Cramer said it's practically impossible to call a bottom in a stock, so if investors are looking to buy 400 shares of an $90 stock, they should buy 100 shares right now at the $90 price. Then if shares slip to $85 a share, buy another 100 shares. Buy 100 more if the price hits $81, then the rest if it falls below $80.
Cramer said he prefers to use wide scales because it affords investors more flexibility. The worst-case scenario in this example would be the stock going higher than $90 a share, in which can you've just made money, albeit less than you were expecting. But in the long run, buying more as a stock goes lower is the right way to buy.
Know When to Sell
"Every stock comes with an expiration date," Cramer told viewers, and the next lesson is all about knowing when to sell.
Cramer said knowing when to sell a stock is every bit as important and knowing when to buy it. That's especially true when it comes to your winners.Despite the fictional character Gordon Gekko's proclamation that "greed is good," when it comes to gains in your portfolio greed is downright dangerous, said Cramer. Investors have to take some profits in their winners, he said. You haven't really won until you take a little off the table. Why sell your winners? Simple diversification. What was once 15% of your portfolio when you bought it has now grown to over 20%, and according to Cramer's rule on diversification, no single sector should ever account for more than 20% of your portfolio. As for the losers, Cramer said you don't need him to tell you they should be sold, but a frequent rookie mistake is to hold onto your losers and hope they'll someday get back to even. This thinking is the worst kind of amateur mistake. Take the small loss now, he said, and avoid the bigger ones that will likely be coming. Don't give your losers the benefit of the doubt. Cramer said younger investors can afford to wait a little longer to sell than older ones because older investors can't afford to take the risk of losing their gains closer to retirement. Take all of your invested capital out, Cramer concluded, and keep playing with the house's money.
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