Investment versus a weak one . And what happens when the facts change . Tonight im going to show you in real term whats can go right and what can go wrong because i want to teach you how to learn from both my wins and my mistakes so you can replicate the wins at home but avoid the losses. These are all taken from real Life Investments made with my Charitable Trust, where we document every trade in realtime so we know what went through the minds of both jack moore, our research director, and myself contemporaneously as we tell you what we would do before we pull any trigger. So often were restricted because if i mention one of the portfolio stocks on air on season, the trust is frozen, and the trust cant take action. But we can tell you what the trust would have done. Sadly, because of the restrictions the trust really cant do as well as you might be able to do the bulletins from actionalertsplus. Com. But these lessons well learn tonight, they encompass all the moves we could have made and did make. Ill spare you the gritty details of the actual bulletins although we write them, i think, with kind of elan. But i wanted to fill you in on the misjudgments that lead to losses and the correct thinking that leads to gains. First let me describe the process by which my Charitable Trust works. I set it up a decade and a half ago as a way to be able to keep my hand in the stock market even as my contract wouldnt let me own or trade stocks, so i can do the show free of any conflicts. Its designed that so that any profits whether from capital gapes or dividends, go to charity, enabling me to give away over 2. 5 million since we started. It had many coPortfolio Managers and Research Directors during this time and weve always worked hard together. Its a true collaboration, where decisions are made when both the research director, in this case, jack moore, and previously coPortfolio Manager stephanie link, now a Portfolio Manager at tia craft and still a regular on both Halftime Report with scott wapner and closing bell. At all times we try to run a diversified portfolio, seeking out the best ideas for value, income, and growth. We divide the portfolio into these segments and rank the stocks within them. So members who subscribe to the newsletter can pick among the stocks that suit their needs. I always liked the idea even as it often expoised me to an intention level of public scrutiny. I didnt give up the lucrative world of hedge funds where i had been before 14 years before that, where i managed to gain 24 per year versus 8 prls for the s p for a less remuntive world for the sake of pain and suffering. I wanted to show you how real portfolios think with an open hand when they make decisions. Unlike the way these Money Managers present themselves on television. I put it like that because when i see Portfolio Managers on tv, they never seem to make any mistake. They never seem to do anything wrong, and ive seen thousands and thousands of interviews. Thats just plain unreal tissic, people. In fact, to go a step further, i their mock perfection is very discouraging as its led to a belief that theres no way you at home could ever do things right. So you might as well give your money to a robo adviser or index fund. Of the many misconceptions about me, the most wrong head san diego i favor index funds. Im so in favor of diversification as a way of playing defense, and thats what an index fund gives you. But i am also a Firm Believer and always will be that if people want to own individual stocks and they still do, although in admittedly decreasing numbers each year they should have the tools they need to help them. And they need to understand what makes for a good stock pick versus a bad one. Why would you ever want to own an individual stock . Because if you use a fund that mirrors an index, youre accepting the mediocre portion of the index along with the good portion. Plus you know you often have insights that are useful in investing, and they can be parlayed into excellent decisions. This didnt used to be such a radical idea. The notion that individuals shouldnt own individual stocks has really only come into the prominence in the last decade and a half as the indirection proponents have become more ascending. They never seem to be able to put a nail in the coffin the individual investors right to research and pick stocks of their own liking. They cant refute that its a terrific thing to do and think theyd be able to choose when you want to pay your taxes by selling or not. They dont extol the virtues of not having to report to other investors, something that hurts longer term Decision Making in virtually every hedge fund and mutual fund out there. Thats why i send the industry of Money Management does you such a disservice on television because the combination of their seeming perfection coupled with the debasing of your own abilities is a toxic brew for do it yourselfers, even as so many brokerage houses correctly extol your chances and your ability to do homework that leads to positive conclusions. Recently weve taken a much more of a club approach to action alerts plus, a kind of membership where we conduct forums to help each other with ideas. Do we have any empirical evidence that individual investing works beyond my own record as a professional . Is it all arrogance to think that you can do it yourself and you shouldnt check some boxes and send your money into someone who is either knowledgeable but wont talk to you or is lacking in knowledge but has a handbook of answers or for that matter is just a machine . All i know is that when i worked at Goldman Sachs advising wealthy people with their stock portfolios, i was astonished at how often they crushed the market simply by looking at companies and making decisions based on how those companies and their managements might do. These were my clients. And that was at a time when there was far, far less information than we have now about companies, especially now the web allows us to find out more than ever. Information is more perfect these