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It’s Buy and Homework – Not Buy and Hold

If you want to beat the market, Cramer says you need to know a handful of extremely important rules before you can be successful. You need to unlearn some of the worst, most harmful myths that all too many people seem to believe about stocks and investing. One of the biggest? Buy and hold.

Buy and hold isn’t a strategy, it’s an ideology. Its one central tenet is based on the idea that if you buy a stock and hang onto it for long enough, you’ll make money. It’s the security blanket you use when a stock drops: “I know the stock is down now, but buy and hold says it’ll eventually bounce back and go higher than where I bought it.” But it’s just not true that your stock will necessarily recover its losses.

Worst of all, buy and hold breeds laziness. It means you don’t have to do your research. It’s the perfect excuse to not do your homework. And the only way you can really know if your stocks are going up (or down) is by doing that homework. So that’s the rule: buy and homework, not buy and hold.

Homework should include checking your stock with CNBC.com’s investing tools, reading all the relevant news stories about it, comparing it to its peers and competitors, reading through its quarterly and annual reports, and especially listening to its quarterly conference calls. Very few nonprofessional investors listen to the conference calls, Cramer says, but they’re the single most important part of your homework. And if you don’t do this homework, you’re setting yourself up to lose a lot of money.

Don’t feel bad if you’ve been practicing buy and hold – it’s not your fault because you’ve been bamboozled. Even when Cramer started investing he believed in buy and hold. Everybody who’s new to the game believes in this ideology. And why wouldn’t you? All your life you’ve been told that buy and hold works.

And you know what, 30 or 40 years ago when taxes were high and commissions were even higher, buy and hold might have made sense. But now it’s a relic. If you own a stock and you don’t understand the business it’s in, if you don’t know any reasons why the stock should go up other than because buy and hold says so, if you don’t pay attention to your stocks to make sure nothing bad is on the horizon, you will probably end up losing money and never knowing why.

The professionals are always actively looking for new ways to make money, new stocks that can perform, and they will beat lazy individual investors that just sit tight holding on to the same stocks indefinitely. You have to be like the professionals. You have to be like Cramer: always on the hunt for a bull market. Homework takes a little time, but if you’re trying to make money, it’s the only option. If you don’t have time to do the homework, that’s fine – just put your money in a mutual fund – but don’t try to manage your own money if you don’t have the time because that’s just buy and hold all over again.

Bottom Line: Forget about buy and hold. The only way Cramer thinks you can try to make money in the market is buy and homework.

Questions? Comments? madmoney@cnbc.com

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  • Jim Cramer is host of CNBC's "Mad Money" and co-anchor of the 9 a.m. ET hour of CNBC's "Squawk on the Street."

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