Cramer's 'Mad Money' Recap: Lessons of a Fund Blowup

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Jim Cramer devoted his "Mad Money" TV show Monday to explaining what market players can learn from the hedge fund Amaranth's mistakes.

"The $9 billion hedge fund that fell like a house of cards," Cramer called it.

What Amaranth tells us is that everyone is vulnerable, Cramer said. "You cannot pick, invest in, or trade stocks blindly."

Amaranth's collapse was "awful" because the fund made many mistakes, Cramer said. The first lesson people can learn is that "hubris is not a good investment strategy," he said.

When people become too proud, they might get reckless, like Amaranth did, Cramer said.

"It put too many investing eggs in the energy-sector basket," he said. "Scale back risk a little bit, as it's not smart to take huge risks."

Speculate only with 20% of your nonretirement portfolio, Cramer said.

Lesson No. 2 is "don't take on enormous amounts of debt when trading." Amaranth's use of margin was "idiotic" and "irresponsible," Cramer said.

"Buying on margin is a crime, and before you know it, you'll be sitting on a gigantic amount of debt," Cramer said. "Cut margin back."