Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.
This program last aired on Aug. 28.
NEW YORK (
) -- "Tonight's show is devoted to avoiding common mistakes and recognizing misinformation when you see it," Jim Cramer told
viewers. He said the best way to make money in the markets is to invest with discipline using his five rules for navigating confusing, and sometimes infuriating, markets.
Cramer's first rule: Don't dig in your heels when you're wrong. Citing the economist John Maynard Keynes, "when the facts change, I change my mind," Cramer said, adding it's natural to not want to admit you're wrong but it's also a quick and easy way to lose money.
Cramer recounted how in March 2009, when the
Dow Jones Industrial Average
had fallen to just 6,500, he made the bold call that the downside was minimal. That call, he said, spurned tons of hate mail from those investors who had succumbed to the theory that all the Dow could do is plummet lower and lower and lower.
But Cramer said he had done his homework by analyzing where he felt every stock in the venerable industrial average should be in a doomsday scenario. This included valuing all of the banks at zero. From there he determined that the industrials just couldn't possibly fall much lower than where they already were. A month later, the Dow Jones was 1,500 points higher.
The notion of changing one's mind is a tough one to come to terms with, said Cramer. It's like expecting your favorite sports team to stage a comeback an hour after the game has ended. The facts are always changing in business, he noted, and at some point, investors need to acknowledge that the game is over and they were wrong.
Cramer's second rule: Price matters. It matters so much that even companies you hate can become attractive at a low enough price. This, of course, does not apply to deteriorating companies or those with bad fundamentals headed toward bankruptcy, said Cramer, but for high-quality companies that are down on their luck for one reason or another.
Cramer said he often gets hate mail from viewers when he recommends selling a company he previously liked just because the price got too high. But after a big run, Cramer said that even the best of companies can get too expensive and needs to be sold until the fundamentals of the company catch up to its share price.