Jim Cramer’s advice for investors looking to buy AI stocks
Stocks rise and fall all the time. But lately, some daily fluctuations in AI stocks have reached extreme levels. Investors need to respond accordingly by changing their approach to putting money into the business. On Monday’s Morning Meeting, Jim Cramer said he wasn’t yet ready to put new money into tech stocks, reiterating a point he discussed at length in his Sunday column. But if investors want to buy dips in some chipmakers and other data center plays, Jim’s advice is to use “large scales” to soften the blow of sharp moves. On broad scales, Jim means buying shares gradually at predetermined price levels (with relatively large differences between them) as volatility creates opportunity, rather than buying the entire position at once or at prices that are very close together. “What I like to do is find prices,” Jim said. “When you’re building, you want to do pyramid styles.” Of course, we’re always looking to buy stocks of high-quality companies as they fall; If the investment thesis and fundamentals remain unchanged, a lower price means better value or more bang for your buck, especially if earnings estimates remain intact. But when trading in a sector, industry, or stock changes dramatically, as has happened with hyperscalers and AI stocks lately, you need to change your scales. We may have previously considered increasing our Intel position with a 5% decline; now we need to see a drop of close to 10%. We want to use volatility to our advantage and still build what we think is a great long-term investment at levels that can lower our overall cost base. Using pyramid buyouts is a strategy that requires extreme discipline and forward planning. The idea here is to not only buy at lower levels, but also increase the purchase size each time. For example, let’s say you want to create a new position in INTC. Let’s say you want to buy 80 shares in total. You can do this in several ways: 1. Simple dollar-cost averaging: Buy 20 shares in four separate purchases at predetermined lower price levels. 2. Weighted pyramid: Increase the number of shares purchased at decreasing prices in each of the four transactions. For example, buy 5, 15, 25 and 35 shares. You still have 80 shares, but most of the shares come at a lower basis. 3. Doubling pyramid: Divide the total position size by eight to determine the initial buy. So, we initially buy 10, double it with another 10 (now a total of 20 shares), then double it again with 20 (now a total of 40) and double it once more by buying another 40, resulting in a total of 80 shares. Any combination of these strategies will help you lower your basis; What matters is your style and how comfortable you are in a decline. The most important thing to consider is to “know yourself” and know which strategy you will be ready to follow when the time comes. If the stock moves higher in any of these scenarios, you stop buying and ride the smaller position to the upside, which we view as a high-quality issue. In either case, increased volatility requires you to expect larger declines between each purchase than you would expect in a less volatile market. With this strategy, you can also consider scaling up with each purchase. For example, the first purchase may follow a 5% decline, but you might expect an 8% decline on the second purchase and a 10% decline on the third purchase. This way, while you place a larger bet each time, you also get a little more margin of safety with each buy – increasing your chances of getting closer to the end of the move. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
