- CNBC's Jim Cramer breaks down why investors should listen and believe in what executives say about their companies.
- The "Mad Money" host also pinpoints the hardest part of individual investing.
"When someone shows you who they are, believe them the first time," Dr. Angelou once said.
Even though she wasn't talking about publicly traded companies or their stocks, this bedrock principle applies to the world of finance, Cramer told investors.
"To put it as bluntly as possible: When a CEO tells you that business is bad, take their word for it," the host of CNBC's "Mad Money" said. "Don’t try to make excuses. Don’t bend over backwards finding justification so you can keep owning the stock of a company that’s not delivering. Just get the heck out, at least until the smoke clears and you can better assess the damage."
This rule has kept Cramer focused when investing for his charitable trust. Listening to what CEOs and CFOs say via conference calls and interviews is often the "best resource" for investors to get insights on a particular company, he said.
So don't be too cynical. Like the rest of Angelou's quote says, "People know themselves much better than you do. That’s why it’s important to stop expecting them to be something other than who they are."
After more than 30 years of investing, Cramer knows how difficult it can be to put together a great portfolio and follow his many investing rules at the same time.
Sometimes, those rules can even seem contradictory. You should have conviction in the stocks of companies you believe in, but you should be ready to change your mind if the facts change. You need to be cautious, but you also need to be ready to pounce on key opportunities. You should be skeptical, but sometimes, you have to suspend your disbelief.
"Believe me, I get it," Cramer said. "If you take all my rules literally, you’re going to be running around in circles while tearing your hair out. I mean, how do you think I went bald?"
But the "Mad Money" host wanted to make sense of the madness and put his rules into context for investors.
And for those who want to manage their own money, he has one overarching rule: You need to know yourself.
Cramer always tells investors that they need to be able to do two things before putting together their ideal portfolio: Do the homework and defend your stock picks.
For him, doing the homework means knowing your stocks — and the underlying companies — like the back of your hand. Know how the company makes its money, how much money it makes, what its management says on the quarterly conference calls and what Wall Street thinks about the stock.
Once you've done the homework, Cramer recommends developing a thesis for each stock and explaining it to another human being. It doesn't have to be a professional; as long as you can explain why you own what you own, he said.
Only then can you start putting together your portfolio. Ideally, Cramer likes to see a diversified portfolio with five to 10 individual stocks — how many you have should directly correlate with how much time you can spend doing the homework on each one, he said.
"What’s the most important thing for you to keep in mind? Above and beyond everything else, you need to know that your perfect portfolio won’t stay perfect for long," Cramer said. "Those five to 10 stocks you thought were winners? Yeah, unless you’re absurdly lucky, not all of them will stay winners."
The former broker and hedge-fund manager knows all too well that the investing game is "full of heartbreak," which is why he adheres to one cardinal rule when it comes to stock-picking: Always try to stay flexible.
For Cramer, often seen as a fiery, high-energy financial guru, the hardest part of investing is keeping your emotions in check.
"For many of you, managing your emotions will be the hardest part of investing; harder than even picking winners, harder than identifying new trends, harder than knowing when to cut your losses," the "Mad Money" host said. "Why? Because the market is a harsh mistress."
Owning stocks is no walk in the park, Cramer said. Unless you can predict the future, mistakes are inevitable, and losing money can be really difficult to handle.
"You’d need the patience of the Dalai Lama to not get upset when you buy a stock and it falls off a cliff," he said.
And while not everybody has the patience of a Buddhist monk, investors can't afford to punish themselves when things don't go their way, Cramer said.
While investors are far from perfect, Cramer's final message was that markets can be seriously flawed, too.
"Don’t assume that the action necessarily makes sense," he advised. "A lot of times, stocks go up or down for the wrong reason, or no reason, or an outright stupid reason."
But the market's frequent errors define what stock-picking is all about, the "Mad Money" host said: finding stocks that are mispriced and seizing on the opportunities that can make you money.
"The caveat here, though, is that sometimes when the market makes a mistake, it’s not worth trying to fight it," Cramer said, adding that sometimes it's worth being a little cynical.
"But here’s the bottom line: Don’t just assume that stocks that go down deserve it," he said. "In the immortal words of Clint Eastwood in 'Unforgiven,' deserve’s got nothing to do with it. The market is going to make mistakes — your job is to recognize when it’s doing something wrong and to try to take advantage of it."