Stocks always go up and down. But lately, some of the daily swings in AI stocks have crossed into extreme territory. Investors need to respond accordingly by changing their approach to putting money to work. On Monday’s Morning Meeting , Jim Cramer said he wasn’t ready to put fresh money into tech stocks just yet, echoing something he discussed at length in his Sunday column . But if investors want to buy the dips on some of the chipmakers and other data-center plays, Jim’s advice is to use “wide scales” to soften the impact of any sharp moves. By wide scales, Jim means buying stock gradually at predetermined price levels — with relatively large gaps between them — as volatility creates opportunities, rather than buying the entire position at once or making buys at prices too close together. “What I like to do is come up with prices,” Jim said. “You want to do pyramid styles as you build down.” Of course, we’re always looking to buy the stocks of high-quality companies as they go lower; if the investment thesis and fundamentals are unchanged — specifically, if earnings estimates remain intact — a lower price simply means better value, or more bang for your buck. But when trading in a sector, industry, or stock changes dramatically, as it has with the hyperscalers and AI stocks in recent days, you must change your scales. We may have previously looked to add to our Intel position on a 5% decline; we now need to see a decline closer to 10%. We want to use the volatility to our advantage and build what we think is still a great long-term investment at levels that can lower our overall cost basis. Using pyramid buys is a strategy that requires extreme discipline and planning ahead. The idea is not only to buy at lower levels but also to increase the size of the buy each time. For example, say you want to build a new position in INTC. And let’s assume you want to buy 80 shares total. You could go about it a few ways: 1. Simple dollar cost averaging : Buy 20 shares in four separate buys at predetermined lower price levels. 2. Weighted pyramid : Increase the number of shares bought with each of the four trades at descending prices. For example, buy 5, 15, 25, and 35 shares. You still end up with 80 shares, but the bulk of the shares come at a lower basis. 3. Double-down pyramid : Divide the total position size by eight to determine the starting buy. So we buy 10 to start, double down with another 10 (20 total shares now), then double down again with 20 (40 total now), and double down once more with another buy of 40, resulting in a total of 80 shares. Any combination of these strategies will help lower your basis; what it comes down to is your style and how comfortable you are buying into a decline. The more important consideration is to “know thyself” and know which strategy you will actually be ready to abide by when the time comes. If the stock rallies in any of these scenarios, you stop the buying and ride the smaller position to the upside, which we consider a high-quality problem. Either way, the increased volatility requires you to wait for larger declines between each purchase than you would in a less up-and-down market. With this strategy, you may also look to increase the scale with each buy. For example, the first buy may come after a 5% decline, but you may wait for an 8% decline for the second buy, and a 10% decline for the third buy. In this way, while you are making a bigger bet each time, you’re also getting a bit greater of a margin of safety — a greater chance you’re nearing the bottom of the move — with each buy. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber 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 trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Jim Cramer’s advice for investors looking to buy AI stocks