Skip to main content

Editor's note: This is a special sneak preview of Jim Cramer's just-released book,

Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)

. Look for more sneak previews every day, and get your free copy with your annual subscription to Action Alerts Plus; click here for details. Catch Cramer in person at his last book signing event: Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco. Missed the first sneak previews? Read the book intro and the rules of getting and staying rich: Rule 1, Rule 2, Rule 3, Rule 4 and Rule 5. Know what pros do right and amateurs do wrong: Part 1, Part 2, Part 3, Part 4 and Part 5. Learn the five mini-bull markets that will stampede for years, starting with aerospace and defense, agriculture, oil and oil service, minerals and mining and infrastructure.

Twenty New Rules for Investing

For twenty years, I managed money professionally, taking the funds of rich people and trying to make them richer. I was in a performance business; I got to keep 20 percent of the gains, even if they were only on paper. There are two kinds of gains in the business: realized and unrealized. When you sell a stock for profit, that profit is a realized gain. When you own a stock that's up from where you bought it, that's an unrealized gain. At the fund I took 20 percent of both realized and unrealized gains. I also received 1 percent of the assets as a management fee. I initially reported to my investors once a quarter, but increasingly they asked for monthly, then weekly, and ultimately daily performance figures. As my assets grew and my performance fluctuated by the hour -- I needed to make $430,000 a


just to continue my yearly returns -- some clients asked for my numbers hourly.

With that kind of pressure, I began to focus entirely on short- term returns. If I could have a good day, I could satisfy the investors who checked in by 4 p.m. A good morning, and I didn't dread the hourly calls. In my last two years I installed software that flickered reds and greens along with down and up arrows every tenth of a second, all the better to see whether I was making or losing money at that

very moment


Needless to say, I felt like was on a daily treadmill from 4 a.m. until 4 p.m. as I traded early morning in Europe and then the U.S. markets right until the closing bell. Thank heaven my investors didn't demand nightly returns. I used to trade from 4 a.m. until 11 p.m., breaking only for a quick dinner before Tokyo opened. I was able to stop that insanity only after Tokyo peaked in 1989, and I never looked back.

I give you all of this information because I could not wait to retire from such an insurmountable minute-to-minute challenge. Although I have had a love of stocks my whole life, I do not have a love of report cards, and I was being graded with every tick of the symbols in my portfolio.

And I wanted to resume another passion I had, journalism -- this time not just print, but Internet and television journalism. I wanted to stay in the game, but I couldn't be a legitimate journalist and a serious investor of my own money at the same time. To be a journalist I had to agree to provisions in my contract that wouldn't let me profit from any securities. That led to a wholesale sell- off of every stock I had, a retreat from all hedge funds, and a charge into real estate and cash.

And you know what? I was miserable. Just miserable. My beloved stock market was marching on without me and I wanted to get back into the band!

I struggled mightily for a formula that wouldn't let me profit but that would let me show others how the game is played, and I came up with a charitable trust model. I would put money into a trust that would distribute the profits to charities of my choosing at year- end. None of the gains could accrue to me.

Very quickly, through mention on and CNBC, people wanted to know what I was doing with the trust and whether they could follow along. So I created a website and an electronic newsletter,

Scroll to Continue

TheStreet Recommends, which you have no doubt heard of if you watch

Mad Money

or read's section, where

my blog appears. For a fee, I would show you how I would manage my personal stock portfolio. In order not to profit, lest the product become a big success -- which it has, the largest paid subscription e-newsletter anywhere -- I let you buy the stocks ahead of me and sell them ahead of me. Unfortunately that has skewed performance down for me, but it doesn't matter because it skews it up for those who subscribe to the newsletter.

The business of running money personally, not being in the hedge fund world, has been incredibly eye- opening for a number of reasons. First, I am, at last, able to think longer-term, which is incredibly liberating and refreshing for me. In fact, I'm forced to think longer-term because of a whole variety of restrictions on the charitable trust that prevent me from trading stocks in the short term. I love the idea of being able to buy something and let it work over time, which is good because that's all the charitable trust lets me do. I try to have a six- to eighteen- month time frame for all my buys, which gives them a chance to truly percolate and blossom. As you will soon see, when I don't let them do so, I don't make as much money at best and perform quite poorly at worst.

Second, I think I have become a much better investor. That's because when I was at my hedge fund, we were in a very different world, an unregulated world where the big boys -- including me -- could always outperform small investors. We were able to call managements any time up until one month before the quarter -- the so-called quiet period when they knew approximately the results of the quarter and weren't allowed to give them away -- and ask how things were going. That allowed us to have a better idea than anyone else whether a given company was going to beat the estimates, meaning it would report a better- than- expected quarter or a worse- than- expected quarter. Given that the biggest determinant of a company's stock, besides its sector, is whether or not it will beat the estimates, these calls were money in the bank.

But at the end of the 1990s, the government ruled that such contact was illegal and the only way anyone could communicate with executives was through public forums -- no more one-on-one insights. After a series of prosecutions by the government, the rule, Regulation FD, or Fair Disclosure, was interpreted to mean that unless the information was released and on the company website, it was not considered legal.

