Mad Money

Why 'Buy and Homework' Is a Better Strategy

The Dow is on Track

Sooner or later every stock reaches a point where it can go no higher, and, in fact, starts going a whole lot lower. Markets are no different. So simply buying and holding a position for the long term doesn't work as an investment strategy. Instead, Cramer on Tuesday recommended "buy and homework."

These tops, or the points at which a stock or market reaches a particular price and then crashes downward, can erase gains just as quickly as they were made. So investors must keep a watchful eye on their portfolios. That way they know to take profits when share prices are peaking.

That's the homework part, but what exactly should you look for? One sign is the disappearance of bears. When there are no analysts left that are negative on a particular stock, then that removes all chance of an upgrade. By that point, everyone who wants the stock already owns it, and that means an end to the buying.

"With no more buying," Cramer said, "you've got a top. Time to sell."

The second tell requires even more homework. Beyond merely researching your own holdings, you have to study the sectors they occupy. Why? Because competition can kill a company's profits. Competition is such a threat, Cramer said, that 70% of the tops he's seen in his 25 years on Wall Street were a result of it. So, again, do your homework.

"Otherwise I can practically guarantee you that you will get blindsided," Cramer said, "your stock will top and then you'll lose money."

To sum up, keep an eye on the analysts and the competition if you want to spot approaching tops. And read this post for even more of Cramer's top-focused trading strategies.

Call Cramer: 1-800-743-CNBC

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