Many people have seen or heard James Cramer’s Mad Money and it makes sense every once in a while to reread his books. The process typically does not change, the names of the companies often do. In rereading his book Real Money, Simon and Schuster, NY, 2009, it provided very good lessons to write about.

In his book, Mr. Cramer gives some rules to trade and invest by based on why you bought the stock. The reasons can be classified as either trading or investing.

If trading the rules include:

never turn a trade into an investment. If you are buying for a trade based on a great reason to buy – when that material reason or something that will drive the price higher happens, did the stock price move? If nothing happens sell and move on. The reason to sell is if the reason you bought did not happen or did not move the share price, would you want to own the shares without the reason you bought it? Mr. Cramer says when he is trading – he buys more shares than when investing. Did you put in a small amount or large amount relative to your other shares you own? If you put in a relatively large amount, sell you position and try something else.

Your first loss is your best loss. If you buy and the shares go down, the market is telling you something. Listen to the market.

You do not have a profit until you sell. Paper gains are paper gains, gains taken can never be losses. When you have gains sell some shares or lock in profits.

Control your losses, winners take care of themselves. Concentrate on the losing positions for one bad apple can destroy the others.

Do not fear you missed anything. Discipline is the most important rule in winning investing, and sometimes that discipline means you missed the opportunity and it is too late.

Do not trade headlines. Read the headline, but learn the story before you trade it.

investing rules.

Bulls and bears make money, pigs get slaughtered. Do not be too greedy, take some money off the table. It is near impossible to get the high, There is no rule that you can not sell some of your holdings and still keep part as you determine where the price might go.

It is okay to pay taxes. Taxes do not trump the fundamentals of the market. If something is dangerously overvalued, sell some of your holdings or you will be left with much less. The reality is there are many methods to bring taxes down or avoid them.

Do not buy all at once, arrogance is a sin. Buy in increments, see what the market does and buy again. Mr. Cramer says he invest monthly into his retirement account, holding money in cash is okay, in some parts of the cycle it is a very good thing to be in.

Look for broken stocks, not broken companies. Your job is to find good companies with a bad stock. They will get better, ask why is it broken? and how is it getting better?

Diversification is the only free lunch. The market moves through economic cycles – take advantage of it. Prices do not only go up, they also go down.

The fundamentals must be good in takeovers. If you are buying a stock because you think it will be takeover, make sure the company is a good company without the takeover aspect. Would you buy it without the takeover aspect?

Never subsidize losers with winners. When the stocks go down, often the best stocks are sold because the losers are down too much. Sell the losers, keep the good ones and add to the good. Think of how much the losers have to come back, just to break even, why would it?

When high-level people quit a company, something is wrong. If a CEO or CFO leaves unexpectedly sell and go to the sidelines. After a time and you still like the stock buy it again but you will know the reason.

Be able to explain your stock picks to someone else.  Some of the questions are: what is going to make this stock go up? why is it going to go up when you think it is? what happens if you wait? do you like this stock more than the others you own and why?

Linking to dividend paying stocks, when stocks pay a dividend it is easier to determine why you hold them. The dividend continues to give you a return on your investment and the stock price tends to go up over the years. If you talk to those that put money into the market not selling and losing some money are stories you will or likely have heard. The key is search for quality, narrow the field and stick closer to the better companies, understanding no company is perfect.

There are more questions than answers, till the next time – to raising questions