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Editor's note: The following is a recap of a "Mad Money" episode that first aired on Oct. 4. It was rebroadcast on Tuesday.
Do Your Homework
Good investing isn't a game. You have to make plans and stick to them to be successful, said Jim Cramer on his "Mad Money" TV show Tuesday night. "Good investing isn't a game, it's not random, it's not all touch and go." You need to understand what you are buying and why you are buying it. Without that understanding, you will lose money, said Cramer. Additionally, don't lie to yourself when you're wrong, he said. That only compounds the problem. When you're wrong, you need to recognize it quickly. Don't let hope creep in or give yourself the benefit of the doubt. If you're wrong, sell the stock and find something new. "Don't lie to yourself as the evidence comes in. You need to coldly evaluate the evidence and act on it rationally ... Hope has no place," said Cramer. "If you can't be honest with yourself, you can't make a dime." Cramer recommends only buying stocks you have the time and the inclination to research and follow. "Buy and homework," says Cramer. For a diversified portfolio, he recommends a minimum of five stocks and maximum of 10. Cramer's rule for diversification also includes having no more than 20% of your portfolio in a particular sector. That means if you have five stocks, you should own, for example, no more than one tech stock, one oil stock, one health care stock, one defense stock, etc. Cramer's method of managing his portfolio involves trading around investment positions. He likes to sell some of an investment if it goes up too much and buy it back lower, always keeping a core position in the stock. Cramer will only make pure trades if he has a clear entrance strategy, a clear exit strategy, a defined time frame and catalysts to propel the stock. How should one decide when to sell? "No one is good enough to be able to call a top or a bottom," he said. Cramer follows this mantra: Bulls make money, bears make money, pigs get slaughtered. If you have a stock that has a good gain, take some off the table so that you're playing with the house's money, and let the rest run.