There’s always a bull market: Jim Cramer’s 25 lessons to grow money, and not lose it

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Mad Money
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Mad Money

Jim Cramer is to Wall Street what peppy songs are to Bollywood movies. The renowned American television personality and host of the popular show 'Mad Money', who can shoot holes in the most robust corporate balance sheets, recommends defensive play when it comes to stock investing. Here is a list of Cramer’s own 25 rules of investing, which he says can help investors avoid big losses and keep their money safe and amass solid wealth.

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​Rule No. 1: Bulls & bears make money; pigs get slaughtered
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​Rule No. 1: Bulls & bears make money; pigs get slaughtered

Cramer says investors often get intoxicated with their gains in a bull market and tend to not book profits and never take anything off the table. This, Cramer feels, is a big mistake that investors make and they often end up getting slaughtered by their own greed. He said less greedy investors manage to cut their losses and stay in the game. One of the hardest things about investing is holding on in the face of big declines or market chaos, he says, adding that short-term pain often translates into long-term gains.

“Being cautious and ringing the register near tops ends up keeping you in the game. Because you never know when stocks you own are going to really get crushed. You never know when the market could be just annihilated. You can’t have certainty. If you assume stocks will keep going up forever in a straight line, I think you’re going to be in for a world of hurt,” he wrote in his book, Real Money: Sane Investing in an Insane World.

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​Rule No. 2: It's ok to pay the taxes
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​Rule No. 2: It's ok to pay the taxes

Cramer says it is a universally accepted truth that no one has ever liked to pay taxes and as long as there have been taxes, investors have hated paying them. But he says it is best to make peace with the tax man as, like death, taxes are inevitable and unavoidable. “It's important to remember that gains, any gains, can be ephemeral. It is better to stop worrying about the tax man and take the gains when those gains appear unsustainable than to ride things back to a loss. Stop fearing the tax man; start fearing the loss man. You won't regret it,” said the Mad Money host.

Rule No. 3: Don’t buy all at once
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Rule No. 3: Don’t buy all at once

Cramer said investors should not buy everything or sell everything at one go. It is best to buy and sell stocks in stages so that an investor can get the overall best prices over time. "It’s just plain hubris to buy a big chunk of anything (relative to your net worth) all at once. Who knows if the stock will crater soon after? You must resist feeling like you are making a “statement” with your purchase. Resist the arrogance, buy slowly. It’s humbling … and it’s right," says he.

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​Rule No. 4: Buy damaged stocks, not damaged companies
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​Rule No. 4: Buy damaged stocks, not damaged companies

Cramer says when there is a selloff in the market, the first thing to do is to look for the companies that caused it. There’s a big difference between a broken company and a broken stock, and being able to gain handsome returns in a selloff requires knowing the difference between the two. “When the market suffers huge losses, investors have an opportunity to buy good stocks that have taken an unfair beating. If you’re looking at a company that is part of the reason for the correction, you’re looking at a broken company. Those are directly in the blast zone and certain to be obliterated,” says he.

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Rule No. 5: Diversify to control risk
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Rule No. 5: Diversify to control risk

Cramer says it is only through diversification that an investor can avoid getting nailed by sector risk, which is about 50 per cent of the entire risk of owning a stock. He feels if an investor can control the downside by managing his risk, the upside will take care of itself. “That’s the only investment concept that truly works for everyone. If you can mix enough different sectors into your portfolio, you can’t be hit by one of the myriad perfect storms that come our way far more often than you would think. Controlling risk is the key to long-term rewards, and controlling risk means being diversified at all times,” said the co-founder of TheStreet.com.

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​Rule No. 6: Do your stock home work
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​Rule No. 6: Do your stock home work

Cramer says it is best for an investor to find out all about a company before buying its stocks. It is foolish to invest money in a company one knows nothing about. Although some argue that they can’t do enough stock research due to their busy schedule or because of their lack of knowledge on financial statements, they can always hire a financial manager to do the research on their behalf as it will be worth the time and money and will save them from incurring big losses. “If you fall back on a buy-and-hold strategy for any group of stocks and don’t pay attention, I can assure you that you’ll be soundly beaten by professional managers with good track records who are actively searching for good stocks all of the time. I’m quite certain that any index fund can beat you, but that’s just not a strategy for wealth-building. Remember, it’s ‘buy and do your homework’, not ‘buy and hold,’ he says.

