you need to yen people tell you to take advantage of your 401(k) and ira. the money you put in comes in the pretax. you don't pay taxes on the money you contribute. you pay no taxes on the capital gains tax and investments can compound for years tax-free. giving you much larger returns. you only pay taxes when you
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withdraw. especially if you are worried about tax rates and dividends and capital gains. they do fluctuate as you go up and down. as much as i like the status of the 401(k) plans, i want to give you something nobody will say. most 401(k) plans stink. they have high management fees and costs that eat into your returns. they offer you lousy choices for investments and not nearly enough control. the businesses to me sometimes are racketed for the fees. i am very upset about this, but i hope to stop it. you want a diversified portfolio of five to ten stocks. most won't let you do that. they choose from a limited menu of no more than a couple different measurements. the best you can do is find a decent low cost index and put
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your money in there. given the premises is that you can do better by picking individual stocks and managing your portfolio on your own with your own time frame. that makes a 401(k) a poorly designed vehicle. sometimes it feels like the whole system was set up to benefit the services. not you. given the way washington works, i wouldn't be surprised if that was the case. most stink. should you contribute to the 401(k) even putting cash. you have to take advantage of the tax nature. these vehicles are too good to pass up. many employers will match the conbugzs. i'm a big believer of not turning down free money. put enough money in your 401(k) to max out the company match. the rest should happen in your ira until you hit the upper limit of what you are allowed to contribute. unlike most 401(k), you can invest any way you can.
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it was 5,000 or 6,000 if you are over 50. what should you buy? the best bet is to own many of the high yielding stocks they talk about all the time on this show that provide the protection and generate income. a couple of wrinkles that make investing different. for example, as much as we like high yielders, it doesn't work well for partnerships. i think the pipeline stocks and energy partners as much as i wish they d. it's a distribution with the return of capital. you don't pay any taxes with the stock. there is this tax rule that has been interpreted and you buy too many of these stocks within the retirement, you could give that status and paying the irs taxes you wouldn't have paid if you bate them in a regular brokerage camp. the same can hit you with real estate investments. in general we tend to have high yields and worth owning the ira. you have to be careful and what
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you i have to tell you is that's the group we want. before you choose them for the retirement counts, you will go with the yielding. are ow that? you need use the same metrics. high yields and it has to be and company better have enough earnings. the track record of raising their dividends and that's great for capital gains that are there. the bottom line, a huge part that was is retirement. the best way to prepare is like an ira and investing it in high dividend. they can e invest and compound without paying taxes and withdraw at the very end. that's a terrific recipe for producing huge long-term returns. david in california. >> caller: like your show. >> thank you for calling in. >> caller: the comment about listening on conference calls, you are probably at the institution level.
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do the individuals gain access to the conference calls with the listen only mode so they can listen to the questions and the response. >> you don't need it to n realtime. you get the transcript. sometimes i do it in realtime and other times during the show. i do the transcript at home or at night. it's readily available everywhere. you can stop and think and you can't do that when you listen to it live. long-term investing is not only an rarks, but the stocks. reinvest and build up overtime. avoid the taxes by simply making sure you make the contributions every year. stick with cramer. [ male announcer ] research suggests the health of our cells plays a key role
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here's the serious conundrum. how are you supposed to pick stocks when they are going in and out of style on the wall street fashion show. how do you buy something when in reality that's not the way the
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game started wo work anymore. few stocks you can keep on riding higher and higher. when you find them, they are the holy grail of investing. those don't go in and out of vogue. stick with the fashion show analogy. all right. like i told you before, there was no such thing as the stock you can own forever. that's the essence of the buy and hold thinking that lost so many people with huge sums of money over the years. some are more lasting than others. there is a certain stock that can incree the multiyear gain that can be owned much longer than ordinary stock. we are talking about what's known as secular growth stocks. a rare broad that you should be on the look out for. these are driven by powerful long-term stories that transcend the strength or eakness of the underlying economy. most need a healthy economy to strive, but a secular growth story can deliver spectacular
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numbers even in the economy. they could keep pounding the stock higher quarter after quarter regardless of the economic environment. how do you spot a growth name. i like to look for big picture themes. this is a play or a much broader trend. take the move towards healthy eating and the embrace. this organic theme made whole foods the theme into a power house stock. the thing for haynes celestial in the aisles of whole foods, it's not your average company. while these stories can last for years, even growth trends in the end have a limited shelf life. what you see is that there fewer and fewer plays that can make you money. last longer, but not forever. when the smart phone was a recent invention and most people had dumb phones.
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i started talking about the tsunami. there was a ton of money to be made over the smart phone food chain as people converted from dumb phone to smart phone. that was the reason to buy apple that never stopped the performance. it turned out not to be a license to buy the weakest players that fell by the wayside as we learn. it doesn't lift all ships. the ones with holes still sink. here's the bottom line, most of the time you can hang on to a sock for years and years. with a secular growth story with the same team that is pushing up a whole foods or an apple. nothing wrong with owning the stocks for as long as the story stays intact. it can be a long time. just like life, even secular growth doesn't last forever. while you may want to go with the growth, even the biggest wave ends up crashing on the shore. only home work will keep you from crashing along with it.
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lairy in tennessee? larry? >> caller: this is this james j. kram sner. >> yes, how are you in. >> caller: i wanted to call and thank you for putting my daughter through college. >> you are terrific. thank you so much. thank you. >> caller: i had a question. tax season is coming up and they teach us to trade around the four positions up and down. i wonder if you have any advice for us coping with the sales. >> that's a problem. that's why what i will do on that question is tell people because i can't give individual tax advice. you have to speak to your consultant about when you can take the sales and go back and buy. you are right. there can be a problem, but i don't want to speak broadly because it's individual to a person's taxes. no stock is forever. they come in and out of fashion
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>> all night i have been trying to walk you through what it does and doesn't mean to be a good long-term investor. there is nothing virtuous about long-term investing don't get hung up on the nomenclature. it's loaded with negativity. i'm not making any judgments. we are here to make money. i haven't stuck to making long-term winners and it's an easy strategy for home gamers. i like it.
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if it does better when you manage your money, you need to get the stocks and more power to you. i am not going to judge you. never forget you do not have the horses to compete or the hedge funds with multimillion budgets to support their training operations. one of the reasons why i prefer longer term. they don't care whether it was made in trades or not. we have seen banks with mexican cartel s and despite the international. they will not draw the line at money made with stocks. the teller is not going to say accept the deposits. money is money. here's the buy and hold talk. the only money worth making is boring investing. the only difference between trades and invests. investments are positions you plan on being in for a year or a year and a half. day trading is differently. i can't encourage it because you
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will lose money. don't be fooled. you don't have to choose between passively sitting on your holdings even when you feel like you should be taking action or getting in and out on a daily basis as a trader. you can do what you need to do to save money. find a happy medium. just be true to you're develop. stay on top of things. you will do better or in a huj fund you can have. only those who are trying to manage your money for themselves or take your money and their min yon. those are the only ones who disagree with the at the same time who said you can do it better yourself. this is cramer. why should golfers take 5-hour energy? playing golf all day can make you tired. i've been taking the product for about a year.
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