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 eleventh rule of investing. Read more about his rules:
  1. Pigs Get Slaughtered
  2. It's OK to Pay the Taxes
  3. Don't Buy All at Once
  4. Buy Damaged Stocks
  5. Diversify to Control Risk
  6. Do Your Homework
  7. Don't Panic
  8. Buy Best-of-Breed
  9. Defend Some Stocks
  10. Don't Bet on Bad Stocks


In my years as a hedge fund manager, I spent three hours every day analyzing the mistakes of the day before. That was my major task, one that I completed before anyone else came into the office, generally between 4 a.m. and 7 a.m. I would analyze every losing trade -- you don't need to analyze the winners, they take care of themselves -- and try to figure out how I could have made more money or lost less money.

I was maniacal about it. And after a couple of years of this, I realized that good performance could be directly linked to having fewer positions. That's one of the reasons I insist on owning only 25 positions, no matter what, for my Action Alerts PLUS portfolio.

I never will buy a stock without first taking one off. That's a great discipline and one you should adopt, pronto. All the bad money managers I know have hundreds of positions. All the good ones have a few that they know inside out and like on the way down.

That's why I say:

Don't own too many stocks.

I know it can be constraining. For instance, right now I like DuPont ( DD), Dow Chemical ( DOW) and Eastman Chemical ( EMN) because we are in a major upswing in chemicals. But my discipline leaves room for only one, so I own the one that I think is the cheapest and the best, Eastman.

I don't like tech so I am judicious about having tech positions, which is why I have only Intel ( INTC) and Lucent ( LU). I long for more Internet plays now that they have come down, but I don't have room for more than Yahoo! ( YHOO) or else I will violate my rules.

When I lost the most money, by the way, my "sheets," my position sheets, were as thick as a brick. When I made the most money, my sheets were, well, one sheet of paper, double-spaced. And I ran hundreds of millions of dollars.

Please remember that whether you are a pro or an amateur, you can always have too many positions.

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
7. Don't Panic 8. Buy Best-of-Breed
9. Defend Some Stocks 10. Don't Bet on Bad Stocks
11. Own Fewer Names
Check back for more of Cramer's Rules
At the time of publication, Cramer was long Eastman Chemical, Intel, Lucent and Yahoo!.

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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