As the averages continued their losing streak this week, Jim Cramer thought it would be a good time to review his tried and true rules of investing. One key rule he lives by is be able to explain your stock picks to someone else.
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?
The last question is particularly important, because when you add a stock to your portfolio you are increasing your homework load. Cramer never likes to add a stock without subtracting one first.
"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)
Ultimately, buying a stock should be like buying a car. There is a lot that goes into it. Really in a jam and don't have anyone to ask? Just call Cramer on the lightning round.