Mad Money

Cramer: Build new portfolio with these 5 stocks

Cramer's Playbook: Stay diversified

(Click for video linked to a searchable transcript of this Mad Money segment)

Jim Cramer believes that individual investors can beat the market. That is, he thinks by holding between 5 and 10 stocks and then actively managing those positions, individual investors can do better than the market broadly.

Of course, actively managing positions isn't easy: it involves significant research, something Cramer calls homework.

"The most important element of homework is going over the earnings reports, and not just the earnings release, you have to actually listen to or read the transcripts of the quarterly conference calls," Cramer said. Also, homework involves understanding the sector, parsing through SEC filings, reading news stories and following Street research.

"If you don't have the time or the inclination to do the individual stock research, this strategy won't work," Cramer explained.

Adam Jeffery | CNBC

However, if you are willing to put in the time and effort, then Cramer thinks you can do quite well, but only if you also practice diversification.

Specifically, Cramer believes that no more than 20% of your portfolio should ever be in the same sector. "Otherwise you're putting too many eggs in the same basket. That's a mistake."

Because of Cramer's 20% rule, a diversified portfolio necessarily contains at least 5 stocks, but it also contains no more than 10, otherwise you'll hold too many to do effective homework. And to execute Cramer's strategies, you'll need about $10,000 for investment, otherwise investment fees may be too large as compared to your total capital.

Read more from Mad Money with Jim Cramer
Bullish declines? Cramer says yes!
Growth bulls for rent
2 stocks that deserve more attention

Now, if you're ready to do the homework, and if you're willing to practice diversification and if you've saved $10,000 for the sake of investment, you're ready to invest like Jim Cramer.

Following is how Cramer would put money to work, right here and right now.

1. EOG – Energy sector: "I would hold an oil and gas stock as a way to play the American energy renaissance. I like EOG Resources, which has been hammered of late," he said.

2. Google or – Tech sector: "Not only would I hold a tech stock, but I would hold something that's riding the wave of social, mobile and the cloud. I think you can't go wrong with Google. Or if you're feeling more aggressive look at," Cramer said.

3. Johnson Controls – Industrial sector: "I believe the global economy is now in recovery mode therefore I'd own an industrial. I like Johnson Controls very much because I believe it could unlock a tremendous amount of value by breaking itself up."

4. Costco or Whole Foods – Retail sector: Cramer believes that this sector presents many opportunities, broadly. However, if you were to start a position immediately, Cramer likes Costco on the current pullback or Whole Foods which he calls a long-term bet on "the all-powerful natural and organic trend."

5. Merck or Gilead – Health Care sector: "If I wanted to be conservative, I'd go with Merck, a big pharma company that has a solid 3.1% yield and major restructuring going on. Or, if I wanted to be more aggressive, I'd buy Gilead," as a bet on the companies promising new treatments.

Alt: If one of the categories above doesn't resonate with you, Cramer has an alternate idea. "I'd think about owning an entertainment stock, something like CBS or Viacom or Time Warner, or Cramer-fave Disney."

Just one note: Market dynamics are always shifting so if you're reading this article after March 12th, the day this Mad Money segment first aired, Cramer's outlook may have changed.

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the "Mad Money" website?