days. Everyone seems to have equal access. But the simple fact is i watched people clobber the market regularly, and ive always therefore resented those who tell you you cant do it yourself. I saw it with my own yiez. Doesnt it both you to be told that youre basically a fool and an id yolt if you try to manage your own money . It bothers me. Its kind of like going to home depot, asking a question among the orangeaproned salespeople, and being told, thats only for the pros, not for the do it yourselves. I would find that to be astoundingly stupid and an arrogant judgment. You should feel the same way about those who tell you that you cant do it yourself. The only real difference is the home depot people arent trying to get your money from you whereas all the people who constantly hype their own prowess or denigrate those who would love to try to do it themselves are driven by the desire to get you to surrender your assets to them. Its kind of their business model. Now, these pros just arent questioned about their motives, which to be fair would be quite rude. So they look like theyre always acting in your best interests, and they very well might be most of the time, particularly if you dont have the time, the inclination, the temperament or the ability to make sound judgment about stocks and bonds. But heres the bottom line. Lets say you actually do. Lets say you have the time. Lets say you have the inclin agsz. Lets say you have the desire to do it yourself. Lets say you want to save money, not pay a percentage of your assets to someone who may not be better than you are when that percentage can add up to big numbers over time. Then you know what . This show, tonights show, its for you. Beth in connecticut, beth. Caller jim, for my i. R. A. , i have a 15year time horizon. It is okay to be all in a diversified stock portfolio like the s p 500 index . Yes, absolutely. Thats exactly, beth, what i would recommend. I think thats a great way to handle it, and i think thats exactly what you should do. Nick in arizona, nick. Caller jim, booyah. Booyah. Caller i had a question about with all the recent mergers and acquisitions that have been going on, how does one maybe try to look for the next possible acquisition, or how do you position yourself to maybe make money on that . You tend to look at the sector and see when theres sector activity like in the food groups or the telco group. You look at ones that seem to not have a bandwidth to be bigger and someone else could gobble them up and therefore raise their numbers. Thats really the pattern that ive used over multiple years. Ben in florida, ben. Caller hey, jim. Thank you very much for everything you do. I listen to your podcast every morning on my way to work. Thank you. Caller i just have a quick question. Ive called before, and youve blessed my diversified portfolio, and now i need a little help on how to adjust my cost basis when trading around a position. Sure. Well, i mean, look, i usually dont like it unless a stock has gone up 25 , i dont want to take any off. Stock goes down say 20 , i buy back the stock that i took off. Its in a bunch of my books. You know what, these days for action alerts, im actually discouraging a lot of trading. I dont want to have too much trading because the trust doesnt want to incur the fees. But it certainly makes sense if the market has a big spurt up and your stock went up with it to take a little bit off the table. All right. Ready to take your financial future into your own hands . Then tonights show is for you. Ive got the lessons you need to know to get ready to do it. Plenty more mad money ahead. Youve often heard me say the biotechs can be a great place for speck lagsz, but theres four rules you need to know before you ever buy one. Make sure youve got them. Then its one of the worst possible actions you can take when it comes to your money. Ive made it myself, and now i want to help you avoid it. Find out if youre at risk. And my cautionary comments when it comes to investing in commodities. So stay with cramer. Announcer dont miss a second of mad money. Follow jimcramer on twitter. Have a question . Tweet cramer, madtweets. Send jim an email to madmoney cnbc. Com or give us a call at 1800743cnbc. Miss something . Head to madmoney. Cnbc. Com. Mommy, your wish came true if youre going to wish, wish big at the lexus december to remember sales event. Get up to 2,500 customer cash on select 2016 and 2017 models for these terms. See your lexus dealer. Lepes foods is a locally owned here in santa rosa. As a Small Business, were always looking to save money, and pg e was able to help us. I help the Small Businesses save money and energy. It feels great. We looked at their lighting, their refrigeration system, and with just those two small measures, they were able to save a good amount of money. I was shocked. I couldnt believe that i could save 1,500 a month. With the savings that we get from pg e, were able to pass it on to our customers. Its pretty awesome. Learn how your business can save at pge. Com businessenergycheckup. Together, were building a better california. This show tonight is all about learning from my mistakes and from what i got right from my Charitable Trust. Were starting from the proposition that you do want to do it yourself, meaning manage your own money. And what i would hope youd do with this show is help yourself to try to figure out if you could actually do it on your own, or maybe its just too difficult and you got to send it to someone else. Thats okay. No sin. I want to start with the classic mistake, the choice of stock in the company itself. Drug stocks. Its a sobering one for anyone trying to profit from pharmaceutical innovation. We started from a simple proposition. Find companies that are doing break through medicine that have something in the pipeline. Thats really what drug stock investing is about. The idea behind this kind of investing came about from something that happened to me in the late 1980s, before i started my old hedge fund. Merck, at the time the greatest Pharmaceutical