Click here for an archive of Jim Cramer's Mad Money recaps. Click here to get Jim Cramer's Mad Money Post Game video exclusively on TheStreet.com.
In a special episode of his "Mad Money" TV show, Jim Cramer showed investors how to avoid losing money by noting the most common mistakes investors make.
He stressed the importance of investing with discipline, using rules to better recognize opportunities and avoid losing money.
Cramer said his first rule for investors is to not dig in your heels when you're wrong. Quoting the great economist John Maynard Keynes, Cramer said "when the facts change, I change my mind."
Digging in your heels and refusing to acknowledge that your investment thesis is wrong is a sure fire way to lose money, said Cramer. It's natural to be angry, but when the market's turned against you, investors need to adapt.
Cramer said he's been repeatedly been chastised by critics and the media for changing his mind. In March 2009, Cramer called a bottom in the market at Dow 6,500 and came under intense scrutiny for his bullish call. But he said the facts were that unless most of the stocks in the Dow went to zero, the average just couldn't go much lower.
The facts changed, he said, and so did his outlook. A month later, the Dow was 1,500 points higher.
Cramer said investors must swallow their pride, admit when they're wrong, and move on if they ever expect to be successful.
Cramer said his next rule for investors is that price matters. He said even the companies you don't like at all can be bought, if the price gets low enough.
Cramer said he never advocates buying a stock where the fundamentals are deteriorating, but in between the best of breed companies and the worst of breed companies, there is a lot of room for opportunity if the price drops far enough.
Cramer said knowing the right price to buy a stock should be a sliding scale, based on how good the company is. The better the company, the more investors should be willing to pay for it.
Cramer said at their very worst, both
Bank Of America
which he also owns for his
Action Alerts PLUS portfolio and
were priced for bankruptcy.
That means that anyone who felt bankruptcy wasn't going to happen was able to get these companies at tremendous prices and has been rewarded handsomely.
Investors should also look for companies trying to raise capital through secondary offerings of stock, he said. Often these secondaries are priced below the true value of the company, allowing investors to buy in between 5% and 10% less than the previous day's closing price.
Cramer said price forces investors to make new judgements about bad merchandise, and investors need to be ready.
A Dose of Skepticism
When it comes to investing, don't assume everything you hear or read is the truth, said Cramer. Stocks themselves aren't misleading, he said, but the companies behind them can be.
Cramer told investors that there are strong and weak players in every sector. He said the weaker ones will almost always blame their problems on the entire industry. He also be skeptical when a weaker player said their shortcomings are due to an industrywide slowdown.
Cramer said investors can't assume every company in an industry is the same. He said some companies are better run than others, some sell overseas, others don't, the possibilities are endless. Cramer said investors need to look out for excuses.
True Upside Surprises
Cramer's next rule for investors was also about misdirection, only this time to the upside. He said that not all upside surprises are worth getting excited about. Cramer said that often what the media reports as "better-than-expected" results are not what the professionals on Wall Street were hoping for.
It can be confusing and frustrating for investors to see a company report what the media claims as an upside surprise, only to have shares plummet immediately after.
According to Cramer, there are two types of upside surprises: organic and manufactured. Organic surprises are ones stemming from higher-than-expected sales and improving fundamentals, while the latter comes from just a better bottom line, with no top-line growth.
In the case of a manufactured surprise, Cramer said many factors could be coming into play, such as cost cuts, changing tax rates, or stock buyback programs.
It's not a surprise if a company's "better" earnings come from fewer shares being on the market, he said. A true surprise, said Cramer, comes from better-than- expected sales and nothing else.
So-Called Expert Advice
Cramer's final rule for investors focused on TV pundits who criticize the market and tell you to avoid stocks at all costs. Cramer said investors should never assume these "experts" are any more honest than those hyping up stocks. Having a negative outlook, he said, does not equal credibility.
Cramer said those who criticize the markets may not be trying to help you. While it may be hard to believe, he said mutual and hedge fund managers may actually want the markets down to short stocks or buy in at better prices.
Check out the latest edition of
"Cramer's Take onTop-Searched Stocks" on Stockpickr.
Want more Cramer? Check out Jim's rules and commandments for investing from his latest book by
For more of Cramer's insights during the Lightning Round, click here
At the time of publication, Cramer was long Bank of America.
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."
None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com 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 TheStreet.com, 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 TheStreet.com. 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 TheStreet.com, 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.