Cramer's 5 Rules For Becoming a Better Investor
To help investors avoid some of the most common and money-losing mistakes, "Mad Money" host Jim Cramer on Monday offered his five rules for investing in any environment.
"If you follow my rules, you should be able to recognize an opportunity when you see it," Cramer said. "And manage to avoid losing money when you don't have to, no matter what the circumstances, including a collapse in Europe or a slowing in China or even a skyrocketing oil price."
Cramer has relied on these rules throughout his more than 30 years of investing, including when he managed a sizable hedge fund at which he generated a 24 percent annual return after fees.
Rule #1: "Don't dig in your heels when you're wrong"
The late, great economist John Maynard Keynes always said, "When the facts change, I change my mind."
And Cramer has adopted the quote as his personal mantra.
After all, one of the easiest mistakes to make is refusing to change your mind when the facts are in and you've been proven wrong, he said. It's one of the most difficult things for the most emotional investors and traders to do, but also crucial to be a good investor.
"Swallowing your pride is never easy, but the more time you spend digging in your heels, the less you have to take advantage of the new situation and profit from it," Cramer explained.
Rule #2: "Price matters"
Price is so important, that if it is low enough, investors are willing to buy stocks of companies they don't even like that much.
However, Cramer will never recommend a stock when he thinks the fundamentals of the underlying company are deteriorating. Typically, there's a lot of space between a "best of breed" company and one that's probably not worth investing in, he said.
In normal circumstances, then, if a lowly company's stock falls to a certain level that makes it just too darned cheap to pass up, Cramer thinks it's perfectly OK to buy when you merely have a low opinion of the underlying company. That's when price matters.
So how do you know when the price is right for a stock you wouldn't otherwise buy?
It's a sliding scale, Cramer said, where the better the company, the more you should be willing to pay.
If speculating, he recommends looking for companies that have been left for dead, even though they still have pulse upon closer inspection. Just be sure that bankruptcy is not on the table, he added. So long as bankruptcy is not on the radar, then buying an unattractive company at an attractive price could make a lot of sense.