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When Jim Cramer first started out in trading, he didn't like rules. His view was that either they couldn't really help, or they would cut his upside and prevent him from making more money.
But over time, and after getting burned too many times, he learned the value of discipline.
"The rules protect you against your own bad judgment about what's going on at the companies you own or what's happening in the market overall," the "Mad Money " host said.
In order to really make money in the market these days, investors need discipline. Mistakes can be costly in trading, but if you do nothing with your money, you will have a whole lot of nothing to show for it.
Cramer constantly worries about the stocks in his charitable trust. One sign of danger for him is when the stocks in his portfolio go down when the market is going up. That is a sign to him that someone knows something he doesn't.
There are so many things that can go wrong besides the market taking a nosedive. Sometimes, management will puff up a stock or have some sort of snazzy press release to make things sound a lot better than they actually are.
Or maybe someone found out that the stock isn't as good as it seemed and they should have done their homework.
Another nightmare scenario is when you could own too much stock in the market versus what the market's going to do. You ran out of cash and can't buy any more stock, and decide to make the terrible decision to borrow money to finance your portfolio.
"Stocks aren't houses. You can't fall back and live in them if you have mortgages on them. They just get taken away," Cramer said. (Tweet This)
So, what is the magic trick to bail you out of a bad situation?
"Discipline trumps conviction," Cramer added
Find your own form of discipline to make sure you are watching your stocks and have a game plan for when things go wrong. For instance, Cramer has a system of ranking his stocks when things are good, so this way he can hedge himself when they go awry.
He also thinks it is important to be willing to "circle the wagons" on a few high-quality stocks, and be willing to buy them when they are down so you can get a better average price for your earnings.
Cramer's ranking system will get you through the chaotic times and allow you to remain cool and methodical when everyone is scrambling in chaos.
At the end of the day, the most important thing that Cramer wants investors to recognize is that things will go wrong. There will be a stock that you own one day where there is something wrong with the company, and you don't know about it. There will be events that you cannot foresee.
The trick to reducing the damage to your portfolio is to be ready with a game plan that will bail you out in the short term and keep you in the market long term. This way, your money is ready to work for you when you need it most.