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Avoid this investing strategy—it’s a ‘road to disaster’
Jim Cramer can’t guarantee that following certain financial strategies will see you to a secure retirement, but he’s pretty sure of a few that won’t.
In the preface of his book, “How to Make Money in Any Market,” Cramer issues a few warnings about building long-term wealth. One is that your confidence “might be misplaced” if you plan on relying on Social Security to fund your retirement. Another is that betting on the outcome of basketball games is not a solid investing strategy.
“Third, and maybe worst of all, trolling the internet for ‘meme’ stocks like GameStop and hunting for short-term victories in the hope of long-term financial stability is an easy road to disaster,” he writes.
A “meme” stock is a stock that gains sudden popularity on the internet, leading to skyrocketing prices. Cramer cautioned investors about such investments during GameStop’s original Reddit-fueled trading frenzy in 2021, during which GameStop stock went from less than a dollar per share to an intraday high of $120.75, adjusted for splits.
Cramer says the backlash from some investors was fierce enough that he hired private security. But many investors who didn’t heed his warning got burned: By 2024, GameStop stock traded in the neighborhood of $10 a share. It’s currently trading around $20.
Cramer’s warnings about GameStop and other meme stocks comes down to what investing pros call the “greater fool” theory. Investors buy overpriced assets they know aren’t long-term winners in the hopes of selling at a higher price to someone else.
Cramer has another analogy about investing in meme stocks. “When you buy the kind of stock like GameStop, that is just literally a musical chairs game,” he tells CNBC Make It. “And I’m against musical chairs and I’m pro-investing.”
In other words, if you get into risky short-term trades, you could end up without a seat and lose a lot of money when the music stops.
Avoid trading in favor of investing
None of that is to say that Cramer doesn’t want you to speculate — he does. Cramer advocates for dedicating a small percentage of your portfolio to stocks you think have the chance to deliver huge returns, even at a substantial risk of loss. But he wants even your long-shot stock picks to be fundamentally strong companies that you plan to hold for the long term.
Meme stocks, which investors tend to hold solely in the hope that the price will go up, and not based on underlying fundamentals, are unlikely to fit the bill, Cramer says.
“I like you to get in, and, if it’s a really good company, you stay in,” he says. “But GameStop was not a good company. That was simply people who were just chasing.”
When thinking about a prospective investment, Cramer suggests asking yourself whether you’re envisioning a transaction with a beginning and an end.
“If it has a beginning and an end, I say don’t own it, because I want owning. I don’t want trading,” Cramer says. “Trading is for people who professionally traded like I did for 20 years.”
To build wealth, he says, you’re better off choosing investments that you expect to deliver consistent growth over the course of decades. Such firms should have bright long-term prospects, underpinned by growing earnings, innovative products or services, and durable competitive advantages over peers.
“My version of investing may not give you the instant high of a short-term ‘victory’ that will eventually come crashing down,” Cramer writes in his book. “But buying and holding shares in best-of-breed companies can compound your money in spectacular fashion over time.”
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