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

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 involves 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. During its run higher skeptics were warning that the energy drink maker's momentum would fade, but analysts were initiating coverage and touting the stock so 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.

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

To email Scott about this article, click here: Scott Rutt

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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."

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