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Jim Cramer understands the importance of doing homework and picking individual stocks, and wants investors to get the upper hand. So he shared his personal investing rules to provide a glimpse of what really happens behind the scenes of the stock market.
"I think this show can play a role in your financial education and get you to the point where you make fewer errors and have more of a chance to make money longer term if you choose to invest in individual stocks as well as index funds," the "Mad Money " host said.
When Cramer was growing up, he had to learn how to invest the hard way. His father "Pop" worked very hard selling boxes and bags to retailers, and it was tough to save money back then. Pop had money in a bank account, but it didn't pay much interest.
One day Pop announced that he was going to take that money and buy the stock of National Video because his brother heard from a guy named Jack that it was the next big thing. At first the stock went up dramatically, and Pop was so happy he kept buying more.
In fact, that was all Pop knew about the stock. He did not follow it intraday and had not researched the company. Eventually the stock started to plummet, and Pop lost everything on the investment.
"All I can say is that I'm glad for two things: one is that Pop never borrowed money to buy National Video, and two that stocks blessedly stop at zero on the way down," Cramer said.
Cramer learned a very valuable lesson from watching his father go through this experience. He learned that investors will want to own individual stocks to augment their paycheck, but they must know how to invest in an individual stock if they are going to do so.
That is why he created the following four rules for owning stocks:
No. 1 Tips are for waiters.
No. 2 You must do the homework if you are going to own an individual stock.
No. 3 If you can't do the homework, then own an index fund.
No. 4 If you fear losing money, don't own stocks at all because they will go down as well as up.
His father went wrong by not researching the company and relying on someone else for information on how it was doing. Therefore, he was at the mercy of the movement of the stock and he only knew how to buy, not cut his losses.