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Rule No. 24: Explain Your Picks

Editor's note: Jim Cramer's new book, Real Money: Sane Investing in an Insane World , is available in selected bookstores now. As a special bonus to RealMoney readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here . Today, we present Cramer's twenty-fourth rule of investing. Read more about his rules:

  1. Pigs Get Slaughtered
  2. It's OK to Pay the Taxes
  3. Don't Buy All at Once
  4. Buy Damaged Stocks
  5. Diversify to Control Risk
  6. Do Your Homework
  7. Don't Panic
  8. Buy Best-of-Breed
  9. Defend Some Stocks
  10. Don't Bet on Bad Stocks
  11. Don't Own Too Many Names
  12. Cash Is for Winners
  13. No Woulda, Shoulda, Couldas
  14. Expect Corrections
  15. Watch Bonds
  16. Don't Subsidize Losers
  17. Check Hope at the Door
  18. Be Flexible
  19. Quit When Execs Do
  20. Patience Is a Virtue
  21. Be a TV Critic
  22. When to Wait 30 Days
  23. Beware Stock Hype


One of the worst things that ever happened to stock picking was the Internet, because it took away one of the most important brakes on the process, one of the most important warning systems, which is talking to someone about a buy. Now you can, with a stroke of a key, buy the stock of Sirius (SIRI - Get Report) or Avaya (AV) without ever having to explain to another human being why you are doing so.

This is why you should always:

Be able to explain your stock picks to someone else.

Buying stocks is a solitary event -- too solitary. As I love to say, we all are prone to making mistakes, sometimes big ones. One way to cut down on these mistakes is to force yourself to articulate to someone else why you like Elan (ELN) or why you think Biogen Idec (BIIB - Get Report) is a winner.

When I was at my hedge fund, I always made every portfolio manager sell me the stock, literally sell it to me like a salesperson, before I would buy it. If you are in a position where you are picking stocks yourself, get someone to listen to you and let you articulate your reasoning.

Recently, one of my email correspondents said that her daughter bought the stock of Sony (SNE - Get Report) because of the Xbox. Ouch! That would be Microsoft (MSFT - Get Report) that makes the Xbox. A mistake like that would have been picked up by most people who articulated their reasoning to others. The simple selling of the idea first, to someone else, can help you spot flaws.

I also like to ask people, "What's going to make this EMC (EMC) go up, what's the catalyst?" Or, "Have we missed the move in this EnCana (ECA) already?" And, "What's your edge?" These are among the questions I ask. If you can't answer, you shouldn't be buying.

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
7. Don't Panic 8. Buy Best-of-Breed
9. Defend Some Stocks 10. Don't Bet on Bad Stocks
11. Own Fewer Names 12. Cash Is for Winners
13. No Regrets 14. Expect Corrections
15. Know Bonds 16. Don't Subsidize Losers
17. No Room for Hope 18. Be Flexible
19. Quit When Execs Do 20. Patience Is a Virtue
21. Be a TV Critic 22. When to Wait 30 Days
23. Beware the Hype 24. Explain Your Picks
Check back for more of Cramer's Rules

At the time of publication, Cramer was long EnCana.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict."

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

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