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A Few Notes on Get Rich Carefully

| | Posted in: Individual Investing

In the introduction to his 2013 book entitled Get Rich Carefully, television personality and former hedge fund manger Jim Cramer describes it as: “…tailored for those who are befuddled about and distrustful of stocks but seek better returns than they’ve gotten from somnambulant managers and underperforming mutual funds. It’s meant for those who think they can profit from stock price gyrations but don’t know how and why stocks really go up and down. …Bond funds have gone from cautious friends to reckless, wily enemies. Real estate seems played out, gold stymied, commodities kaput. But stocks? Let’s go figure them out. Let’s go harness them together. Let’s go get rich with them, carefully this time, so you don’t have to give it back. Let’s go forward and makes some hay, because at last the sun is shining, and we have the tools to harvest the money that’s within our grasp after years of toiling in the most barren of vineyards.” Based on his experiences over the past eight years and his consequent rethinking of how stocks work nowhe concludes that:

From Chapter 1, “What Moves a Stock” (Pages 45-46): “…we have to accept that stock gyrations often don’t have much to do with the day-to-day success or failure of the individual companies they are meant to track. …Stocks now trade like commodities because index futures have overwhelmed the stocks that are in them… ETFs have created a homogenized environment among different stocks in the same sector that is often more powerful than the fundamentals of the individual companies. …Bonds and the Fed matter more than ever because we have now seen the bottom in interest rates and they are climbing, impacting stocks in lockstep… International influences must be grafted onto your thinking about stocks pretty much on a daily basis because of the electronic linkage of all markets… Only after you understand all of these forces does it pay to consider how the fundamentals will impact the prices of stocks, and the fundamental input we most care about is whether a company is raising its guidance for future sales and earnings.”

From Chapter 2, “Getting a View of the World from the Source” (Pages 57, 107): “It’s only after you have estimated the world’s growth, and the sector’s growth within the world’s prospects, that it is worth figuring out how a given company is performing in that sector and what management is doing to exceed the average performance of companies in that sector. If you can approximate all three–the macro or world economic growth, the sector growth, and the micro achievements, including sales and earnings of the companies themselves–then you are going to be successful at growing your wealth carefully through superb stock picking. …Measure your company’s growth rate against both the rate of growth in its own sector and the rate of world [or domestic] growth… Get your top-down growth views from management of companies on their conference calls.”

From Chapter 3, “Seven Major Themes Made to Last” (Pages 110-111): “…there are themes that you can count on no matter what, ne’er-to-fail themes with tremendous staying power, which you can always fall back on as a source of terrific, multiyear investment opportunities. I’m betting these themes hold up not just for one or two but perhaps as long as five years… The first is new tech, the companies that have embraced the holy trinity of mobile, social and cloud… Second, the beneficiaries of the desire of all Americans to look good and healthy… Third, the newfound virtue of value, as consumers demand bargains… Fourth, companies that buy other companies to take advantage of scale and synergy… Fifth is what I call ‘stealth tech,’ companies that innovate where you didn’t think there was innovation… Sixth, the new pharmaceutical companies, the biotechs… And seventh, the renaissance in oil and gas that’s happening in our country…”

From Chapter 4, “Breaking Up Is Easy to Do” (Pages 173, 201): “When a company separates into two or even multiple companies, the results over time…can be staggeringly positive. …When you spot these breakup candidates before they occur, you could be embarking on a journey that ends with a fourfold win. The first victory comes when the market speculates that a breakup is a possibility… The second bump comes with the announcement of the actual breakup. The third increase comes as the soon-to-be-split-up stock creeps toward the dissolution. The fourth boost happens when they actually separate into different, publicly traded stocks. …these ten equities have lots of upside potential and a downside limited by their breakup values and their undeservedly inexpensive price-to-earnings multiples…”

From Chapter 5, “CEOs: The Bankable 21” (Pages 203, 205): “…knowing the record and character of the CEO–what he’s brought to the table before and what he can bring to the organization in the future–will determine, more than any other factor, whether you will be able to get rich investing with that leader. …That’s why I am going to reveal here the best of the best, the twenty-one people who…deserve your praise and your money.”

From Chapter 6, “Charting for Fundamentalists” (Pages 259, 291): “I don’t want to fill a book with technical tools. …I just want to give you the basics of what has worked and a few extra insights that most fundmentalists, whether hobbyists or professionals, need to know to be as informed as possible about how to use the charts and the technical data these software packages give you. …No matter what, though, don’t use the technicals in isolation. Use them to solve conundrums… The combination of the charts and the fundies…is so powerful that you need both in your arsenal.”

From Chapter 7, “Lessons Learned from My Charitable Trust” (Page 296): “In examining my bulletins, I discovered seven situations when buying might be warranted and seven when you need to take a pass, even if the logic behind making a move seems compelling.”

From Chapter 8, “What Matters? What Doesn’t? What We Should Care About” (Pages 338-339): “The monthly labor reports are of tremendous significance and can color the investing firmament for months on end. …Don’t be thrown off the scent of some important and positive actions by companies, such as breakups to bring out value. …Pull the file on a company, do some homework and get ready to buy a stock where there is concentrated insider buying. …don’t trade off [old Federal Reserve minutes]… Don’t act on SEC filings of big-time investors.”

From Chapter 9, “When and How to Sell in the New, More Difficult World of Investing” (Pages 340-341): “There are multiple signals that tell you when to exit; if you are sitting around waiting for a top, you are going to end up losing a lot of money. That’s why I have compiled a list of ten warning signs that you must take heed of and act on when you see them.”

From Chapter 10, “Check Your Emotions at the Door” (Page 381): “If we are going to be the best investors we can be, we have to learn to tame our worries yet stay skeptical enough to make considered judgments about when our investments have gone awry. A scared investor is a terrible investor. But the other bookend, euphoria, is just as toxic to our financial judgment.”

From “Conclusion” (Pages 408-409): “You should know that stocks routinely become divorced from the ‘fundamentals’ in ways so predictable that you can profit from these dislocations. …You now presume that declines will happen at the drop of a hat, sometimes for no good reason, and you are ready and waiting with your buy list of best-of-breed names to exploit long-term themes that aren’t hostage to the whims of the domestic or international economies.”

In summary, readers may find Get Rich Carefully an interesting and eclectic source of stock investing hypotheses. However, developing samples to test such hypotheses would likely be quite difficult due to the subjective/imprecise nature of many recommendations.

Cautions regarding conclusions include:

  • Support for the recommendations in the book derives largely from anecdotes rich in metaphors rather than rigorous quantitative analyses (either cited or original). As noted, rigorous quantitative tests would generally be difficult to formulate.
  • The author does not quantify reasonable expectations for the return/risk performance of a well-maintained portfolio based on one, some or all of the recommendations offered. He does state on page 1 that he is “confident you can beat the averages.” Per an academic study from 2009, summarized in “Investing in Jim Cramer’s Money Madness”, his stock picking is on average neither extraordinarily good nor unusually bad.
  • As explicitly represented, the book addresses only stocks, not other asset classes.
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