Cramer Remix: When spotting a bargain may be too good to be true

  • "Mad Money" host Jim Cramer reveals how a second- or third-tier company may not be the best bang for your buck.
  • And when CEOs unexpectedly resign, that should be a big red flag for investors, he argues.
  • Cramer also explains how the internet has become a "double-edged sword."

CNBC's Jim Cramer always tells investors to buy shares in best-of-breed companies, even if that means paying more for their stocks.

For the "Mad Money" host, it's a matter of discipline: the best-run companies with the best prospects can help shelter investors' portfolios and minimize their losses.

"Why is owning best of breed even a question?" Cramer asked. "When you're shopping for a car, you buy best of breed — or the best you can afford. It's not even an issue. We pay up for the highest quality brand because we know that a brand, a good brand, signifies reliability."

"The idea that you would purposefully try to buy a worst-of-breed car is downright crazy," he continued. "Nobody says, 'I'll take the one without the airbags, it's cheaper.'"

Cramer argued that the same concept should be applied to stocks. Investors tend to go after low-quality stocks because they see them as bargains, but that's more likely to result in losses than in gains, he said.

Understanding the bond market

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The stock market can be confusing, but one piece of advice has rarely steered Cramer astray: always keep an eye on bonds.

"Look, I know the bond market is boring, ... but it's much larger than the stock market, and more importantly, it's very important to the overall direction of stocks," Cramer said.

When Cramer was running his hedge fund, he'd always call into the office with the same question when he was away from his desk: "Where are the bonds?"

"That's how much it mattered to me on a day-to-day basis," he said. "Yet stock market investors seemingly forget the bond market all the time."

When CEOs go, maybe you should, too

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Unexplained executive resignations are a major red flag for Cramer.

"You need to be very cautious when you see unexplained resignations by key executives," the "Mad Money" host told investors. "To put it bluntly, when the chiefs resign, maybe you should go, too."

Breaking from his usual method of homework and careful deliberation, Cramer said investors are better served presuming something is wrong and selling right away when CEOs step down for no clear reason.

"Shoot first. Ask questions later," he said.

The internet: Is it helping or hurting investors?

Cramer also shared his rules about how investors should view the seemingly endless information streaming from the internet.

"You don't need me to tell you that the internet has been kind of a double-edged sword," he said. "These days, everything is searchable. But for all of the ways in which the internet makes the process easier, it also creates new problems."

The No. 1 problem? Cramer has always maintained that investors have to be able to explain their stock picks to other people; if they can't, they shouldn't buy the stocks in question.

"Buying stocks is a solitary event — too solitary," he said. "But we're all prone to making mistakes, sometimes big ones. To err is human. If you want to cut down on these mistakes, you should force yourself to articulate to someone else, not just yourself, why you like a stock."

He also argued that "it pays to be a critic" when it comes to Wall Street. They hype can get so raucous around certain stocks that investors can lose sight of what really matters, so don't believe everything you hear from market commentators, he warned.

"Bottom line? Always be able to explain your stock picks to another human being and never take anything on faith in this business, not from the analyst community and not ... from the money managers who love to come on TV and talk their book," Cramer concluded.

Handling your losers

Finally, no matter how smart, informed or lucky you are, the "Mad Money" host knows without a doubt that you'll eventually end up investing in some "suboptimal" stocks.

But as much as investors hate to sell stocks when they're declining, it's almost always better to sell losing stocks than to sell winning stocks to pay for the losses, he said.

"Thus my rule: never subsidize losers with winners," Cramer told investors.

"My advice to anyone who is stuck in [this] position is quite simple: Sell the losers and wait a day," he continued. "If you really want them back, go buy them back the next day. But once they're out of your portfolio, I've got to tell you: I doubt that you'll even be tempted to buy back that stock."

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