Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.
This program last aired July 2, 2015.
NEW YORK (TheStreet) -- Nobody likes to play by the rules, Jim Cramer told his Mad Money viewers. But with investing, rules can protect you from your own bad judgment.
Cramer said people are always asking him whether he worries about the stocks he owns. The answer is, of course, absolutely. He said that everyone worries about their investments, especially when your investments are heading lower in an up market.
But that's why Cramer said he believes in active money management, staying nimble and flexible to always keep your money working for you and not against you. The first step in that process is finding out why your stocks aren't performing as you expected. Cramer said you need to do your homework because you can't be informed if you don't inform yourself.
Must Read: Warren Buffett's Top 10 Dividend Stocks
Once you know what's gone awry with your favorite stock, what do you do next? Cramer said investors typically make two mistakes at this point: they end up owning too much stock so they don't have any cash left to buy into the decline, or they like all of their stocks equally so have no inclination to sell.
Cramer said investors should always have cash on hand to buy more, if that's what they deem necessary, and they should always rank their stocks from best to worst. That way if your best stock is going down you automatically know to buy more, but if the worst one is dropping you can cut your losses early.
Discipline trumps conviction, Cramer concluded. This is the mantra all investors should follow. Accept the fact that something may happen that you didn't foresee and have a plan to deal with it when it does.
Trades and Investments
Never turn a trade into an investment. That was Cramer's second rule for investors. What does it mean? Cramer explained.
Cramer said when you invest for a trade you're expecting an event, a catalyst, to take that stock higher over the short term. An investment, on the other hand, is not driven by news, it's something you want to own over the long haul.
How are these two different? Cramer said with a trade he wants to buy all upfront, taking maximum advantage of the event when it occurs so he can then take his winnings and run.
Investors, however, are different. With an investment, Cramer said he buys only a portion upfront, buying more on weakness and market pullbacks. Why? Because the ultimate goal is to build a position at the best possible price and, unlike a trade, there's no hurry.
Cramer said investors should never turn a trade into an investment because if the catalyst they were waiting for doesn't happen, there's a good chance that stock is heading lower. The reason is simple -- you're probably not the only one who waiting on the catalyst. Too often investors make the mistake of doubling down at this point, but Cramer said the odds are against you.