Sneak Preview: Cramer's New Investing Rules

Editor's note: This is a special sneak preview of Jim Cramer's just-released book, Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer). Look for more sneak previews every day, and get your free copy with your annual subscription to Action Alerts Plus; click here for details. Catch Cramer in person at his last book signing event: Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco.

Missed the first sneak previews? Read the book intro and the rules of getting and staying rich: Rule 1, Rule 2, Rule 3, Rule 4 and Rule 5. Know what pros do right and amateurs do wrong: Part 1, Part 2, Part 3, Part 4 and Part 5. Learn the five mini-bull markets that will stampede for years, starting with aerospace and defense, agriculture, oil and oil service, minerals and mining and infrastructure.

Twenty New Rules for Investing

For twenty years, I managed money professionally, taking the funds of rich people and trying to make them richer. I was in a performance business; I got to keep 20 percent of the gains, even if they were only on paper. There are two kinds of gains in the business: realized and unrealized. When you sell a stock for profit, that profit is a realized gain. When you own a stock that's up from where you bought it, that's an unrealized gain. At the fund I took 20 percent of both realized and unrealized gains. I also received 1 percent of the assets as a management fee. I initially reported to my investors once a quarter, but increasingly they asked for monthly, then weekly, and ultimately daily performance figures. As my assets grew and my performance fluctuated by the hour -- I needed to make $430,000 a day just to continue my yearly returns -- some clients asked for my numbers hourly.

With that kind of pressure, I began to focus entirely on short- term returns. If I could have a good day, I could satisfy the investors who checked in by 4 p.m. A good morning, and I didn't dread the hourly calls. In my last two years I installed software that flickered reds and greens along with down and up arrows every tenth of a second, all the better to see whether I was making or losing money at that very moment.

Needless to say, I felt like was on a daily treadmill from 4 a.m. until 4 p.m. as I traded early morning in Europe and then the U.S. markets right until the closing bell. Thank heaven my investors didn't demand nightly returns. I used to trade from 4 a.m. until 11 p.m., breaking only for a quick dinner before Tokyo opened. I was able to stop that insanity only after Tokyo peaked in 1989, and I never looked back.

I give you all of this information because I could not wait to retire from such an insurmountable minute-to-minute challenge. Although I have had a love of stocks my whole life, I do not have a love of report cards, and I was being graded with every tick of the symbols in my portfolio.

And I wanted to resume another passion I had, journalism -- this time not just print, but Internet and television journalism. I wanted to stay in the game, but I couldn't be a legitimate journalist and a serious investor of my own money at the same time. To be a journalist I had to agree to provisions in my contract that wouldn't let me profit from any securities. That led to a wholesale sell- off of every stock I had, a retreat from all hedge funds, and a charge into real estate and cash.

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From Jim Cramer's Stay Mad for Life by James J. Cramer and Cliff Mason. Copyright 2007 by Jim Cramer. Reprinted by permission of Simon & Schuster, Inc.

At the time of publication, Cramer was long TheStreet.com.

Jim 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. Watch Cramer on "Mad Money" weeknights on CNBC. To preorder Cramer's newest book -- "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)," due in stores Dec. 4 -- on Amazon, click here. Click here to order "Mad Money: Watch TV, Get Rich," click here to order "Real Money: Sane Investing in an Insane World," click here to get "You Got Screwed!" and click here for Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he appreciates your feedback and invites you to send comments by clicking here.

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