This rule and its interpretation changed everything. It made the whole concept of trying to game short- term movements in stocks almost impossible -- not just for "home gamers," my term for nonprofessional investors, but for hedge fund managers. So the new style of my trust suited the times well.

Third, my charitable trust allows me a rare and


look back at why I bought or sold a stock. I am on record about what my thought process was. Which is why what I am about to teach you is the single best set of lessons I have ever come up with. Most people never set down contemporaneously why they do something. If you want to minimize the mistakes you make, you should keep a diary and at that exact moment when you buy or sell, write down why you did it. You will be struck by how many of the same patterns you repeat. The charitable trust forced me to invest like an ordinary person, and that's given me a lot of insight into the kinds of mistakes that regular investors often make, not the kinds of mistakes that hedge fund managers often make.

It is my sincere hope that you will not have to make those mistakes, not have to take the serious pain that I have had, because I have taken it

for you!

With that introduction, let's explore the twenty most valuable lessons you will ever need for investing --

not trading

-- your personal money. Both

Real Money: Sane Investing in an Insane World


Mad Money: Watch TV, Get Rich

have more than adequately addressed the best ways to trade. When I wrote the sets of lessons in those books, I still had my head stuck in the world of professional money management and hedge funds, of daily performance checkups, not of sensible long- term investing over a twelve- to eighteen- month horizon.

Here are my lessons from running, my charitable trust:

1. Don't invest like a hedge fund manager.

You don't have to worry about the quarter, so don't play it for the quarter. Free yourself from that mentality. There are so many services and websites and programs devoted to moving quickly and taking advantage of short- term movements and events that it's almost as if all of the financial services media were set up as if you are or wanted to be a hedge fund manager.

But as I have indicated, such thinking does not allow you to perform over a long period of time -- not just because the tax consequences are higher for short- term trading but because the best ideas are the ones you own and continue to do homework on, investments that you're confident have long- term potential and don't require minute--by-minute analysis. After all, if you're reading this book you probably don't have time during the day or even during the week to trade stocks and constantly monitor them.

That's one of many habits that cost people so much in 2000. And when I went over my trades from I found that so many of my gains were truncated and much smaller than they could have been because I wanted to show good numbers, quarterly numbers, as if I were under pressure to continue to perform the old way. We are inundated with stocks and tables each month that show who is doing better or worse than someone else. I am sure you fall prey to wondering, "How am I doing?" Take it from someone who has suffered the lumps of being too competitive: It's a big mistake, especially when it's all in your head.

Foster Wheeler


was one of the best picks that I've had in many years, an infrastructure play, meaning it's a company that engineers and constructs giant projects like petrochemical refineries and power plants, both of which are in incredible demand. Soon after I bought it the stock went down about 10 points, from $50 to $40. (One of the great things about keeping a contemporaneous document is that you can see where you made all of these trades. If the stock went down after you got out, congratulate yourself, but if it went up, you'd better be prepared to explain how you left the gains on the table.) At $40 I bought more. It then dropped to $30 and I bought more still. Slowly it went back to where I bought it and then above to the mid- $50s. As the quarter came, I wanted to record that terrific gain. It didn't matter that I liked the stock as much as ever. I wanted to be sure I booked a winner.

Though I had sworn that I would run as if no one was looking over my shoulder, I booted it. Subsequently the stock doubled over the next year as my thesis about the stock's potential played out.

I had fallen victim to hedge-funditis. Had I not cared about the short term so much, I would have held on to a huge gain for at least some of my holdings. While you may not feel as if you are running a hedge fund, the focus on short- term performance has infected pretty much every investor I know. You don't need to show good days, good months, good quarters, or even good years. You just need to show great wealth over many years. Invest for the long term. Lose the hedge fund mentality.

Editor's note: This is a special sneak preview of Jim Cramer's just-released book,

Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)

. Look for more sneak previews every day, and get your free copy with your annual subscription to Action Alerts Plus; click here for details. Catch Cramer in person to get it signed: Wednesday, Dec. 5, at 7 p.m. EST in New York City's Union Square Barnes & Noble; Wednesday, Dec. 12, at 7 p.m. in Bridgewater, N.J.'s Borders; and Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco. Missed the first sneak previews? Read the book intro and the rules of getting and staying rich: Rule 1 and Rule 2.

From Jim Cramer's Stay Mad for Life by James J. Cramer and Cliff Mason. Copyright

2007 by Jim Cramer. Reprinted by permission of Simon & Schuster, Inc.

At the time of publication, Cramer was long

Jim Cramer is a director and co-founder of He contributes daily market commentary for's sites and serves as an adviser to the company's CEO. Outside contributing columnists for and, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. To preorder Cramer's newest book -- "Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer)," due in stores Dec. 4 -- on Amazon,

click here. Click

here to order "Mad Money: Watch TV, Get Rich," click

here to order "Real Money: Sane Investing in an Insane World," click

here to get "You Got Screwed!" and click

here for Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he appreciates your feedback and invites you to send comments by

clicking here. has a revenue-sharing relationship with under which it receives a portion of the revenue from purchases by customers directed there from