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​Rule No. 7: No one made a dime by panicking
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​Rule No. 7: No one made a dime by panicking

Cramer says when things are not going well for a company, people usually panic and sell to protect their interests. These panic moves do not lead to profits and there will always going to be a better time to sell than during those moments of panic. Therefore, it is essential that when the masses are fleeing due to a downturn in the market, investors should not go with the flow. “There is usually some sort of bounceback later that will enable you to sell at a better price. No one ever made a dime panicking. There will always be a better time to leave the table than the one brought on by panic,” says he.

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​Rule No. 8: Buy best-of-the-breed companies
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​Rule No. 8: Buy best-of-the-breed companies

Cramer advises investors to buy shares of ‘best-of-the-breed companies’, even if it means paying more for their stocks as the best-run companies with best prospects can help protect portfolios and minimise their losses. Cramer warns investors to not go after low-quality stocks because they may seem as bargains, but are more likely to result in losses than gains. “Why is owning best-of-the-breed even a question? When you’re shopping for a car, you buy best of breed — or the best you can afford. It’s not even an issue. We pay for the highest quality brand because we know that a brand, a good brand, signifies reliability,” says he.

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Rule No. 9: Defend some stocks, not all
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Rule No. 9: Defend some stocks, not all

Cramer says investors should not make the mistake of trying to support all of the stocks all the time. "He who defends everything defends nothing," he says. He says when things get tough, investors need to recognise that many stocks that they had bought for better times may not be in good enough shape to rally. "You can't own everything you would like to own. If you try to defend them all in nastier time than when you bought them, you’ll simply run out of capital or go on margin near the bottom. And then you’ll be margined out — sold out by the margin clerk when the stock market has finally found its footing. You’ll lose your reserve and not be ready if the market doesn’t turn in your direction," says he.

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​Rule No. 10: Bad buys won’t become takeovers
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​Rule No. 10: Bad buys won’t become takeovers

Cramer says investors should never speculate on companies with bad fundamentals as the odds of ending up owning something that can go down much more than anticipated are very high. "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," he cautions.

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Rule No. 11: Don’t own too many names
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Rule No. 11: Don’t own too many names

He advises investors to stick to only a few positions that they know inside out and never buy a new stock without selling off another. He said good performance is linked directly to having fewer positions and investors who own fewer stocks, tend to make more money. "It can be constraining, but you will perform better. You’ll end up selling some stocks that are good and buying other stocks that aren’t as good. But take it from someone who’s owned stocks for 39 years — it’s far more likely that you’ll be selling marginal companies and getting bigger in better ones. That’s how to make a portfolio really work for you," he says.

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​Rule No. 12: Cash is for winners
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​Rule No. 12: Cash is for winners

Cramer feels raising cash is often a much better strategy than buying Put options or shorting stocks when the market seems unattractive. “Go sit on the side lines — nothing is wrong with that — [and] wait for the situation to improve. Believe me, it’s never the wrong call when you don’t like the tape or you can’t find anything that truly makes sense for you,” says he.

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​Rule No. 13: No Woulda, Shoulda, Coulda’s
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​Rule No. 13: No Woulda, Shoulda, Coulda’s

According to Cramer, the worst thing an investor can do is let a mistake undermine his confidence. He feels the pressure of owning stocks and having to make decisions about whether to buy or sell them is intense and can be emotionally brutal. So, he advises investors to be proactive and forget the past mistakes and move on. “When you get caught up in past investment mistakes, it interferes with your ability to make sound investment decisions going forward. It erodes your confidence. Learn how to forget your past mistakes and losses," he says.

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Rule No. 14: Expect, don’t fear corrections
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Rule No. 14: Expect, don’t fear corrections

Cramer advises investors to be emotionally prepared for market corrections as they are an unavoidable part of investing. Knowing that they’ll inevitably happen at some point can soften the blow and can be one of the best chances to make money. "Most people act as if corrections are total shockers, the type of things that never happen. But they are coming. And you better prepare for them. To me, they are like the rain. I expect it to rain. I prepare for it. When it comes, I am ready. I have an umbrella and a coat or I stay indoors," says Cramer.

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Rule No. 15: Don’t forget about bonds
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Rule No. 15: Don’t forget about bonds

He says it is very critical to always keep an eye on the bond market as bonds are a tool for capital preservation. As investors get closer to retirement age bonds offer a safer investment profile as it protect cash that people “can't afford to lose.”

