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What Does "Buy and Homework" Mean?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 20 August 2014
  • Copyright Protected:
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    Conjecture Corporation
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Buy and homework is a trading philosophy promoted by commentator Jim Cramer. He argues that investors should keep up with the stocks in their portfolios to understand when to buy and sell. Effective organization can help investors avoid problems like holding stock too long, or missing warning signs of a significant change in stock values. The buy and homework approach is an alternative to buy and hold, where investors make purchases but do not continue to investigate the stocks after buying.

Portfolio managers and other finance professionals routinely do their homework because they need to keep up on market movements. At any given time they may be advising clients on whether to buy, sell, or hold, and thus they need to know what’s going on with various financial products. They may read annual reports, listen in on shareholder conference calls, and engage in other research activities. Analysis and reporting with this information can help investment advisers assist their clients effectively.

Cramer’s philosophy argues that individual investors should do the same with buy and homework. They should know the contents of their portfolios well and be aware of events that might influence stock values. Their regular homework to research market activity can help them stay on top of their portfolios to make intelligent buying and sale decisions. Many of the tools for completing homework are available for free; annual reports, for example, must be provided to shareholders free of charge.

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Critics of the buy and homework approach argue that it requires a significant time investment, and that investors may be able to recoup losses if they can hold on to stocks long enough. However, it may be possible to allocate a relatively small amount of time each week to research. Studying up could also support ongoing investment activities by allowing people to keep up with specific industries and market sectors. Holding stocks indefinitely can also be dangerous, as some companies never recover from downturns.

Responding to critics of the buy and homework approach, Cramer argues that investors who don’t have time to do research should turn the management of their portfolios over to a finance adviser. The fees paid to advisers balance out when it comes to earnings provided through their advice and active portfolio management. Some advisers also provide mentoring and encouragement to their clients, supporting them if they want to develop independent investment strategies and take over more portfolio management over time.

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