Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.
NEW YORK ( TheStreet) -- "When you own stocks, you need to be humble," Jim Cramer told "Mad Money" TV show viewers Monday, as he dedicated the entire show to helping investors protect their profits from things they likely never saw coming. Cramer said that at some point something is going to go wrong with every portfolio, which is why diversification remains the single most important concept in investing. The traditional view of diversification means that no more than 20% of your portfolio can be in any given sector. So if you own five stocks, that means only one tech stock, one health-care name, on financial, etc. Investors need to err on the side of caution, said Cramer. Oil producers and oil refiners may be different, but their success and failure both ride on the price of oil, which make them the same. Hardware and software are both technology, which make them the same as well. But beyond the traditional views on diversification, Cramer said investors need to take it a step further and make sure their portfolios can win in any market, and that means owning some gold along with a high-yielding dividend stock, a growth stock, a speculative stock and a foreign stock. Cover all these bases and a portfolio will be bullet-proof, Cramer said. Why gold? Cramer said that gold is a special case because it tends to go up when everything else goes down. Think of it as stock insurance, he said, a safe haven. He continued to recommend the SPDR Gold Shares ( GLD), as owning the gold miners themselves has proven to be too risky.
The Value of SpeculationCramer said his next lesson for investors is to never underestimate the value of speculation in your portfolio. He said while the "professionals" will tell you speculation is a dirty word and something to be avoided at all costs, in fact speculation done right is necessary to stave off boredom and it can also net you a ton of money. So why should you invest in stocks with single-digit price tags rather than the so-called "blue chip" companies? Well, some of those blue-chips including General Motors ( GM), American International Group ( AIG) and Citigroup ( C) have proven there really is no such thing as "too big to fail."
Cramer said there are two types of companies that fall into the single-digit territory, and knowing the difference makes all the difference. The first type are broken companies, those little stocks that no one has ever heard of. Those are the stocks that will likely never amount to anything, noted Cramer, adding that no stock has ever fallen into the single digits because things are going well. But the second type of low-priced stocks are those of good companies going through hard times, companies like Ford Motor ( F) or Sprint Nextel ( S) or Skyworks Solutions ( SWKS). Cramer said when these companies fall on hard times and their shares fall below $10, money managers are no longer allowed to own them, which only sends prices plummeting further. But when the fundamentals turn, these stocks can rocket back to the upside, making the speculator look like the smartest guy in the room! These are the speculative stocks for which every investor should be on the lookout, Cramer said.
Think GrowthCramer said the next type of stock that must be part of every portfolio is a growth company. Strong secular growers can overcome even the weakest of economies because they want what Wall Street craves -- growth and tons of it. Stocks like Amazon.com ( AMZN), Chipotle Mexican Grill ( CMG), Deckers Outdoor ( DECK) and Express Scripts ( ESRX) are all examples of stocks that seem to defy gravity. Cramer said as a general rule he's willing to pay a multiple up to twice a company's growth rate. So for a company growing earnings by 20% a year, he's willing to pay up to a 40 multiple for the stock. He said growth stocks won't typically trade below one time their growth rate unless something is seriously wrong, which make the growth/multiple metric an easy one to gauge. Once investors have a growth name in their portfolio, Cramer said to pay close attention to the direction of the earnings estimates and whether earnings are increasing or decreasing. While growth stocks will soar as earnings are on the rise, they will come crashing down at the first change in momentum or stumble. Just look at Apple ( AAPL) or Google ( GOOG) as recent examples of growth stocks gone awry.