CNBC’s Jim Cramer on Wednesday delivered a message of caution to retail investors who helped drive up the price of so-called meme stocks last week.
The trading activity that was sparked on Reddit ignored traditional investing logic. It triggered an unprecedented short squeeze in stocks including AMC Entertainment and GameStop that captured the attention of people in and beyond the investing community.
After a mixed day of stock trading on Wall Street, where the Dow Jones and S&P 500 indexes posted modest gains and the Nasdaq Composite slipped a couple of points, Cramer sought to introduce investing guidelines to the retail investors who participated in last week’s craze.
“If you’re part of this new cadre of investors, I am begging you to follow my seven new rules,” the “Mad Money” host said.
The new class of investors Cramer is referring to is, in large part, the tens of millions of market players introduced to stock investing by commission-free trading platforms such as Robinhood, which has come under fire for the way it handled high-volume trading in the meme stocks last week.
With shares of AMC down 56% from its highs and GameStop down 80% from its peak last week, Cramer said the Reddit revolution is at a crossroads. He advised viewers to follow accepted valuation principles such as price-to-earnings ratios to find stocks worth buying, pointing to stocks such as United Parcel Service, Abbvie and Google parent Alphabet as having more acceptable price multiples.
“There’s only one good reason to own stocks, and that’s, of course, to make money,” Cramer said. “We are at a critical point in this market, a point where the cheapest stocks are often the best and the most expensive stocks are often the worst.”
“I want to address the retail revolution … [and] put it in context, because sometimes revolutions fall apart,” he said. “Sometimes you get a two-day junta, then things go back to normal; other times they maybe take the radio station before the tanks roll in.”
Here are Cramer’s seven guiding tenets for new investors:
- Augment your capital with the stocks of companies that deserve to go higher over time
- Don’t try to wipe out other investors
- Find opportunities to capitalize on stock moves driven by emotional trading
- Don’t depend on the government to introduce regulatory changes
- Don’t borrow money from brokers to buy stocks
- Keep a sound head and follow corporate earnings reports
- Invest in companies that are in good shape and poised to do better in the future
Disclosure: Cramer’s charitable trust owns shares of Alphabet, AbbVie and United Parcel Service.
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