This show originally aired on Aug. 4, 2008.
Jim Cramer told investors that it’s important to learn how to limit your losses when you’re investing. Cramer introduced 25 rules that will help market players avoid big losses and play it safe when investing in the stock market.
1. Stay Diversified. Cramer reminded viewers of the losses that investors took in Enron when they weren’t properly diversified.
2. Buy and sell slowly. Don’t buy or sell any position all at once. Look to enter positions slowly, using sell offs to add, and take profits in the way up.
3. Your first loss is your best loss. “If your thesis on a stock changes, take the loss and sell.
4. Dividends limit losses.
5. It’s always good to have some cash. Professional investors always allocate a percentage of their capital in cash.
6. Don’t own too many volatile stocks.
7. Know what you own so you don’t buy into a broken company.
8. Don’t own low-dollar stocks it can wipe out a portfolio.
9. Accounting irregularities equals sell.
10. Stay away for two quarters following an earnings shortfall. It takes at least six months for a company to turn itself around after a screw up.
11. When your broker stops talking about a stock, it’s time to sell.
12. After a big run, get defensive.
13. If a stock’s dividend yield is twice that of Treasuries, sell it. Dividends that high are a warning sign that the yield may be in trouble. There are two exceptions: oil tanker stocks, whose yield is based on their day rates, and master limited partnerships.
14. If a company has a new CEO, stay away.
15. Never turn a trade into an investment. If you bought a stock because of a specific catalyst, sell it when that catalyst doesn’t materialize.
16. Never sell call or put options.
17. Never use margin.
18. Never buy a stock at its all-time high. Wait for a 5% to 8% pullback before getting in from the all-time high.
19. Play with the house’s money. Take money off the table as stocks go up until you’ve recovered your initial investment.
20. Keep your head clear. When times are hard it’s okay to sell.
21. Contribute to retirement accounts throughout the year. Don’t invest in that 401k all at once. Spread your retirement investments out during the year and contribute more during the months when the market goes south.
22. Mutual funds should be diversified, too. If you have money in multiple funds, make sure they don’t all invest in the same kind of stocks or sectors.
23. Playing defense is crucial in volatile markets. Don’t wait for stocks that are down a lot to recover. Bad stocks usually go lower.
24. Invest in stocks with buyback programs.
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