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Cramer's 'Mad Money' Recap: How to Invest Like the Pros

Stocks in this article: NFLXCRMHANSGS

Cramer said his normal investment strategy would dictate that if an investor wants to purchase 300 shares of a company, he or she would buy them in increments of 100 shares over a period of weeks or months, using broad-based selloffs as cues for the purchases.

However, a trading strategy is a little different, said Cramer. Trading around a core position dictates that, if an investor owns 300 shares, he or she would sell 50 of them anytime the stock moves higher by 3%. Then as shares retreat by 3%, an investor can buy them back on the cheap.

Cramer said that trading in smaller increments may not seem like much, but over time, the profits can add up quickly. In today's markets, where stocks can soar one day and be thrown out with the bath water the next, it likely won't take long before home gamers begin to see their trading strategies pay off.

Know When to Sell

Cramer's last trick for investors involved the critical question of when to sell a hot stock. He said there's certainly a lot of money to be made by owning a hot momentum stock, but investors have to know when it's time to leave the table or risk losing it all.

Such was the case with high-fliers Netflix (NFLX) and Salesforce.com (CRM), two long-time Cramer faves that fell from grace in spectacular fashion.

So how can investors tell when a momentum stock has peaked? Cramer said one thing they can look for is the analysts' coverage. For smaller, more speculative stocks, Cramer said the rule of thumb is that when a stock has half-a-dozen or so analysts covering it, the stock will begin to peter out because it has become too well known.

This was the case with Hansen Natural (HANS), one of the hottest stocks between 2004 and the first half of 2006, noted Cramer. The whole run higher, skeptics were warning that the energy drink makers' momentum would fade, but with analysts still initiating coverage and touting the stock, it continued its run higher.

That was until May 10, 2006, recalled Cramer, when Hansen stock split five-for-one, but was also picked up by Goldman Sachs (GS), the fourth analyst to begin coverage. After Goldman brought Hansen into the spotlight, Cramer said the stock immediately started to cool off, as it had hit that critical mass of analyst coverage.

Small momentum stocks are worth owning, said Cramer, but when investors see analysts jumping on the bandwagon, it's time to get out.

--Written by Scott Rutt in Washington, D.C.

To contact the writer of this article, click here: Scott Rutt.

To follow the writer on Twitter, go to http://twitter.com/scottrutt.

To submit a news tip, send an email to: tips@thestreet.com.

To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.

At the time of publication, Cramer's Action Alerts PLUS had no position in the stocks mentioned.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on TheStreet.com. The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in TheStreet.com, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.

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