Cramer's 'Mad Money' Recap: School of Stock

Click here for an archive of Cramer's "Mad Money" recaps.

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Editor's note: This is a recap of a broadcast that originally aired on Oct. 4.

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Investor, Know Thyself

Good investing isn't a game. You have to make plans and stick to them to be successful, said Jim Cramer on his "Mad Money" TV show.

You need to understand what you are buying and why you are buying it. Without that understanding, you will lose money, said Cramer.

Additionally, don't lie to yourself when you're wrong, he said. That only compounds the problem. When you're wrong, you need to recognize it quickly. Don't let hope creep in or give yourself the benefit of the doubt. If you're wrong, sell the stock and find something new.

"Hope has no place," said Cramer. "If you can't be honest with yourself, you can't make a dime."

Cramer recommends only buying stocks you have the time and the inclination to research and follow. "Buy and homework," says Cramer.

For a diversified portfolio, he recommends a minimum of five stocks and maximum of 10. Cramer's rule for diversification also includes having no more than 20% of your portfolio in a particular sector. That means if you have five stocks, you should own, for example, no more than one tech stock, one oil stock, one health care stock, one defense stock, etc.

Cramer's method of managing his portfolio involves trading around investment positions. He likes to sell some of an investment if it goes up too much and buy it back lower, always keeping a core position in the stock.

Cramer will only make pure trades if he has a clear entrance strategy, a clear exit strategy, a defined time frame and catalysts to propel the stock.

How should one decide when to sell? Cramer follows the mantra: Bulls make money, bears make money, pigs get slaughtered.

If you have a stock that has a good gain, take some off the table so that you're playing with the house's money, and let the rest run.