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Technology

Cramer uses Apple to outline the difference between trading and investing

With Wall Street abuzz about Apple’s new product launch, which included a new, high-end iPhone model, CNBC’s Jim Cramer wanted to clear the air for those wondering if they should trade or invest in the tech giant’s stock.

“Investing and trading require two very different mindsets. When you invest, you’re going in for the long haul,” the “Mad Money” host said, reflecting on his 21 years as both an investor and a trader. “You don’t want to buy all at once. Instead, you buy gradually, in stages on the way down.”

One of Cramer’s central investing mantras is that your first buy probably won’t be your only buy. Investors should think ahead and leave room to buy high-quality stocks when they decline.

While Cramer admitted that strategy isn’t perfect, he said it’s a good way to prevent yourself from being shaken out of stocks and to view downturns as opportunities rather than obituaries.

“Imagine you’re buying an Hermes tie,” Cramer said. “Let’s say you pay $200 for it — I know, it’s insane, OK? $200. But it’s true. Now, let’s say then you go and you see the same tie marked down the next day for $150. You don’t assume that you should throw away your current tie because it lost value. Instead, you buy more ties because Hermes makes quality merchandise and, after all, you can’t wear the same tie every day.”

That’s how you should think about investing, Cramer said. Be sparing at first so you don’t get shaken out (or unreasonably buy a bunch of $200 Hermes ties), then buy more at a lower price.

Trading is totally different. It’s event-driven, meaning traders search for a catalyst in order to sell a given stock. Whether or not the catalyst works out in their favor, they end up selling the stock.

“Why? Because you can’t turn a trade into an investment no matter how much you might like to do so. You bought that stock with a specific catalyst in mind. If, for whatever reason, the catalyst doesn’t play out like you expected, don’t rationalize [and] try to come up with a new reason to own it. You’ve got to sell,” Cramer said. “Them’s the rules, loss or not. At least the loss is contained if you take it off the table.”

The second cardinal rule of trading is to not reach for a trade. Cramer called the traders who bought Apple in the days leading up to the launch “clowns” because they wrongly assumed one of three things would happen.

First, they assumed that the iPhone X would be so great that it would shock people into buying the stock. Second, they assumed those people would buy them out of their positions. Third, they may have had no idea what they were doing.

“Any of those buyers are almost certain to be shaken out now, and that’s the worst thing you can do as a trader,” Cramer said. “You’re at the mercy of everyone else in the market. Many of these people are now thinking, ‘I’m an idiot, but you know what, I’ll just own Apple for the long haul.'”

But that’s the wrong strategy for a trader, because if Apple’s stock declines, that trader will inevitably lose money, Cramer said. Traders should focus on not being shaken out instead.

Cramer’s advice to prevent traders from being shaken out was simple: don’t make that kind of trade. Rumors of the new iPhone started swirling days before the release, and it came as no surprise to Cramer that analysts yawned at the launch, as they often do with Apple news.

“Why does all of this matter? Go back to the original narrative at the top. Say you bought Apple for a specific event, the iPhone launch. That event occurs. Predictably, there are a ton of analysts who say, ‘Ehh.’ That’s what they do. So now you’re going to be shaken out because you hear ‘Ehh’ and you know you made a mistake and now you’ve got to cut and run tomorrow,” Cramer said. “That’s why I say the best thing to do would’ve been to do nothing.”

In cases like Apple’s where the stock has already run up in anticipation of a big event, Cramer said it’s fine to admit you were too late. If you still want to own it, buy a small amount and wait for the next drop.

If you want to play the “sell the news” trade, Cramer doesn’t mind, but he said that buying a stock with an obvious catalyst in mind and betting you’ll make money is usually the wrong move.

“Bottom line: once again, a lot of foolish traders got burned in Apple, but investors can now buy the stock more cheaply from these shaken-out knuckleheads. And if it goes lower, you can just buy more. Worst case scenario, it rallies and you don’t own as much as you might want. That’s what we call a high-quality problem,” the “Mad Money” host said.

Disclosure: Cramer’s charitable trust owns shares of Apple.

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Cramer uses Apple to outline the difference between trading and investing

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