Cramer’s 15 Rules for Playing Defense

Forget about making money – sometimes holding on to what you have is much more important. That’s why Cramer created these 15 rules that will keep you from losing your hard-earned cash when the market’s at its worst.Posted 9 Oct 2009

Going “all in” might be cool for poker, but it’s just about the worst thing you can do in investing. Remember the dot-com bubble of 2000? That’s why Cramer recommends a 20% limit on any holding, stock or sector, in your portfolio.

When it comes to stocks, Cramer, like Guns N’ Roses, urges patience. Investors should never get into or out of a position all at once. Better to buy your new favorite company – which you’ve thoroughly researched beforehand, right? – in increments as the share price increases. Once you’ve registered a worthwhile gain, take some profits. And continue to do so, bit by bit, as the price comes back down.

In this case, that’s a verb, not a noun. When the thesis that first brought you to a stock is no longer working, Cramer says, get out – losses or not. Your first loss is your best loss. So take the hint and move on.

If they worked for The Godfather’s Corleone family, they’ll work for you. In investing, dividends make great buffers, meaning they can cut your losses. As long as they’re safe, mind you. Cramer says to look for yields bigger than those offered by government-issued Treasurys and companies that have the cash to pay ‘em.

Never be fully invested, Cramer says. Investors should always have some cash on hand, though, despite Diddy’s demands, it doesn’t need to be in C-note denominations. But always have some greenbacks on the ready in case the market dips. Then you can put that money-market account to work.

Sectors like natural gas, copper, steel, fertilizer, rails and tech tend to swing wildly. So a portfolio full of these plays can be a bit much for the average investor. Make sure you’re up for the ride before you buckle in.

Cramer knows what you’re thinking: You can buy a much bigger position when a stock is under $10, thereby boosting your return. But these single-digit names can be dangerous. After all, they’ve dropped this low for a reason. Keep that in mind the next time you think you’ve found a way to make some easy money.

Don’t go near any company that missed its most recent earnings report for at least two quarters, Cramer says. He’s never seen a turnaround quicker than that. You might even have to wait nine or 10, depending on the situation.

On HBO’s The Wire, the Baltimore Police Department always found “creative” ways to report the latest crime numbers. They wanted to make themselves look good, of course. Well, public companies have been known to do the same thing, so watch out for that. At the first sign of accounting irregularities, Cramer says, sell, sell, sell.

First-year CEOs have a lot to learn, so don’t buy their company’s stock. Let them pay their dues first.

Be smart about taking profits, Cramer says. You want to play with the house’s money whenever possible, so take any opportunity to get your original investment back. Then roll the dice with your winnings.

Ever. If you want to borrow money to buy a house, go for it. But you can’t live in a stock when the price goes down. In fact, you usually have to kick in more money. And once you’re in a hole, it’s very hard to pull yourself out.

That means they’re just as likely to cover up mistakes as you are. If you’re broker stops talking up a stock that you own, especially one that he recommended, sell it. Especially if it’s no longer doing well. He might be embarrassed to admit you own a loser.

A company with a good stock-repurchasing plan will keep their share prices steady during tough times. So look for firms with large amounts of cash to make that happen.

OK, admit it: You were afraid to look at your 401(k) statement throughout the depression/recession of 2008 and early 2009. But Cramer would cautions against that. You want to stay current on your retirement holdings and your stock portfolio – no matter how much it hurts. If you don’t, it could end up hurting a lot more.

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