The biggest mistake of 2014

Cramer: The Biggest mistake of 2014
Cramer: The Biggest mistake of 2014   

Jim Cramer sees a major mistake being made with investors over and over again. They get a little too excited when the market goes up and fail to know when to sell at least a portion of their position.

Ultimately, that leads to gains made only on paper and losing the opportunity quickly. You snooze, you lose!

Holding a stock with major gains is nothing short of being just plain greedy. Investors must take some off the table. And in Cramer's book of rules, greed is bad and discipline is good. Strict discipline leads to the ability to cash out when you're winning.

Therefore, when you have a large gain on a position, find a level where you can feel satisfied with what you have. Then take at least a portion of your bet off the table. Otherwise, you put your gains at risk, and Cramer says that's piggish.

Read MoreCramer: How to make money from both bulls & bears

Hogging cash.
Michael Smith | Getty Images
Hogging cash.

Another mistake that the "Mad Money" host sees investors make all the time, is to hold out on selling a position for the purpose of taxes. It's a frequent conundrum that happens all the time.

Should you cash out on your red hot stock and pay short-term capital gains tax, or take a chance and wait out the year to be eligible for long-term capital gains tax?

"I say never consider taxes as a reason to hold a stock if the stock has gone up too fast and can head back down hard, as was the case in 2000, especially when the insiders were bailing out hand over fist," Cramer said.

Active money management means revisiting a thesis for holding the stock on a regular basis. If for some reason that thesis is thrown out the window, then Cramer thinks it is better to sell the position than try to beat the big tax man.

Read More Cramer: Watch out! Taxes don't trump fundamentals

Whenever 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.

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.

Read MoreCramer: Make a market decline work in your favor

Tarik Kizilkaya | Getty Images

Now, it is time to review Cramer's rule of separating the stock from the company. He frequently says "look for broken stocks, not broken companies."

But the stock is the company, right? No. There are lots of bad companies with bad stocks. There are also lots of good companies with bad stocks. An investor's job is to figure out the difference, so they can identify a bargain.

"I go after the stocks with the best fundamentals that happen to have been beaten up even as nothing's wrong at all with the companies," Cramer said.

He spots these stocks by circling back to companies that have just reported earnings, because he knows those fundamentals are intact.

Every week on "Mad Money," Cramer plays Am I Diversified with his fans. A caller will provide five stocks, and he will give his take on whether the portfolio is diversified.

Every. Single. Week. Why? Because diversification is important.

Now five stocks is certainly not enough, and Cramer knows that the human brain isn't wired to want to be diversified. After all if Tesla had a hot run, wouldn't you want to buy nothing but Tesla, Tesla and more Tesla?

Cramer gets it. But having a diversified portfolio is more important than making a few dollars. Because eventually that stock will get too hot, and your portfolio will go down in flames with it.

So, before buying a stock, Cramer wants to make sure there is a proper sounding board.

"As I love to say, we are all prone to make mistakes, sometimes big ones. One way to cut down on these mistakes is to force yourself to articulate why you would like to buy something," the "Mad Money" host said.

When Cramer worked at his hedge fund, he asked people eight questions. A few questions are:

No. 1: What's going to make this stock go up, besides the stock market?

No. 2: Why is it going to go up? Is there something time sensitive?

No. 3: Is this the best time to buy it?

Without a sounding board, you could get yourself into trouble. Really in a jam and don't have anyone to ask? Just call Cramer on the lightning round.

Read MoreCramer's 8 questions every investor must ask