Editor's note: The following is a recap of a "Mad Money" episode that originally aired Dec. 26, 2006. To make money in the market, people need more than good stock picks and good advice about the state of the market, Jim Cramer told viewers of his "Mad Money" show. "They need discipline." Regular fans of "Mad Money" should be familiar with
Know What You HoldMoving on to rule No. 2: when playing a rally, "make sure your stocks actually fit the bill," he said. "Don't be bamboozled by what sector your stock belongs to. Instead, know precisely what you own and why you own it." Although Cramer always advises his viewers to do their homework and know what they own, this rule is different because the point is to recognize that "sectors don't always matter when it comes to giving stocks momentum." People should never confuse a rally within a sector for a rally of that entire sector, he said. Also, he knows people don't always do their homework before buying stocks -- behavior Cramer said he does not approve of. He iterated that he believes people need to spend at least an hour a week per stock they own doing homework to make sure the stock is still a "sound" investment.
Latin AmericaHe said his next rule is "provisionally true" and though at some time in the future he can see it being revoked, he doesn't believe it will be soon. The rule is that "Latin America is always a trade." Every so often there's a "huge wave of interest in Latin American stocks," where everyone in the business who owns these stocks believes that Latin America is an "amazing, long-term growth story," Cramer said. But be careful, he warned, because no matter how good the fundamentals of these stocks may look, these stocks "will always be a trade." The reason for this rule is simple and has nothing to do with the company's fundamentals, he went on to say. It's because almost every institutional investor on Wall Street treats Latin American stocks as trades, not investments. "These are the guys who move the market, and when they decide the trade is over, they clear out," Cramer said. "Everyone out there running money was trained to believe that Latin American stocks are levered to our business cycle, so they'll trade the stocks like that, even when they're wrong." In August 2005, he got behind BanColombia ( CIB), and in March 2006, after the stock had almost doubled, he made the mistake of thinking of it as an investment and did not declare the trade over. Consequently, people who stuck with the stock gave back most of their gains by June 2006, when Wall Street decided the Latin American trade was over.
Difficult to GaugeRule No. 4 is to "be a lemming," Cramer continued. Although it might sound "stupid" and "terrible," he told his viewers not to be original or unique and to instead "follow the Street's lead because most of the time it works." While this doesn't mean people should stop thinking, Cramer said that after doing their homework, if people agree with what the big institutions are buying, and they agree with most of the analysts, "then it's OK to be a follower." "You don't have to feel bad about getting in late in the game or being a poseur," he said. "This isn't about being a unique and individual snowflake. It's about trying to make money." Moreover, Wall Street is often right, Cramer said. And stocks on the 52-week-high list often stay there for days or weeks by hitting new highs. While he warned against simply following the momentum, Cramer said as long as there is momentum and market players have done the homework, it's OK to follow the momentum of a stock they like. Cramer's last and "perhaps most poignant" rule of the night was "don't be afraid to say something is too hard." "There are some things that are just too difficult to game," no matter how much homework one does, he said. Restaurant same-store sales growth is something Cramer believes may be the most difficult to gauge. "Almost every time I've tried to game restaurant same-store sales, I've gotten burned," he said. "There are just too many factors at work, too many different things going on that could crush you if you get it wrong." While he said he's not telling people never to invest in restaurant stocks, Cramer advised viewers not to buy a restaurant stock expecting it to spike on a positive, better-than-expected same-store sales number. "There are too many better, easier ways to make money in the market," he said. "Restaurant CEOs have a hard time predicting their own same-store sales, and the weirdest, most unexpected factors can cause worse-than-expected results." Cramer said he means it when he says there's always a bull market somewhere. Therefore, he doesn't believe people should "beat their heads against the wall" trying to make money playing something that's just too hard.
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