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
readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it,
. Today, we present Cramer's twenty-fourth rule of investing. Read more about his rules:
Pigs Get Slaughtered
It's OK to Pay the Taxes
Don't Buy All at Once
Buy Damaged Stocks
Diversify to Control Risk
Do Your Homework
Defend Some Stocks
Don't Bet on Bad Stocks
Don't Own Too Many Names
Cash Is for Winners
No Woulda, Shoulda, Couldas
Don't Subsidize Losers
Check Hope at the Door
Quit When Execs Do
Patience Is a Virtue
Be a TV Critic
When to Wait 30 Days
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
(SIRI - Get Report)
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 --
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
or why you think
(BIIB - Get Report)
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
(SNE - Get Report)
because of the Xbox. Ouch! That would be
(MSFT - Get Report)
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
go up, what's the catalyst?" Or, "Have we missed the move in this
already?" And, "What's your edge?" These are among the questions I ask. If you can't answer, you shouldn't be buying.