Cramer's 'Mad Money' Recap for Aug. 4

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When it comes to investing, it's important to learn how to limit your losses, Jim Cramer said in his "Mad Money" TV show on Monday.

He outlined 25 rules that he says will help investors play the markets defensively to avoid big losses and keep their money safe.

1. Stay Diversified. Cramer said diversification is the only free lunch in investing. He advocated not having more than 20% of your portfolio in any sector and avoiding having "two-of-a-kind" at all costs.

He recalled investors losing fortunes in the past when they sank all their money in hot stocks of the day such as dot.coms, telcos and energy merchandisers like Enron.

2. Buy and sell slowly. Never buy or sell a position all at once. he said. Instead, buy into a position slowly, taking advantage of weakness, and take profits on the way up.

3. Your first loss is your best loss. "If your thesis on a stock changes, take the loss and sell," Cramer told viewers. Don't let a trade turn into an investment by being afraid to sell. If the reason you bought a stock is no longer valid, you have to sell it, he said.

4. Dividends limit losses. Look for stocks that consistently grow their dividends year after year. As a stock's yield increases, it attracts new investors and helps limit the downside risk. You need only ask yourself, "Is the dividend safe?"

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5. It's always good to have some cash. Professional investors always have cash on hand. Cash is a tool that should be used to buy quality companies after big market sell-offs.

6. Don't own too many volatile stocks. More than one volatile stock in a portfolio is not being diversified. Be honest and ask yourself if you can handle the wild price swings before investing in a volatile stock.

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