Cramer's 'Mad Money' Recap: Play by the Rules

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Editor's note: The following is a recap of a "Mad Money" episode that originally aired Dec. 28, 2006.

"If there's one thing I've learned in my years and years of trying to help make people money, it's that you've got to play by the rules," Jim Cramer told viewers of his "Mad Money" TV show.

Almost every time he's broken his own rules, Cramer said, he's lost money. "That's why the rules are there: They keep you disciplined and they keep you from making mistakes," he said.

In his book, Jim Cramer's Real Money: Sane Investing in an Insane World, Cramer laid out all the rules he played by while running money at his hedge fund.

But in the year he's spent working on his "Mad Money" TV show, he said, he's learned more about stocks than he did during the five years he spent at his hedge fund.

Therefore, he has 20 new rules for people to use in his book, Jim Cramer's Mad Money: Watch TV, Get Rich.

But because Cramer wants his viewers to make money and believes these new rules will help, he said he's going to dedicate his show to explaining five of the 20 rules laid out in the book.

"The new rules aren't just about being an individual investor trying to beat the market," he said. "They're about how an individual investor can understand how the big institutions work."

"There's no such thing as 'the market,' and we shouldn't reify it," Cramer went on to say. "There are just a bunch of funds that control most of the money that goes into stocks, and the guys running the funds mostly think the same way."

Down and Dirty

Rule No. 1 deals with "resisting the business cycle," he said. The business cycle, or the series of highs and lows the economy goes through, is usually controlled by the Federal Reserve. When it raises interest rates, "the cycle gets weaker as the economy gets strangled." And when it cuts rates, the economy gets stronger, Cramer explained.

This means that when the economy's going strong, market players should buy "the dirty, smokestack stocks that make things like machinery, cars and minerals," he said. And when the economy weakens, people should turn away from those cyclical stocks and move into secular growth stocks like health care companies, food, drinks and consumer staples.

With this new rule, Cramer's not telling people to play the cycle, because that's "intuitive." What he's saying is that people shouldn't fight it.

"You can't own cyclical stocks when the economy stinks, and you should stay away from the consumer staples when the economy's stronger," he said. "I don't care how much you like your stock, and I don't care how good it is based on the fundamentals. If it doesn't fit into where we are in the cycle, it could turn you into roadkill."

For example, Cramer said, not long ago, he owned UnitedHealth Group, (UNH Quote) for his charitable trust, Action Alerts PLUS.

He said he loved this stock as it had a "great" secular growth story, its fundamentals were "beautiful," and he thought it would be "the single biggest beneficiary of the new-at-the-time Medicare drug benefit."

However, after riding UnitedHealth up to $63 by late December 2005, the stock sunk to $44 and change by May. It didn't matter that the company had great growth and earnings because the first half of 2006 was a great time to own cyclical stocks as the "economy was steaming," Cramer said.

Although UnitedHealth had "one of the worst options backdating scandals," most of the stock's decline was because "people were selling it in order to buy the cyclical stocks that kick butt in a strong economy," he said.