Company in the world because of its magnificent reputation for new drugs while constantly improving on old ones, had pioneered work with the Harvard Medical School that showed a link between heart attacks and cholesterol. The Company Discovered a cholesterol lowering agent, but wall street was skeptical of both the linkage and the category. Therefore, it was considered to be an unimportant new drug. Little did they know that statins would become the greating selfing class of drugs in history, led by lipitor. I can recall merck doubling, the stock just doubling when the sales came through. Ever since, ive been looking for the next nerve acor from a Pharmaceutical Company that has an established stable of drugs. That he very important because what you want to avoid is a company that has only one or maybe two drugs in the pipeline that one day might or might be approved by for use by the fda. Anything like that could be too risky for you. The ones that never got approval and ended up limping along forever until they were put out of their mystery. Ive had tremendous success isolating these kinds of companies, the good ones, whether it be bristolmyers from its break through Cancer Therapy or celgene when its exploitation of the blood cancer drug or regeneron with its franchise to help keep Macular Degeneration at bay. Its one of the most important kinds of stories you could own, and you should always be on the lookout for the breakout. In the last few years, my research director, jack moore, and i have found two situations that fit the rubric. Both companies trying to solve the biggest crisis of the baby boomer generation, alzheimers. Theres a couple things you need to know about alzheimers. First is millions upon millions suffer and will suffer from it. Second, there is no serious treatment that can hold the disease off or maintain it at an acceptable level. Third is that many have tried and failed to find a cure. But fourth and most important, if you have a medicine that can reverse brain plaque, which is thought to be the cause of the illness, it would be the biggest drug in the history of all time. Billions of dollars at stake. The company thasz thats had the best success so far at early trials is eli lilly, the indianapolis giant. Weve gone to hear them several times over the years as theyve reported on the progress of the drug. We selected it for the Charitable Trust knowing that lilly has many other irons in the fire, a good Balance Sheet, and nice sized dividend. In other words, when we purchased the stock in the high 70s, we had excellent hopes that it would reveal data points that showed some success in its battle against alzheimers. But in the past few times the firm has spoken about the drug, we detect aid more prolonged set of obstacles. Finally when lilly spoke not that long ago, we sensed less optimism on the drugs prospects. We werent alone. The stock dropped to the low 70s after its presentation of some of the findings of the drug. Out of frustration, the trust sold eli lilly, not happy with how long it would take for this alzheimers story to play out. We ended up taking a small loss on the stock. Now, there are four lessons here. First we were dead right to be sure that we had the upside of the other drugs, the reputation of the firm, and the good dividend. It allowed lillys stock to bottom, that dividend in particular, and contained our loss. So lesson one, if youre going to speculate, make sure theres something to fall back on. Lesson two is trickier. The stock ultimately bounced back as others decided prospects were better than we thought, and they didnt discontinue their work on the drug. That meant the stock bounced and bounced hard after we sold it. So your takeaway, if you did enough homework to know eli lilly has enough in the pipe away from the drug to keep the earnings up basically, you didnt need to sell the stock when this one drug didnt pan out. At the very least, cow have waited for more of a bounce and sold it at a higher level. Really surprised that we did this. Big mistake by me. Third lesson, the time to buy a stock with a potentially amazing drug is after people have given up on it but before the trials are discontinued, which often happens. Thats when expectations are at the lowest. We took a swing at lilly when many people were already excited about the property pects for the antialzheimers therapy rather than waiting for a down series of days or the dying down of any talk about the medicine, which is kind of like maybe it works, maybe it doesnt. The investor event where it was talked about first, the one that really intrigued us, was very well attended. We were far from alone when we bought the stock. So, therefore, we paid too much for it. The trust overpaid. It was far better to wait until it wasnt top of mind for any investors. That would have been just a few weeks after the meeting. The fourth and final lesson, when youre investing in a drug company thats going after especially intractable disease like alzheimers, be more skeptical than youd be with a disease thats easier treat. This happened with biogen too. So many Drug Companies have failed trying to fight alzheimers that its way too arrogant to bet that youre on the right path with any one Companys Research department. So heres the bottom line. When youre going to invest in a company with a potential cure for an intractable illness, make sure the drug company youre investing in has multiple drugs away from it in the pipeline and a good Balance Sheet as well as a dividend to protect the down side. Second, if the drug doesnt initially work but it hasnt been written off, expect a bounce. A better time to sell. Third, dont buy the stock when its still a ton of hoopla out there about its new drug. Wait until the fuss dies down and get a better price for the stock. Finally, when you have a drug company against a dwult disease that many others have failed to cure, please be more skeptical. There is a reason that others fail. Its an incredibly problem to solve. The company you like might fail too.