NEW YORK ( TheStreet) -- Individual investors can not only invest like the pros, they can beat them, too. Those were Jim Cramer's words to his "Mad Money" TV show viewers Tuesday, as he dedicated the entire show to detailing the methods to his madness. Cramer said it doesn't take a lot of effort to invest one's own money, just a few hours a week for research, or "homework," as he so often calls it. But the results from that research will bear far more fruit than blindly dumping money into an index fund, or worse, a bond fund in a time of historically low interest rates. Where can investors find their research? Fortunately, it's practically everywhere, said Cramer. It's on sites like CNBC.com, TheStreet, Yahoo! and others, as well as on the individual Web sites of every publicly traded company. When first starting out, Cramer recommended using the 52-week high list. The new-highs list shows stocks with true momentum, said Cramer, especially in a bad market. But that does not mean that investors should just blindly chase every stock on that list. Instead, Cramer said research will still need to be done to separate the truly great stocks from the ones that are just lucky. >>7 Stocks Hit 52-Week Highs After researching the new-high list and picking out the winners, Cramer suggested that the homework is still not done. He told viewers to never chase stocks higher, as the market will always sell off and provide a better entry point in the not-too-distant future. Cramer said he always advises buying stocks on weakness, then trimming positions into strength. A broad, market-wide selloff provides an excellent entry point, he concluded.
Insider BuyingCramer's next trick for investors: Look for stocks with strong insider buying. Company executives are no dummies, explained Cramer. If they're buying their company's stock, then maybe you should be too. Cramer said that executives can sell company stock for all sorts of reasons. But buying, especially in large quantities, should be a clear signal that execs are highly confident in their outlook and are putting their own money on the line to prove it.
Short InterestContinuing on the insider buying theme, Cramer's next trick involved looking for a special type of insider buying, one that involves a stock with a huge short interest. Cramer explained that short sellers must have a lot of conviction in order to bet that a stock is heading lower. The downside of shorting a stock is infinite, while going long on a stock limits losses at zero. Short sellers also risk a short squeeze, a bit of good news about a company that sends shares high enough that those who are short the stock are forced to cover their positions. The dynamics of short-selling makes insider buying all the more interesting, said Cramer. When lots of people are betting against a company and an executive starts buying, Cramer said that's like drawing a line in the sand and saying "our stock goes this low and no lower." Cramer said anytime investors see a large short interest coupled with meaningful, not token, insider buying, their ears should perk up and the research should start immediately. While short sellers are smart people, noted Cramer, they often know less than those in charge of running the company. Cramer offered a caveat to betting against the short sellers, however. He said to avoid hot-button stocks where the short interest is simply too large to overcome. At the height of the financial crisis in 2008, Cramer noted that short sellers were able to overrun many bank stocks, thanks in part to the removal of protections like the uptick rule, which helped to slow these so-called "bear raids." Home gamers can still find opportunities where the short sellers have overreached, concluded Cramer, especially in stocks that pay a solid dividend, which often helps to deter short sellers, who must pay the dividend on the shares they've borrowed.