How to make a market decline work in your favor

Whenever Jim Cramer buys a new stock, there's something he absolutely refuses to do.

He would never buy a position all at once. Seriously, no matter how attractive or cheap a stock is, the “Mad Money” host would never, ever scoop it up in one fell swoop.

"I only buy in increments, and I buy on the way down," he said.

Why? Wouldn’t you want to take advantage of a good opportunity?





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There is what he calls "an inherent fallibility" in the first moment of buying. Too often, investors are excited by the purchase or by the prospects of the company and go overboard.

Thus, buying stock in increments will take the emotion out of the purchase and remind investors of the bottom line.

And as Cramer often reminds his fellow Cramericans, emotion and stocks should be kept at arm's length.

Instead, scale into a position gradually. For instance, establish a position of 25 percent first. Then watch for a pullback, and increase the size of the position on a decline until it's fully invested. As long as the fundamentals of the company haven't changed, it's a winning strategy.

"I do it this way because I know I am fallible. Also, I know if I commit all my money at one level and then the market takes a huge tumble, I will feel very angry."

And stocks rarely go up in a straight line.

With Cramer's increment-purchasing strategy, it will allow you to take advantage of the peaks and valleys of the market. You can make a decline work in your favor.

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By embracing declines and viewing them as an opportunity to acquire favorite stocks at a lower price, investors are truly playing the market like pros.

Of course, there may be a rare instance when Cramer's strategy doesn't work.

"The worst that happens with my method? Simple: I don't get enough stock on before a very big move. I don't have as big a profit as I would like. Now that's what I call a high-quality problem."

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