Sneak Preview: The Best Way to Use Tips

Editor's note: This is a special excerpt from Jim Cramer's book, Jim Cramer's Mad Money: Watch TV, Get Rich. To order your copy and read all the rules, click here.

How can you make the right sell calls?

7. Use tips as a contraindicator. Whenever you start getting "tips" about a stock, that's a good time for you to stop buying, start doing some homework, and probably sell the thing. In my last book [Jim Cramer's Real Money: Sane Investing in an Insane World], I told you that tips are for waiters. If a tip is good, it must be inside information, and therefore it's illegal. Every other kind of tip is based on publicly available information that most investors in a stock are already familiar with. If it's old news, it can't make you money.

As I put together "Mad Money" every day I am deluged with stock tips. I've come to realize that they actually can be useful. Tips are a great reason to sell a stock. Tips indicate that there are a lot of investors in a stock for the wrong reasons.

When people own a stock but they don't understand it, they can be shaken out at even the slightest sign of bad news. They're bad fellow shareholders because they haven't done the homework and they really don't have a clue what they're doing. A stock that is generating lots of tips is full of these in-it-for-the-wrong-reasons, cut-and-run investors.

I'm not saying you should just clear out and sell off your whole position in a stock when you get a tip, but you should absolutely go back, redo all the preliminary homework, and make sure that stock isn't headed for a fall.

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