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It’s Buy and Homework – Not Buy and Hold

If investors want to beat the market, Cramer says they need to know a handful of extremely important rules before they can be successful. They 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, money will be made. It’s the security blanket investors 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 honestly, it’s just not true that a stock will necessarily recover its losses.

Worst of all, buy-and-hold lets investors be lazy. It means they don’t have to do their research. It’s the perfect excuse to not do homework. And the only way they can really know if their 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 a 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 doing homework. And if investors don’t do this homework, they’re setting themselves up to lose a lot of money.

People shouldn't feel bad if they’ve been practicing buy-and-hold. It’s not their fault - they’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 they? All their lives they’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, Cramer said. If an investor owns a stock and doesn’t understand the business it’s in, if he doesn’t know any reasons why the stock should go up other than because buy-and-hold says so, if he doesn’t pay attention to his stocks to make sure nothing bad is on the horizon, he 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 if they just sit tight holding on to the same stocks indefinitely. Be like the professionals. You have to be like Cramer: always on the hunt for a bull market. Homework takes a little time, but when trying to make money, it’s the only option. Don’t have time to do the homework? That’s fine – just put money in a mutual fund. But Cramer doesn't recommend an investor manage his own money if he doesn’t have the time because that’s just buy-and-hold all over again.

Questions? Comments? madcap@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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