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Rule No. 24: Explain Your Picks

Jim Cramer

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 Quote - Cramer on SIRI - Stock Picks) or Avaya(AV Quote - Cramer on AV - Stock Picks) 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 Quote - Cramer on ELN - Stock Picks) or why you think Biogen Idec(BIIB Quote - Cramer on BIIB - Stock Picks) 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 Quote - Cramer on SNE - Stock Picks) because of the Xbox. Ouch! That would be Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) 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 Quote - Cramer on EMC - Stock Picks) go up, what's the catalyst?" Or, "Have we missed the move in this EnCana(ECA Quote - Cramer on ECA - Stock Picks) 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