Commandment No. 5: Tips Are for Waiters

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 "Ten Commandments of Trading." For more about the new book and to order it, click here. To learn his "Twenty-Five Rules of Investing," click here. To read Cramer's first commandment, click here. To read Cramer's second commandment, click here. To read Cramer's third commandment, click here. To read Cramer's fourth commandment, click here. Today, we present Cramer's fifth commandment.

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It's pithy and the interviewers love it, so whenever I'm asked about my new book, Jim Cramer's Real Money, the fifth of my Ten Commandments of Trading comes up:

Tips are for waiters.

"What does it mean, Jim?" they ask. Actually, it means that human nature and securities are a potent and devastating mix. People can whisper in your ear that Nokia(NOK - Cramer's Take - Stockpickr) is going to buy Research In Motion(RIMM - Cramer's Take - Stockpickr), and you believe, you genuinely believe, because you want the big score. You know that the best moves are takeovers and you are convinced that if you can catch one, it will make up for all the bum steers and bad bets you have made. Tips are winning lottery tickets in most people's eyes.

That's the reason I've had to default to a simple analogy, tips are for waiters, to remind myself how stupid tips really are. Does it occur to you, on hearing the tip, that if the person telling you that Nokia is going to buy RIM really knows that's going to happen, the person is an insider and is breaking the law, and you could get in trouble, too? Does it occur to you that if the person isn't an insider, he doesn't know? There simply is no way a tip like that can work. Leave it for the waiter.

It gets more sinister. Most rumors start for a reason: Someone's in a bad position. Instead of thinking, "Sure, Cisco(CSCO - Cramer's Take - Stockpickr) is going to buy Nortel(NT - Cramer's Take - Stockpickr)," after you are given that particular tip, you should be thinking "Man, is this guy wearing a ton of Nortel and what won't he do to get rid of it."

I know that cynicism isn't a particularly positive attribute, but when it comes to tips, it sure is. Leave them for the waiter.