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Cramer uses fantasy football to teach investors the cardinal rules of diversification

  • "Mad Money" host Jim Cramer shares how his winning strategy works in both fantasy football and investing.
  • Having a diversified portfolio is a lot like having a well-balanced team, Cramer says.
  • Keeping football in mind, Cramer makes suggestions for a killer portfolio.

Fantasy football season is upon us, and if you think the sport fan craze is a total waste of time, Jim Cramer has some news for you.

"You're dead wrong," the "Mad Money" host said. "The lessons and discipline of the typical fantasy league are incredibly useful when you're picking stocks."

At his old hedge fund, Cramer made a point of using fantasy football to teach his employees more about stocks, what they represented, and why they were priced how they were.

"We'd put a slew of stocks on the board and you had to pick them with imaginary money," Cramer said. "It was a fabulous lesson, one I suggest you perform yourself if you're just starting out ... especially if you don't have enough money saved up yet to build a real portfolio."

In a world where more people are investing or trading online, often without a broker, Cramer finds one of the biggest mistakes to be someone buying a stock without knowing much about it or being able to explain why he likes it.

It's kind of like trying to play more than three wide receivers in a game, the "Mad Money" host said, turning back to his fantasy football analogy.

"How about if you want to play fantasy with a traditional two running back, three wide receiver, one tight end, one quarterback, a kicker, and a defense set up? I find this breakdown to be incredibly educational for us for investing purposes because by the nature of the fantasy football setup, you have to have a diversified portfolio," he said.

The top wide receivers — the market's equivalents being FANG, the stocks of Facebook, Amazon, Netflix and Google, now Alphabet — will get chosen first, leading investors to find other stocks (or players) with "mojo" like Nvidia, Salesforce or Tesla, Cramer said.

"Running backs need to be bruisers who can go the distance and not get hurt mid-season," Cramer said, suggesting DuPont, which is set to merge with Dow Chemical, or the powerhouse that is the stock of Microsoft.

In the world of stock market quarterbacks, Cramer's front-runner by far is the stock of Apple, thanks to its low price-to-earnings multiple as a consumer products company.

Tight-ends who can block and catch are critical for the "Mad Money" host, so he would trust stocks like PepsiCo, United Technologies, JPMorgan, Honeywell or 3M to get the job done.

"Defense is so easy it's ridiculous," Cramer continued. "You can pick up Lockheed Martin, my favorite, or General Dynamics or Raytheon — a lot of Pick Sixes expected there — Northrop Grumman, L3 or sleeper stocks like Kratos."

For kickers, Cramer would go for UnitedHealth, Coca-Cola or American Express as reliable names that are not usually subject to rabid selling in the case of a pullback.

"I could go on and on, but let me suggest that before you even buy a stock, you see if you have too many draft picks from one position, especially wide receiver," Cramer concluded. "You could get days like last Thursday where you're totally trashed and put up no points and that's enough to drive you out of fantasy football, or even the actual portfolio league of stocks, anytime."

Watch the full segment: Cramer aligns football with investing

Disclosure: Cramer's charitable trust owns shares in Facebook, Alphabet, Apple, Nvidia, Dow Chemical and PepsiCo.

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