Money Stirs Emotions – controlling these emotions is part of what made me a great investor; it will make you a great investor

Reason must trump emotion. You must win. I must make you a better investor.

Jim Cramer’s Road Rules:

Rule #1: Bulls Make Money, Bears Make Money, Pigs Get Slaughtered
This rule kept me in the game when the tech bubble popped 5 years ago. For one year of our lives the NASDAQ gave away money to those who were bulls. After 3000 points of free money the bulls morphed into pigs and everyone who was piggish met their fate. My number one goal is to keep you in the game. The people who got wiped out by the NASDAQ crash tend to be people who never took anything off the table.

I went into Bonds the first time ever in the third week of March at the top. First time ever and everyone who read me HATED me. They hated me cause I switched, I was flexible, they hated because everything I like I now hated. Sell sell sell to everything. My take is that I did it right because I believed in selling; sometime selling is the greatest gift of all. I need you to be flexible.

Rule #3: Don’t Buy All At Once, Arrogance is a Sin
When I first started as a professional trader, if I wanted to buy CAT, I wanted to buy it NOW. What an arrogant son of a gun I was, arrogant and wrong. When I have a new name, as I recently did in General Mills (GIS) I buy in little tiny portions. I care about getting it right and being correct, not being arrogant and not being a pig. If you want to be a successful investor you need to buy in little increments and not be arrogant and believe that you are always right.

Q: Do you have any techniques to make decisions rationally?
A: Every day when you look at your positions you see where you bought it and where it is now. That particular contrast paralyzes people worse than a deer in headlights. White out the column of where you bought it. Instead of having a negative psychosis of knowing where its been you only see where its going to. White out the basis and you’ll do much much better.

Q: Is there a rule that you use for buying or selling up or down once you’ve got a trade in? 20%, 20% is there a rule that stops you from getting slaughtered?
A: My discipline is to buy weakness and to sell strength. My discipline is so rooted in common sense that I hate to be held to a quantitative solution. Say you were to call me and say I bought the SHLD at 50 and it’s at 100 and I haven’t sold any… I’d say WOAH come on man!!! Bells should be going off!! You’re a pig! You should know, its common sense, take a little off the table.

Rule #13: No Woulda, Shoulda, Coulda

I hate people who say shoulda, woulda, coulda. Those people are not for me.

Rule #6: Buy and Homework, Not Buy and Hold:
We don’t believe in buy and hold. Who came up with that nonsense? The process starts when you buy the stock. You buy the stock, you get the reports and read them. Homework you do on stocks is not irrelevant. There are no excuses. You should spend an hour per position per week on each stock you own. You don’t want to do the homework, leave the driving to others please, give the money to a mutual fund. Don’t screw it up cause you will.

Q: How do you separate what you like versus what is a good company – for example, Krispy Kreme (KKD) and Starbucks (SBUX)?
A: I love the idea that maybe you like the doughnuts. The balance sheet, you gotta see how a company makes money. When I looked at how KKD was making money it was pretty clear they weren’t making money selling doughnuts they were opening a lot of stores, doing a lot of mumbo jumbo blue smoke things, franchise fees. The bottom line here is that the way to start any research is to like the thing that the company makes. But if you can’t look at the balance sheet and determine how they are making money then move on. There is another fish in the sea for you my friend.

Q: How do you determine an entry point for a stock?
A: Investment: When I want to do an investment I want to hope the market comes down. I like to start small and as the stock goes down I buy bigger and bigger and bigger. Say General Mills, I’d buy 200 at 49, then hope it goes to 48 so I can buy another 300 then if it goes to 47 then that’s nirvana and I’m really buying it.
Trade: A trade is a specific catalyst. You have to pick your spot and nail it. You buy it all at one level and wait for the event. When the event happens, whether its good or bad, you are out of there!

Rule #5: Diversification is the Only Free Lunch:
Diversification is about the downside and loss avoidance.

Jim Cramer talks with Herb Greenberg of Marketwatch.com, Editor of Herb Greenberg’s Reality Check:

Cramer: Why is going through the hate list and finding overly shorted stocks, in your opinion, a suckers game?

Greenberg: When a stock gets squeezed up, the shorts sometimes have to cover and they leave their positions. Those stocks end up having no natural buying cushion underneath them and they end up falling in a vacuum. Sometimes the real issue is that sometimes those companies are so darned bad that they never do get squeezed up.

