Cramer's 'Mad Money' Recap: Back to Basics

Tips: For Waiters, Not Traders

The next rule is "tips are for waiters," Cramer said. He said he knows people like to get "hot stock tips" and "make easy money," but there's no such thing as a stock tip, and "you have to discipline yourself so that you never, ever take a tip seriously."

For example, if there is a person that gets a tip from a friend that Nokia wants to buy Research In Motion, "alarm bells should start ringing" in that person's head, Cramer said.

The only way the tipster could know that would be if he's an insider, and if an insider tips you off to the deal before it's announced, he's breaking the law, he said.

"Having the Securities and Exchange Commission investigate you is pure hell even if you haven't done anything wrong," Cramer said. "Imagine how bad it would be if you were actually guilty of something."

However, if the tipster is not an insider, then there's no way he could know that Nokia's going to try to take over RIM, he went on to say. And getting a tip from somebody who doesn't know anything is "worthless."

Although, people would love to get a real tip, "those don't exist," Cramer said. "If you get a tip, it's either illegal, incorrect or straight-up manipulative."

Disciplined Diversity

Moving on, Cramer said that while people want to be diversified in theory, when they go off and actually pick stocks to invest in, they often decide they don't really want to be diversified in reality because it's "boring, conservative and totally unsexy."

"I like to think that I'm universally loved, but people really tend to hate me when one sector is en fuego and I tell them to take some money out of it and spread it around because you can't keep all your eggs in one basket," Cramer said. "But when the party's over and that sexy sector falls out of favor," all of a sudden people thank him profusely for keeping them diversified.

Keeping a diversified portfolio means never having more than 20% of one's investing money in a single sector, he explained. While no fun, diversification is "essential" for those serious about investing.

The urge to throw all of one's money into one hot sector is "wrong" and "can ruin you," Cramer warned. "You absolutely must stay diversified, and this rule can't be bent, broken or spindled."

Invest in Steps, Not Leaps

Moreover, if people want to be good investors, they need to refrain from getting too arrogant, he said. "Arrogance is a sin" that will always lose people money.

"The single most arrogant thing you can do as an investor is buy your whole position in a stock at once," Cramer said.

This is something investors should never do. Instead, he said, the "smart and humble thing to do" is to buy incrementally and "patiently wait for good entry points as you gradually build up your position."

People who buy a position all at once generally end up feeling stupid most of the time, and even worse, they end up making less money than if they'd been patient and bought incrementally.

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