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Rule 10: Bad Buys Won't Become Takeovers

Nothing's more exciting than a takeover.
Nothing's as lucrative.

You can put on a lifetime's worth of moves in a day from a takeover.

So people go to great extents to try to get them, including buying a lot of bad companies in the hope of catching one takeover.

Funny thing about bad companies:
They rarely get bids.

In fact, the companies that get bids are great companies with cheap stocks,
not crummy companies with expensive stocks.

Yet that's what people buy, all the time.

So here's my rule: Never speculate on companies with bad fundamentals.

The odds are that you will end up owning something that could go down much more than you thought, but that has very limited upside.

You can make much more money buying a company that is doing well and can still get a bid, than you can buying a company that is doing poorly and is unlikely to get a bid.

It makes sense:
not a lot of bad companies get bids
because not a lot of managers can turn bad companies into good ones.

If you had moved on, you could have bought high-quality companies that moved up over time and could have done much better.

When you're scouting for companies where the fundamentals are good, and the takeovers are likely,

remember that,
unlike companies with bad fundamentals that you speculate on,
if these go down you don't need to cut and run.

If they don't get a bid, you still can still buy more and find other ways to win.

That's not something you can do with a company that's gone from bad to worse while you were waiting, irrationally, for lightning to strike.

Action Alerts Plus portfolio manager and TheStreet's founder Jim Cramer has learned a lot over his 30+ years of investing. So he created a list of 25 Rules for Investing that can help you avoid the novice pitfalls that even he fell into on occasion.

For instance, many investors speculate on companies with bad fundamentals, thinking the company many one day be a takeover target.

But it rarely happens.

Rule 10: Bad Buys Won't Become Takeovers

"The odds are that you will end up owning something that could go down much more than you thought, but that has very limited upside," says Cramer. 

"You can make much more money buying a company that is doing well and can still get a bid, than you can buying a company that is doing poorly and is unlikely to get a bid."

So watch Cramer talk about Rule #10 above -- and why you again should do your homework before you buy a speculative stock.

Sign up and watch Jim Cramer's 25 Rules For Investing here!

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