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NEW YORK ( TheStreet) -- There's nothing worse than watching the averages roar higher while your portfolio just sits there, Jim Cramer told "Mad Money" viewers as he devoted his entire show to teaching investors how to best take advantage of short-term rallies. Cramer said the most important lesson in dealing with big market moves is preparing for the future and not letting great opportunities to sell pass you by. He said just as investors can't give in to despair when the market plunges, they also can't get blinded by euphoria when things are going well. "You don't actually have a profit until you sell something," Cramer reminded viewers. You aren't making money until you "ring the register." That's why selling into strength is always the best policy. There's nothing wrong with feeling good about a rally, as long as it doesn't lead to complacency -- the enemy of every investor. You can be thrilled about your portfolio's performance, said Cramer, but don't forget that you've also been given a chance to sell at great prices. Remember the goal of investing: buy low and sell high.
Take a Hard LookCramer's next rule for investors was to always scrutinize your portfolio hard during big market rallies. The only time investors need to be tougher on their portfolios is during brutal market declines. Cramer said it's only natural to fall in love with a stock that's making you a lot of money. But in the end, you can love your spouse, you can love your kids, you can love your dog and maybe even your job, but you should never love a piece of paper, especially if its value is heading higher. When a stock is making you money, you tend to love it more, but actually you should be liking it less. The more expensive it gets, the riskier it gets and the more likely it is to fall. That's why investors should re-rank all of the stocks in their portfolios during big rallies, taking into account the risk/reward they now offer. Stocks you bought low and still represent great value? They should be ranked highest. Those with big gains should be ranked progressively lower. Emotionally, this may seem counter-intuitive, said Cramer, but in a rally where everyone is buying like crazy, the smart money should be ringing the register on their biggest gains.
Cramer said that at his charitable trust,
Action Alerts PLUS , he ranks stocks on a scale of one to four. Ones, he said, are stocks he'd buy at the current price, twos are buys only if they pulled back, threes are stocks you'd sell at a higher price and fours are those you should be selling right now.
Prepare for Down DaysA short-term rally is your best opportunity to prepare for the next big down day, Cramer said in his next lesson for investors. He said preparation is the key to successful investing, which is why you should have a plan for selling every stock you own, preferably before you even buy it in the first place. Cramer said his rally playbook is really a prologue to his sell-off playbook. You can't afford to buy stocks on the big down days if you don't first ring the register on your biggest gains during the rallies. Cash is king, Cramer reminded viewers, which is why he always kept at least 5% of his portfolio in cash back at his old hedge fund. He said he was always scaling out of the winners so there was always cash on hand to have the ammo needed for the next down days. The best time to raise cash is right after a big rally, when there's cash to be made, Cramer concluded.
What Should You Sell?So which stocks should investors sell during the big market rallies? Cramer said there are two kinds: the biggest winners, which he already mentioned, and the laggards that you've probably been wanting to sell anyway. Cramer continued that investors must remember that when talking about stocks, price matters. That doesn't mean you should sell all of your big gainers, but you should certainly trim your positions. This may seem crazy, he said, but in reality it makes a lot of sense. As for the laggards, it's always a good idea to look into the stocks in your portfolio that haven't moved with the rest of the markets and then ask why. If your stock can't gain any lift on even a big up day, there may be a bigger problem that needs to be addressed pronto.
Not all laggards are losers, Cramer said. Iit might not be the company's fault that some macro issue is holding the stock back. The fact is, however, that we don't care about blame, we care about winning, Cramer said. If your stocks aren't winning during a major rally, you may want to think twice about owning them.