"It should never come as a surprise that long-term interest rates are rising or falling. Bonds can punch your portfolio in the face if you aren’t paying attention and a lot of people don’t pay attention because bonds are boring. That’s why I say: Don’t forget bonds. Always keep those bond prices and interest rates right in front of you,” says Cramer.

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Rule No. 16: Never subsidize losers with winners
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Rule No. 16: Never subsidize losers with winners

Cramer believes it is essential for investors to not get attached to their loser stocks, especially when they need to generate cash. Although investors hate to sell stocks that are declining, it’s always better to sell losing stocks than to sell winning stocks to pay for the losses. "Sell the losers and wait a day. If you really want them, go buy them back the next day. I am also certain that you never will," he says.

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​Rule No. 17: Check hope at the door
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​Rule No. 17: Check hope at the door

The Wall Street veteran believes investors should never base their decisions on hope and should leave it behind before entering the stock market. Cramer feels hope is an emotion which does not fit in the stock market. “Remember, we don't care where a stock has been, we care where it is going, and it is most likely headed down if you are hoping,” he warns.

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​Rule No. 18: Be flexible
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​Rule No. 18: Be flexible

Cramer feels it is very important for investors to be flexible as businesses are naturally dynamic and markets are always changing. What might have been a good stock yesterday may become a bad stock tomorrow. “If you are not flexible, you will hold on to that bad stock because you know it to be good or are emotionally attached to the company and will be unable to embrace the change," he cautions.

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​Rule No. 19: When the chiefs retreat, so should you
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​Rule No. 19: When the chiefs retreat, so should you

He feels when CEOs and CFOs of a company quit, it is usually an indication that something is wrong with the business. Although there are exceptions, but it is best to sell these stocks quickly as they may head for a downfall.

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Rule No. 20: Giving up on value is a sin
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Rule No. 20: Giving up on value is a sin

Cramer feels there are many high potential companies that may not be doing very well at the moment but are bound to pick up later. These companies can give wealthy returns if investors recognize their potential and treat them with a bit of patience. ”Patience is a virtue. It takes patience. Most don't have it. If you don't, frankly, I think you should let someone who has patience run your money. You don't deserve to,” he says.

​Rule No. 21: Be a TV critic
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​Rule No. 21: Be a TV critic

He warns investors to remain sceptical and not believe everything they see in the financial news channels. “Just because someone says it on TV doesn't make it so. Money managers on television can pretty much get away with saying whatever they want on air,” he said.

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​Rule No. 22: Wait 30 Days after warnings (pre-announcements)
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​Rule No. 22: Wait 30 Days after warnings (pre-announcements)

Cramer advises investors to avoid buying a company which has pre-announced a bad quarter. Investors shouldn't be in any rush to buy these companies as pre-announcements are usually signs that a company is experiencing some form of weakness. Investors should at least wait for 30 days and see if there will be any change and if things will get any better. “Pre-announcements signal ongoing weakness. That's why I like to wait 30 days to see if anything has gotten better before I pull the trigger to buy. Sure, I will miss some great opportunities. Most of the time, though, after 30 days, I find that there is more woe and another leg down," says he.

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Rule No. 23: Beware the Wall Street hype
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Rule No. 23: Beware the Wall Street hype

Cramer warns investors against underestimating as to how a stock may get a big push on Wall Street. He feels analysts and firms sometimes get behind stocks due to their vested interests, which can keep propelling the stocks upwards well beyond reason. "In particular, when you short a stock, remember that an analyst will twist any data point into a positive to get a stock juiced. Again, that's his job. Don't think badly of him; just be ready to reload when he does it," he said.

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Rule No. 24: Explain your picks
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Rule No. 24: Explain your picks

The veteran market commentator says investors should talk to someone before picking a stock and explain the rationale behind buying it. "Explaining the decisions to others can help minimise the mistakes and articulating the reasoning can help recognize any inherent errors," he says.

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Rule No. 25: There's always a bull market
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Rule No. 25: There's always a bull market

Cramer believes there are always going to be some hidden gems (sectors and industries), which will be doing well despite the rest of the market being down. Cramer urges investors to spot these gems and invest in them even if it means that they might have to look further and harder than what their time and inclination allows. “What matters is that you don't simply default to what's in bear mode because you are time-constrained or intellectually lazy,” says he.

(Disclaimer: This article is based on Jim Cramer's Twenty-Five Rules of Investing, from his book Real Money: Sane Investing in an Insane World and video excerpts of CNBC’s Mad Money with Jim Cramer)

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