Cramer's 'Mad Money' Recap: Back to Basics

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Editor's note: The following is a recap of a "Mad Money" episode that originally aired Dec. 27, 2006.

In order to beat the market, investors "need to know a handful of extremely important rules" and "unlearn some of the worst, most harmful myths that all too many people seem to believe about stocks and investing," Jim Cramer told viewers of his "Mad Money" TV show.

When he was a money manager, despite having a "terrific track record," Cramer said he made every single mistake in the book -- that book being Jim Cramer's Real Money: Sane Investing in an Insane World. He said he's also made every mistake featured in his latest book, Jim Cramer's Mad Money: Watch TV, Get Rich.

Out of these, the "single worst and most common mistake" people tend to make regarding stocks is buying and holding them, he said. Buy and hold isn't a strategy but rather an ideology based on the belief that if you buy a stock and hang on to it for long enough, you'll make money, Cramer said. Although it is a comforting theory that allows market players to be lazy, "it's just not true that your stock will necessarily bounce back," he went on to say.

"The only way you can really know if your stocks are going up is by doing the homework," Cramer said. "Buy and homework, not buy and hold."

While homework might not seem like fun, if people don't do it they are setting themselves up for losing a lot of money, he said. When Cramer first started investing in the stock market, he said, he believed in buy and hold, but then he realized there was "something irresponsible and stupid about it."

Buy and hold might have made sense 30 or 40 years ago, "when taxes were high and commissions were even higher," he continued. But now it's a "form of false consciousness that stands between you and your ability to make money."

On the other hand, if market players study up on the stocks and do their homework, they'll be prepared and know when it's smart to buy and when it makes sense to sell, Cramer said. For those people who don't have time to do their homework on a stock before they buy and while they own it, he suggested they put their money into mutual funds instead.

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