Cramer's 5 Rules For Becoming a Better Investor
"If you follow my rules, you should be able to recognize an opportunity when you see it and to manage to avoid losing money when you don't have to, no matter what the circumstances, including a collapse in Europe or a slowing in China or even a skyrocketing oil price," he said.
Rule No. 1: "Don't dig in your heels when you're wrong"
The late, great economist John Maynard Keynes always said, "When the facts change, I change my mind." Cramer has adopted the quote as his personal mantra. After all, he said one of the easiest mistakes to make is refusing to change your mind when the facts are in and you've been proven wrong. It's one of the most difficult things for the most emotional investors and traders to do, but also crucial to be a good investor.
"Swallowing your pride is never easy, but the more time you spend digging in your heels, the less you have to take advantage of the new situation and profit from it," Cramer explained.
Rule No. 2: "Price matters"
Price is so important, that if it could go low enough, investors are willing to buy stocks of companies they don't even like that much. Cramer will never recommend a stock when he thinks the fundamentals of the underlying company are deteriorating and normally there's a lot of space between a "best of breed" company and one that's uninvestable. In normal circumstances then, if a lowly company's stock falls to a certain level that makes it just too darned cheap to pass up, Cramer thinks it's perfectly OK to buy when you merely have a low opinion of the underlying company. That's when price matters.
So how do you know when the price is right for a stock you wouldn't otherwise buy? It's a sliding scale, Cramer said, where the better the company, the more you should be willing to pay. If speculating, he recommends looking for companies that have been left for dead, even though they still have pulse upon closer inspection. Just be sure that bankruptcy is not on the table, he added. So long as bankruptcy is not on the radar, then buying an unattractive company at an attractive price could make a lot of sense.
Rule No. 3: "Don't take your cue from an inferior company"
When a "worst of breed" name says things are bad for the entire sector, don't just take it on faith, Cramer said. Weak players always seek to pin their failings on the entire industry, he explained. It's important, then, that investors are able to recognize the excuses.
If a company has gotten into the habit of serial underperformance and blames its shoddy results on a shoddy environment, Cramer said the odds are that its competitors will tell a different story. At the same time, bad news for one company might not mean bad news for another company in the same sector. Investors can't just assume that all companies in the same industry are equivalent, he noted.
Rule No. 4: "Don't believe the hype"