Rule No. 24: Explain Your Picks

In this special look at Jim Cramer's latest book, he lays out the importance of talking about your stock picks.

Author:: Jim Cramer
Publish date:: Apr 4, 2005 8:38 AM EDT

Editor's note: Jim Cramer's new book,

Real Money: Sane Investing in an Insane World

, is available in selected bookstores now. As a special bonus to

RealMoney

readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here. Today, we present Cramer's twenty-fourth rule of investing. Read more about his rules:

Pigs Get Slaughtered It's OK to Pay the Taxes Don't Buy All at Once Buy Damaged Stocks Diversify to Control Risk Do Your Homework Don't Panic Buy Best-of-Breed Defend Some Stocks Don't Bet on Bad Stocks Don't Own Too Many Names Cash Is for Winners No Woulda, Shoulda, Couldas Expect Corrections Watch Bonds Don't Subsidize Losers Check Hope at the Door Be Flexible Quit When Execs Do Patience Is a Virtue Be a TV Critic When to Wait 30 Days Beware Stock Hype

One of the worst things that ever happened to stock picking was the Internet, because it took away one of the most important brakes on the process, one of the most important warning systems, which is talking to someone about a buy. Now you can, with a stroke of a key, buy the stock of

Sirius

(SIRI) - Get Report

Avaya

(AV)

without ever having to explain to another human being why you are doing so.

This is why you should always:

Be able to explain your stock picks to someone else.

Buying stocks is a solitary event --

too

solitary. As I love to say, we all are prone to making mistakes, sometimes big ones. One way to cut down on these mistakes is to force yourself to articulate to someone else why you like

Elan

(ELN)

or why you think

Biogen Idec

(BIIB) - Get Report

is a winner.

When I was at my hedge fund, I always made every portfolio manager sell me the stock, literally sell it to me like a salesperson, before I would buy it. If you are in a position where you are picking stocks yourself, get someone to listen to you and let you articulate your reasoning.

Recently, one of my email correspondents said that her daughter bought the stock of

Sony

(SNE) - Get Report

because of the Xbox. Ouch! That would be

Microsoft

(MSFT) - Get Report

that makes the Xbox. A mistake like that would have been picked up by most people who articulated their reasoning to others. The simple selling of the idea first, to someone else, can help you spot flaws.

I also like to ask people, "What's going to make this

EMC

(EMC)

go up, what's the catalyst?" Or, "Have we missed the move in this

EnCana

(ECA) - Get Report

already?" And, "What's your edge?" These are among the questions I ask. If you can't answer, you shouldn't be buying.

At the time of publication, Cramer was long EnCana.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, 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. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to

jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click

here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click

here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click

here to get his second book, "You Got Screwed!" and click

here to order Cramer's autobiography, "Confessions of a Street Addict."

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