Cramer's 'Mad Money' Recap: When to Speculate

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Editor's note: The following is a wrap-up of "Mad Money" that originally aired on June 29. The show was rebroadcast Tuesday evening.

Speculation is something that can keep investors interested and enthusiastic about their money, and it can even be necessary under the right circumstances, Jim Cramer said on CNBC's "Mad Money."

Cramer said investors can't really call themselves diversified unless some of their money is in high-risk/high-reward situations.

"I've got a long track record, and almost all of my biggest wins have come from pure speculation," he said. "You must learn how to do it right. You've got to know the rules before I give you permission to use the tools."

He cautioned against using IRAs or other essential savings for speculating. Investors should have two portfolios, he said, one for retirement and the other with extra, discretionary money.

For example, he explained that he bought a basket of telecom stocks in 2002 including Lucent (LU Quote), Nortel (NT Quote) and JDS Uniphase (JDSU Quote). The result was that the group brought in gains of more than 42% in less than a year.

Of the portfolio outside retirement savings or other long-term plans, Cramer said he would be willing to place up to 20% of the extra money into speculation. But for those who have less than $10,000, the best option would be to put the money in a diversified mutual fund portfolio.

Cramer said he likes to look at younger companies, rather than just those that have been beaten down, when speculating. "What I like to do is find the new ideas," he said. "We do not want to speculate on companies with bad balance sheets. You can speculate in the young companies and the ones with good balance sheets."

Investors could do all of their speculation in one stock or pool their funds into a group of stocks in a beaten-up sector. "Luck should not be part of the equation," he said, and he recommended against using margin for speculation.

During the "Am I Diversified?" segment, Cramer took calls from investors who asked him to rate their portfolios. A caller who owned GE (GE Quote), Home Depot (HD Quote), Pfizer (PFE Quote), Cisco (CSCO Quote) and Bank of America (BAC Quote) had a diversified portfolio, according to Cramer.

Cramer also spoke about the importance of market bottoms, which are good buying opportunities if called correctly -- and of course that's the hard part. Don't rely on technical analysis alone, Cramer said, because fundamentals must also be considered. Clues to a market bottom include sentiment reaching very low levels and bulls capitulating and becoming bearish.

For the strategy to work its best, "you need to be right, when almost everybody else in the market is wrong," he said.

Additionally, Cramer said investors should avoid buying or selling stocks through market orders. Instead, they should place limit orders, with the broker getting instructions on the price to buy or sell.

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	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
	25.	Find the Bull Market