What is Buy and Homework

"Buy and homework" is a phrase popularized by former hedge fund manager and TV personality Jim Cramer. The phrase is meant to stress the importance of conducting regular research on individual stock picks and investment decisions.

Key Takeaways

  • "Buy and homework" is a phrase popularized by Mad Money host Jim Cramer.
  • The phase is meant to stress the idea that investors should spend at least one hour a week researching each individual stock position.
  • Cramer believes investors can respond quickly to market changes by staying well informed. This is done by listening to conference calls, reading financial statements and public disclosures, and keeping abreast of company and industry news.

Understanding Buy and Homework

Jim Cramer, host of the CNBC show Mad Money, coined and popularized the phrase "buy and homework." It is based on the idea that a buy and hold strategy is a losing one. Instead, investors need to actively stay informed about their holdings by spending at least one hour a week researching each stock position in their portfolio. 

In Cramer's view, people who take a passive investing approach are asking for trouble. He believes investors must be prepared to make strategic decisions and react to market changes or unexpected fluctuations in stock prices. This is where his "buy and homework" strategy comes in. If investors spend at least one hour a week researching each stock in their portfolio, they will be well equipped to respond to changes in the market.

"Buy and homework" may sound like just another buzzword. However, the underlying philosophy makes sense: it is always a smart idea for investors to do their homework before making important investment moves, and to keep doing their homework to ensure their original investment thesis remains unchanged.

Resistance to the Buy and Homework Approach

The "buy and homework" strategy requires a one hour commitment to research each stock holding. This means paying attention to company and industry news stories, listening to conference calls, reading quarterly earnings reports and 10-K disclosures, understanding the key financial ratios driving the company's business, and knowing what analysts are looking for. Cramer often notes that everything investors need to conduct research is readily and freely available on the internet. 

There are two main arguments against the "buy and homework" strategy. One is people don't have enough time to do the research. The second argument is that if you hold long enough, even a poorly performing stock will eventually come back. 

Cramer's answer to the first argument is that investors who lack the time to research their stock picks would be better off handing their portfolio over to a professional manager, for example, through a mutual fund or exchange-traded fund

The second argument is even easier for Cramer to refute. There are plenty of examples of stocks that have plunged, never to return to their previous levels. Some crash and burn spectacularly, like Enron. This is usually due to a catastrophe or crisis experienced by the company, or some other type of unforeseen incident. Investors who react quickly to the first signs of trouble can at least minimize their losses.

Real World Example of Buy and Homework

Taylor is a retail investor. In addition to taking a passive approach to investing by dollar cost averaging into an index fund, they have bought shares of Company ABC and XYZ Financial.

Because Taylor follows a "buy and homework" strategy, they spend at least two hours each week researching Company ABC and XYZ Financial. This means meticulously poring over financial statements and other public disclosures uploaded to EDGAR, the SEC's online database of company disclosures. Following each quarterly earnings report, Taylor diligently listens to senior executives discuss operating results on public conference calls. Taylor also follows company and industry news on financial websites.

Because Taylor does their homework, they quickly sell their shares after Company ABC announces the loss of a key customer, which has impacted earnings. This helps Taylor to pare their portfolio losses. Meanwhile, Taylor increases their exposure to XYZ Financial after the company reports better-than-expected results in an overseas market.