Cramer: There is a concept of so many people betting against a stock, and its not that bad, that there is some relatively easy money to be made, going after that stock because too many people have bet one way.

Greenberg: I agree with you, the reason those stocks could get squeezed up is that a lot of people who end up shorting these stocks are follow on players. They don’t understand why they were ever shorting the stock in the first place and the minute the company has an ounce of news that doesn’t go the way they’d expect they cover. The smart shorts will increase their positions when the stock goes higher.

Cramer: What are some examples where the short positions were big and it turned out to be smart?

Greenberg: TASR. They say great short squeeze, its gotta go higher. They’ve been saying that since the stock was at 70, 40? One of the great ones was Krispy Kreme (KKD). When I would write negative things about this company people would write and say I was wrong. Sometimes the shorts are right and they are early, but generally it is in the numbers or the story. Krispy Kreme you were able to connect the dots and events. I’d say 80% of the times the shorts are there, while they could be deadly wrong, if they are really there and there’s a lot of buzz there, there just are issues.

Cramer: What about Costco (COST)?

Greenberg: It’s short position is at 3%. There sales per warehouse continue to go higher and higher and higher. This is a company whose greatest problem recently was that its inventory turns are so great, especially at its gas stations, that it got hurt. That’s a heck of a problem to have. If you own it for the long term, it has great management. It will deliver. This is not the company you go out and short, it’s a great company. Betting against great companies is not the thing to do.

Cramer: What about Overstock (OSTK)?

Greenberg: This is a company where there has been such an attack on the short sellers. The fact of the matter is that this is a company in a very tough business that has not met its expectations, always seems to have a story and be scrambling. Down the road, it will be struggling. It will do well in the Christmas quarter like everyone else. But in general, it’s a tough business, a company that hasn’t done well. The CEO quite frankly concerns me with his attacks on you, me and every single person who has raised questions as opposed to doing respectfully what Jeff Bezos did, ignore them.

Cramer's summary of conversation: Use the short list as a place to start. When you come up with an idea, that’s where the homework begins. You also need to recognize that a lot of times the shorts panic and you gotta good one going much higher.

Rule #8: Own the Best of Breed, It’s Worth It:
You go and buy the best, and if it goes down you know to buy more. We pay more for certain car brands, why not stocks? Stay away from the junk and stick with the best of breed it will always be right, ALWAYS.

Q: Is it okay to go down in quality (away from best of breed) just for a quick trade?
A: NO. Strange things happen to lower quality. Bad stocks have a way of finding themselves disappointing you. I will not trade down as it almost always blows up in my face. That is not for me.

Q: What is your opinion on the “Dogs of the Dow” strategy?
A: Reminds me of “Sell in May and go away” or “Buy stocks in December.” There is such a perceived bunch of jibberish out there that it drives me crazy. Here is how we buy stocks, we buy companies. If the company is a dog we don’t buy it, if the company is good we buy it and then we hope the market takes it down for us. I have never, ever, been able to come up with a system that produces stocks. As soon as you start relying on a system everyone else does too and then it’s out the window.

Take profits! Forget about the tax man. There are no gains until you ring the register.

My IRA is in a mutual fund, the Fidelity Contra Fund (FCNTX) run by Will Danoff, one of the best managers in the country.

MOT - Motorola, Inc. - Favorite of the cell phones
NOK - Nokia Corporation (ADR) - #2 cell phone favorite
ERICY - LM Ericsson (ADR) - #3 cell phone pick
F - Ford Motor Company - Sell the Ford, I'd rather see you in Toyota (TM) if you have to be in autos
LU - Lucent Technologies Inc. - Bull
NVS - Novartis AG (ADR) - Sell sell sell

Disclaimer: I AM NOT JIM CRAMER. I sometimes write the summary in first person because my brain doesn't quite move fast enough to process and type at the same time, so please excuse that. This blog has no affiliation with Jim Cramer, CNBC, or Mad Money. This is done for me and you to be able to better follow and track Cramer’s comments, the show goes by quickly so I try and catch as many key words as possible for each pick. ACCURACY IS NOT GUARANTEED but is however strived for.mortgage calculator