Jim Cramer’s advice for investors looking to buy AI stocks
Stocks are always going up and down. But recently, some of the daily swings in AI stock have gone to extremes. Investors need to respond accordingly by changing their spending habits. On Monday’s Morning Conference, Jim Cramer said he wasn’t ready to put new money into tech stocks just yet, echoing something he discussed at length in his Sunday column. But if investors want to buy dips in other chipmakers and other data center plays, Jim’s advice is to use “broader scales” to soften the impact of any sharp moves. By broad measures, Jim means buying stocks gradually at predetermined price levels – with very large gaps between them – as volatility creates opportunities, rather than buying the entire position at once or buying at very close prices. “What I love is coming up with prices,” said Jim. “You want to create a pyramid style as you build down.” Yes, we always look to buy stocks of high-quality companies as they go down; if the investment thesis and fundamentals don’t change – in particular, if earnings ratios stay the same – a lower price simply means better value, or more bang for your buck. But when trading in a sector, industry, or stock changes dramatically, as has happened with hyperscalers and AI stocks in recent days, you should change your scales. We may have previously been looking to add to our Intel position with a 5% drop; now we need to see a drop closer to 10%. We want to use flexibility to help and build what we think is still a great long-term investment at levels that will lower our overall cost base. Using pyramid shopping is a strategy that requires discipline and advance planning. The idea is not only to buy at low levels but also to increase the size of the purchase each time. For example, say you want to create a new position in INTC. And let’s assume you want to buy 80 shares in total. You can do it in several ways: 1. Simple dollar cost balancing : Buy 20 shares in four separate purchases at predetermined minimum price levels. 2. Weighted pyramid : Increase the number of shares bought in each of the four trades with decreasing prices. For example, buy 5, 15, 25, and 35 shares. You still end up with 80 shares, but the bulk of the shares come on a lower basis. 3. Double bottom pyramid : Divide the total area size by eight to determine the starting point of purchase. So we buy 10 to start, double down by another 10 (total of 20 shares now), then double down by 20 (total of 40 now), and down again by another 40 purchases, resulting in a total of 80 shares. Any combination of these methods will help lower your base; what your style comes down to and how comfortable you are to buy comes down to. The most important thing to consider is that you “know yourself” and know what strategy you will be ready to follow when the time comes. If the stock meets any of these conditions, you stop buying and ride a little higher, which we consider a high quality problem. In any case, rising volatility requires you to wait for bigger declines between each purchase than you would in an up and down market. With this strategy, you can also look to increase scale with each purchase. For example, the first purchase may come after a 5% drop, but you might expect an 8% drop on the second purchase, and a 10% drop on the third purchase. This way, while you bet more each time, you also get a bigger margin of safety – a bigger chance of getting closer to the end of the move – with each purchase. (See here for a full list of stocks from Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling stock in his charity portfolio. When Jim talks about a stock on CNBC TV, he waits 72 hours after issuing a trade warning before making a trade. THE PRIVATE INFORMATION OF THE BURNING CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AND OUR PRIVACY POLICY. NO LEGAL LIABILITY OR OBLIGATION EXISTS, OR IS CREATED, BY YOUR ACCEPTANCE OF ANY INFORMATION PROVIDED BY CONTACTING THE INVESTMENT CLUB. NO PARTICULAR RESULT OR INTEREST IS GUARANTEED.
