Cramer's 'Mad Money' Recap: Disciples of Discipline

Using the ethanol trade in 2005 and 2006 as an example, Cramer said at the end of 2005, because the supply of ethanol stocks was so low and demand was "intense," people were able to make "truckloads of money" in stocks such as Archer Daniels Midland (ADM Quote) and Andersons (ANDE Quote).

But then the ethanol game changed, as a company called VeraSun (VSE Quote) came public on June 14, 2006, and added to the supply of ethanol stocks, he said. The VeraSun initial public offering was further followed by IPOs of companies with worse fundamentals -- but just as much ethanol exposure.

"If you'd just been paying attention to the fundamentals, or to the hype about ethanol in the media, you would've been caught totally off-guard by the downturn in ethanol," Cramer said.

"The day VeraSun came public, I called the end of the ethanol, and I got it right ... because I was paying attention to the amount of ethanol stock in the market and the market's demand for it."

Know What You Hold

Moving on to rule No. 2: when playing a rally, "make sure your stocks actually fit the bill," he said. "Don't be bamboozled by what sector your stock belongs to. Instead, know precisely what you own and why you own it."

Although Cramer always advises his viewers to do their homework and know what they own, this rule is different because the point is to recognize that "sectors don't always matter when it comes to giving stocks momentum."

People should never confuse a rally within a sector for a rally of that entire sector, he said.

Also, he knows people don't always do their homework before buying stocks -- behavior Cramer said he does not approve of. He iterated that he believes people need to spend at least an hour a week per stock they own doing homework to make sure the stock is still a "sound" investment.