When Jim Cramer first started trading, he didn't like rules. He believed they either weren't helpful or would cut into his upside and prevent him from making more money.
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 cost you 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. He sees danger when the stocks in his portfolio go down as the market goes up. That tells him that someone knows something he doesn't.
One nightmare scenario is what professionals refer to as being "too long." This means the price of a stock is falling, and investors can't buy any more stock because they are out of money. Then they decide to make the terrible decision to borrow money to finance your portfolio, a move that Cramer thinks is a terrible idea.
"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.
So, what is the magic trick to bail you out of a bad situation?
"Discipline trumps conviction," Cramer said.
He recommended that investors find their own form of discipline to watch their 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 "circle the wagons" on a few high-quality stocks, and be willing to buy them when they fall 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, Cramer wants investors to recognize 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. Events will come 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.