On “Mad Money” March 29, Jim Cramer talked about must-use techniques in purchasing stocks and managing your portfolio. He said actively investing in stocks, rather than having someone else manage your money or waiting for index funds to appreciate, is essential in the wake of the crash of 2008. He suggested spending five to 10 hours weekly managing your portfolio and doing the research. Mimicking the market’s returns rarely works. You have to put in the time by actively managing your portfolio and doing the research. You can beat the averages, but you have to exercise some patience and determination.

The “New Highs List”:

There are a few tools of the trade to pick stocks and manage your portfolio. Watching the “New Highs List” is one tool that never fails. The stocks on the “New Highs List” have something going for them, especially when the market is in bad shape. Either its part of a genuine bull market or it has some serious momentum. Many stocks on this list often keeps going higher and higher. There are some caveats to this however. It is still a good place to start. There is more continuity than change. Only when there are shifts, then you have to change course. Therefore you have to keep doing your homework. There have to be special circumstances. For example, on Monday’s “New Highs List” Cliffs Natural Resources Inc. (CLF), which is a mining and natural resources company that produces iron ore pellets, lump and fines iron ore, and metallurgical coal, surged $1.59 to close at $72.95, after setting a new 52 week-high of $73.95 before pulling back $1.00. This would be a stock to put on your watch-list.

Wait for something to pull back from the “new high list.” It gives you a good lower price entry in a stock. You must always be conscious of price. Purchase on weakness, sell on strength. You should purchase these stocks if you are confident of a comeback. Make sure they haven’t pulled back for a good reason and not just the market pulling back. If the fundamentals haven’t changed, it may have pulled back for mechanical reasons – profit-taking, etc. These reasons should have nothing to do with the fundamentals of the company. If the opposite is true, the stock is no longer a candidate to be purchased.

Finding Great Buys:

You can get a better deal if you are patient and wait for some weakness. There are cases in which buying off the new high list is justified, especially, if the stock is so “hot” because it’s not going lower in the near future. If that is the case, which is a rarity, it would be wise not to buy all the shares at one time. For example, purchase 25 shares first. There is one exception. If your research uncovers insiders buying colossal amounts of stock when it’s at its 52 week high, then that is a great sign of their confidence in the business. The reality is that these insiders don’t think there will be a pull-back in the stock price. Still, you must do the homework and check the fundamentals about the company, including reading through the transcripts of the conference calls.

When a stock has a huge short position is also a great time to purchase shares in the company. There are a lot of people who have serious conviction that the stock is going down. The potential downside is infinite. If there are a lot of short-sellers, you get a short squeeze. In order to bail on their position, they have to buy more shares to cover their positions and close out their losses. This will cause the stock to surge. Similarly, when a company with a heavily shorted stock announces a buyback some of its shares, that is also a good sign. A substantial new buyback in the face of shorts is a good sign and worth a second look, however, you must proceed with caution. The balance of power has shifted in favor of the shorts and against you; therefore, you must avoid situations where the shorts are determined to crush the stock at any cost.

How to Trade Stocks:

Trading around a core position is paramount. Trading is about profiting from short term fluctuations in stock. Knowing how to trade makes you a better investor. First, pick a stock you believe will go higher over the long term, though it will get tossed around by market volatility. Buy in increments. For example, you want to buy 300 shares of Boeing. You should do so increments – 100 shares three times — over a period of time and that would be your core position. Every time the stock rises, you sell some shares to a shave off a profit. Wait until something knocks the stock down, you buy it back in increments. Over time your profits add up and that is what trading around a core position is. It is the height of prudent portfolio adjustment. There are rules to follow. Avoid putting yourself in a spot where you have too much or too little shares of the company.

Using options is the ultimate method of taking your trading to the next level. This will allow you to net small gains that will add up over time. When you have a stock with a lot of momentum, you need to know when to get out. The key to figure out when interest has piqued in a stock and it’s time to sell is by watching the Wall Street analyst coverage. Once hot stock has at least four analysts covering it, the means the run is almost over. It is a good gauge of how much interest and awareness there is in a particular stock. Hot stocks get tapped out when there is nobody left to be attracted to them. All the people interested in purchasing the stock have already done so. It is time to sell. It’s better to take your winnings than wait until the stock starts to cool off. Once too many people know about the stock, the stock will run out of steam and will never recover to the initial stock surge.

The steps given by Jim Cramer are common sense moves for any prudent investor. It takes time to understand and learn how to trade to effectively maximize your profits.

Janet Shan