Cramer's Twenty-Five Rules for Investing

Introduction

Jim Cramer is an American television character, ex- hedge fund manager, and a popular writer. Cramer is the host of the CNBC’s Mad Money, a co-founder and chairman of the Street.com, Inc. Cramer has his twenty-five rules for investing. Some of his rules are discussed below.

Diversify to Control Risk

Cramer believed in managing risk-controlling downside. Investors should seek to manage risk and leave upside to take care of itself. The major risk out there is sector risk. He believes that diversification is an investment idea that actually works for every investor. Intermixing rather different sectors in a portfolio helps investors avoid being hit by one of many perfect storms that come their way far more frequently than they would imagine. An undiversified portfolio is not just unprofessional mistake; many professionals also avoid diversification. Monitoring risks is vital to long-term benefits as it is the art of being diversified.

Don’t Buy All at Once

Just like no stockbroker likes to adhere to incomplete orders, no business adviser has the time to purchase stocks systematically over time. The trick is to get the trade on, at one point and in a mighty way, make a statement to purchase, and get the position on the sheets or in the portfolio. According to Cramer, it is wise for a person to avoid purchasing and selling of all stock at once. One should stage their purchases, work with their orders, and try to get good price over time. When buying or selling shares one should avoid feeling like they are making a statement. In order to be successful in the game, one should fight arrogance, purchase slowly, and even buy after some days.

Be a TV Critic

What we hear on TV is perhaps right, but no more than that. Executives sometimes say anything they feel like saying knowing that it is easy for them to avoid the consequences. It is necessary for a person before making a decision on buying or selling shares to critically analyze any information they get from TV. Any person who takes the advice from TV without scrutinizing it is naïve, since the vetting process on TV is not rigorous. An investor should always be armed for everyday chatter.

There Is Always a Bull Market

It is true that market has a constant nature since there is always something that is working continuously, so investors must get the best of whatever is working well. One must be willing and ready to see further and harder than time and inclination can permit. It is important that one does not evade what can be tolerated, even if they are time-bound or knowledgeably lazy. An investor is supposed to think speculatively than an ordinary or typical investor. The truth is that there is a sector that is always working. Even if one of them stops, others keep operating. An investor must always look for opportunities and make the fast move. A wise investor should not sit down and relax, but look for a sector that is doing well because it is always there.

Explain Your Picks

An investor should always remember to talk to someone about a purchase. The world of internet is making things worse for share picking because the purchase of stock is made with a single strike of the key. Internet is eliminating one of the most crucial brakes of the process, an important warning system which informs somebody else about the reason for purchase. Moreover, buying shares is a solitary event. We are all predisposed to making mistakes, and quite often we make big ones. One of the best ways to avoid making so many mistakes in the process of buying shares is to express to someone else the reason as to why you purchase them in a particular company. Before picking shares, it is prudent that you get someone to attend to and express your reasoning. The simple articulating of the idea to other people can help an investor to spot a mistake.

Defend Some Stocks, Not All

In the circumstances when many shares are in bull’s mode, it matters less how much someone has; the more the coverage, the better. However, when things get hard, it is crucial to realize that many shares bought for better times may not be in good shape to compete. One cannot own everything he would like to possess. Consequently, one does not need to defend all but rather pick the favorite, and protect it. If you try to defend them all, you will run out of capital.

Buy Best-of-Breed Companies

Best breed company implies a greater level of service, a superiority of ownership that can pay surpluses for years. Most of the investors are reluctant to pay for the finest of breeds because they think they are getting short-changed. It is worth investing in the costlier stock when it comes to price-to-earnings principle as it gives comfort. Consequently, it is worth owning the best of breed.

No One Made a Dime by Panicking

Stock markets get hammered, and people leave after such hammering. Panic is the functioning instinct in this case. The desire to flee whenever panic appears is not always the correct position. There is always the right time to go; the best time to abandon the table is not when fear comes. It is always wise to take the opposite aside of the trade whenever panic strikes. There is always a unique day when market rebounds allowing those who pluck up their courage to get the deal with the best price than if they joined the escaping masses.

Do Your Stock Homework

Before buying shares from a particular company, it is advisable for investors to research the enterprise. Before buying any stock, listen to the seminar calls, explore the enterprise’s website, conduct a research, and also read the news. In fact, one should know everything that is available on the site. The important thing to do is to buy and homework rather than purchase and hold.

It’s OK to Pay the Taxes

Aversion to paying taxes on shares induces unreasonable consequences. If investors attempt to get the long-term benefit, they end up with nothing. Avoiding paying taxes complicates the investment, since the only possible way to do that is to sell at a loss. Although gains can be short-lived, it is prudent to stop worrying about taxes and instead pick the benefits when those gains seem untenable than to drive things back to a loss. An investor should be concerned with losses instead of worrying about taxes.

Bulls, Bears Make Money, Pigs Get Slaughtered

The desire not to be too gluttonous saves investors so much loss that they can live to play again. Investors should avoid being a pig and take up their profits. Since it is uncertain when things might crash, one should not delay taking profit with the desire to get more. You never know when the stock can collapse; you can never be sure. One needs to be guided by human nature to make decisions such as when to take profit.