Cramer’s golden rule for long-term market prosperity

Jim Cramer believes the stock market presents the best path to prosperity. But only if you follow this rule: Know what you own.

That may sound somewhat simple; it may even seem a little patronizing, but all too many times the "Mad Money" host is confounded to learn that investors don't really understand their holdings.

"I can't tell you how many people buy stocks because they were told the chart looked good or they got a tip," Cramer lamented. "When I talk with these investors, I quickly find out that they have no idea about the company, the industry or how well it's doing versus rivals. They don't even know if it makes money or pays a dividend!"

That's simply no good.

Nils Hendrik Muller | Cultura | Getty Images

Although charts and tips can generate important insights, nothing can replace doing the necessary research, something Cramer calls homework, and then forming an investment thesis.

Cramer calls research homework because it's time consuming and a little tedious, just like grade school homework.

It involves obtaining a solid understanding of a company's fundamentals by looking at earnings reports, reading news stories, and parsing through Wall Street analysis.

Cramer then uses the information to determine a slew of metrics which includes strength of profit margins, amount of debt on the balance sheet, company position in the industry and the ability of the CEO to navigate an ever changing business landscape.

After you've done your homework you should know a lot about a company. And, "You should be able to explain in three sentences why you own the stock," Cramer said.

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Homework prepares you for the tests that are sure to come from the market. And tests are sure to come, in the form of sharp selloffs.

"You've got to know if your thesis remains intact on a big down day," Cramer said. "And you've got to know if it remains viable after a big rally, too."

"And the best way to do that is to always ask yourself, why do I own this stock? If you can't make a convincing argument you should put your money elsewhere," said Cramer.

Call Cramer: 1-800-743-CNBC

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