Another rule is that it is OK to pay taxes. Some investors despise having to pay "the man." However, Cramer has learned that sometimes the least of your worries is related to taxes. So never, ever allow the abhorrence of taxes to transcend good judgment.
Many investors choose to hold a stock for more than a year, because they are then subject to paying a more favorable long-term capital gains tax. If the position is sold in less than a year, then they are frequently required to pay short-term capital gains tax that can be a higher tax rate. However, Cramer says taxes are never a good reason to hang on to a position.
With this in mind, Cramer said to never consider taxes as a reason to hold a stock. Especially if that stock has become too fat and run up too fast. That means it can come back down hard, just as what happened in 2000 when he called for investors to bail out of their stocks.
"Never hold on to something not worth holding on to, or something that has gotten dangerously overvalued, simply so you can wait until the gain goes long term and the rates come down," Cramer added.
Every week on "Mad Money," Cramer plays Am I Diversified with his fans. A caller will provide five stocks, and he will give his take on whether the portfolio is diversified.
Every. Single. Week. Why? Because diversification is important.
Now five stocks is certainly not enough, and Cramer knows that the human brain isn't wired to want to be diversified. After all if Tesla had a hot run, wouldn't you want to buy nothing but Tesla, Tesla and more Tesla?
Cramer gets it. But having a diversified portfolio is more important than making a few dollars. Because eventually that stock will get too hot, and your portfolio will go down in flames with it.
So, before buying a stock, Cramer wants to make sure there is a proper sounding board.
The Internet has been great for investors, because they can quickly buy or sell a stock without even picking up the phone. But, it has also been detrimental to many, by making it a solitary event.
Have you ever said something you were thinking out loud, only to hear your own mistake? The same applies to investing.
"As I love to say, we are all prone to make mistakes, sometimes big ones. One way to cut down on these mistakes is to force yourself to articulate why you would like to buy something," the "Mad Money" host said.
When Cramer worked at his hedge fund, he asked people the following eight questions:
No. 1: What's going to make this stock go up, besides the stock market?
No. 2: Why is it going to go up? Is there something time sensitive?
No. 3: Is this the best time to buy it?
No. 4: Have you missed a lot of the move? How much has the stock gone up without you? Is it extended on a technical basis?
No. 5: Should you wait until it comes down a bit more? What's the harm?
No. 6: What do you know about this stock that others are missing? Is your instinct to buy based on general knowledge, and you're working on a herd mentality? And have you listened to the conference calls and done the research, or are you flying blind?
No. 7: What do you actually know about the company and sector? Do you have personal knowledge? Do you know how the cloud works, what stock trades with what, or where it lies in the sector food chain?
No. 8: Do you like this stock more than others you own and why? Is there anything to get rid of before buying this stock?
"Without a sounding board, you often simply aren't being rigorous enough. You can be impulsive, and we know from this whole show that impulsiveness is a killer," Cramer said. (Tweet This)
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