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Cramer's 'Mad Money' Recap: Back to Basics

From his list of trading rules, Cramer tells viewers to think 'buy and homework,' not 'buy and hold.'

Click here for an archive of Cramer's "Mad Money" recaps.

Editor's note: The following is a recap of a "Mad Money" episode that originally aired Dec. 27, 2006.

In order to beat the market, investors "need to know a handful of extremely important rules" and "unlearn some of the worst, most harmful myths that all too many people seem to believe about stocks and investing," Jim Cramer told viewers of his "Mad Money" TV show.

When he was a money manager, despite having a "terrific track record," Cramer said, he made every single mistake in the book -- that book being

Jim Cramer's Real Money: Sane Investing in an Insane World

. He said he's also made every mistake featured in his latest book,

Jim Cramer's Mad Money: Watch TV, Get Rich


Out of these, the "single worst and most common mistake" people tend to make regarding stocks is buying and holding them, he said. Buy and hold isn't a strategy but rather an ideology based on the belief that if you buy a stock and hang on to it for long enough, you'll make money, Cramer said. Although it is a comforting theory that allows market players to be lazy, "it's just not true that your stock will necessarily bounce back," he went on to say.

"The only way you can really know if your stocks are going up is by doing the homework," Cramer said. "Buy and homework, not buy and hold."

While homework might not seem like fun, if people don't do it they are setting themselves up for losing a lot of money, he said. When Cramer first started investing in the stock market, he said, he believed in buy and hold, but then he realized there was "something irresponsible and stupid about it."

Buy and hold might have made sense 30 or 40 years ago, "when taxes were high and commissions were even higher," he continued. But now it's a "form of false consciousness that stands between you and your ability to make money."

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On the other hand, if market players study up on the stocks and do their homework, they'll be prepared and know when it's smart to buy and when it makes sense to sell, Cramer said. For those people who don't have time to do their homework on a stock before they buy and while they own it, he suggested they put their money into mutual funds instead.

Don't Dwell on Regrets

The second worst mistake people make when they invest is harboring regrets, he continued. In his

Real Money

book, Cramer made this rule No. 13: "

There are no woulda, shoulda, couldas." And even though people know it's unproductive and bad to dwell on missed opportunities or past mistakes, they still do it, he said.

"Every second that you spend wistfully wishing you'd made different decisions is a second wasted," Cramer said. "It's just human nature: We want lots of money, and when we miss an opportunity or make a mistake, we can spend hours or even days beating ourselves up over it."

In fact, Cramer said he's the worst trespasser when it comes to this rule. When he worked at a hedge fund and got something wrong, he'd "just sit there, totally mesmerized" and totally hating himself, he said. But market players "cannot afford to get thrown off their game" like that.

"So you need to be proactive," Cramer said. "When you make a mistake that you can't stop thinking about, you need to make sure you don't get mired down thinking about how you made such a bad decision."

Instead of thinking about the past, think about the future, as that's the only way to make money, he said. And second, don't let the mistake weaken your confidence.

Tips: For Waiters, Not Traders

The next rule is "tips are for waiters," Cramer said. He said he knows people like to get "hot stock tips" and "make easy money," but there's no such thing as a stock tip, and "you have to discipline yourself so that you never, ever take a tip seriously."

For example, if there is a person that gets a tip from a friend that


(NOK) - Get Free Report

wants to buy

Research In Motion


, "alarm bells should start ringing" in that person's head, Cramer said.

The only way the tipster could know that would be if he's an insider, and if an insider tips you off to the deal before it's announced, he's breaking the law, he said.

"Having the

Securities and Exchange Commission

investigate you is pure hell even if you haven't done anything wrong," Cramer said. "Imagine how bad it would be if you were actually guilty of something."

However, if the tipster is not an insider, then there's no way he could know that Nokia's going to try to take over RIM, he went on to say. And getting a tip from somebody who doesn't know anything is "worthless."

People would love to get a real tip, but "those don't exist," Cramer said. "If you get a tip, it's either illegal, incorrect or straight-up manipulative."

Disciplined Diversity

Moving on, Cramer said that while people want to be diversified in theory, when they go off and actually pick stocks to invest in, they often decide they don't really want to be diversified in reality because it's "boring, conservative and totally unsexy."

"I like to think that I'm universally loved, but people really tend to hate me when one sector is

en fuego

and I tell them to take some money out of it and spread it around because you can't keep all your eggs in one basket," Cramer said. "But when the party's over and that sexy sector falls out of favor," all of a sudden people thank him profusely for keeping them diversified.

Keeping a diversified portfolio means never having more than 20% of one's investing money in a single sector, he explained. While no fun, diversification is "essential" for those serious about investing.

The urge to throw all of one's money into one hot sector is "wrong" and "can ruin you," Cramer warned. "You absolutely must stay diversified, and this rule can't be bent, broken or spindled."

Invest in Steps, Not Leaps

Moreover, if people want to be good investors, they need to refrain from getting too arrogant, he said. "Arrogance is a sin" that will always lose people money.

"The single most arrogant thing you can do as an investor is buy your whole position in a stock at once," Cramer said.

This is something investors should never do. Instead, he said, the "smart and humble thing to do" is to buy incrementally and "patiently wait for good entry points as you gradually build up your position."

People who buy a position all at once generally end up feeling stupid most of the time, and even worse, they end up making less money than if they'd been patient and bought incrementally.

Want more Cramer? Check out Jim's rules and commandments for investing from his popular book by

clicking here


Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for, Inc., and CNBC, and a director and co-founder of All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of 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, 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 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, 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, 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 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, 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.