Cramer's 'Mad Money' Recap: Play by the Rules

When to Believe the Hype

Rule No. 4 : Whenever a stock is being heavily shorted and heavily hyped at the same time, it's time to sell that stock, he said.

"Hype can be many things, but what I'm talking about here are analyst recommendations, celebrity endorsements and much-touted facts in the media that don't actually mean anything for a company's bottom line," Cramer explained.

To find the percentage of shares in a company that are shorted, or bet against, people can go to Yahoo! Finance, Google or TheStreet.com, where Cramer is a shareholder and director, and look up the stock.

Stocks that are heavily shorted and heavily hyped are "dangerous," and people should think of them as "a war with two sides," he said. While on one side there are analysts who love the stock and talk it up, on the other side there are people betting a lot of money that the stock will go down.

"You don't do something as risky as shorting a stock unless you're a well-educated investor who has done his or her homework on the thing," Cramer said.

"So when all the analysts are having their lovefest with the stock, and you have an army of shorts sitting on the sidelines, you should see a red flag."

This almost always means there's some negative piece of information concerning the stock that the company and analysts are not talking about, he said. It's not inside information, but it's information that the bulls would be more comfortable ignoring.

Cramer said what happened with NutriSystem (NTRI Quote) provides an example of what can happen with a heavily hyped stocked that's loved by analysts love but also has a huge short interest.

It turns out the company had a "big problem" with its distribution model, information that was not emphasized, but which the shorts knew about.

Cramer's fifth and final rule states that "past performance is not indicative of future success." In other words, if people have made a lot of money playing a particular trend, or by investing in a "hot industry," then their natural instinct might be to keep finding new ways to play that trend, Cramer said.

However, as "every investment is different," he urged people not to let their success to make them "overconfident" or to "feel invincible."

"Don't let the fact that one stock has made you money influence your decision to buy a similar-looking stock," Cramer stressed. "Stocks have no memory and you could lose big."

If market players follow these five rules, along with Cramer's older ones and his 15 other new ones, they should be able to make themselves some mad money, he said.

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Want more Cramer? Check out Jim's rules and commandments for investing by clicking here.