your wish can come true. of the world's most revered luxury sedan. this is a history of over 50,000 crash-tested cars... this is the world record for longevity and endurance. and one of the most technologically advanced automobiles on the planet. this is the 9th generation e-class. this is mercedes-benz. you know, the beer you choose says a lot about you. you want friendly, but not pretentious... classic, never trendy. you want a real american beauty. are you talking about the budweiser? or... me? yes.

♪

i'm jim cramer. and welcome to my world. you need to get in the game. go out of business. and he's nuts! they're nuts! they know nothing! i always like to say there's a bull market somewhere. "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain you, but to educate you. write this number down. 1-800-743-cnbc. this show is all about what i can bring to the table for you. okay? different kind of thing. see, i talk about trying to help you make money, but the truth is, making money isn't that hard. it's not losing money that's difficult.

so, tonight i'm putting all my advice about how to play defense. how to keep your money safe. how to avoid big losses, into one show. 25 rules that i use myself when running my charitable trust. when i say that i have something, it's because it's in a trust. i can't make any money, just charity does. you want to follow along, it's called actionalertsplus.com and you should be using these, too, because it's individual money. not institutional money. it could be your money. you need these different rules if you want to try to save yourself from losses. so you can celebrate your gains. 25 bite-sized tips that if you listen to all them should help protect you from the risks to the downside. that lets the glorious upside take care of itself.

think of this as your "mad money" defensive game plan. number one, simple, most important rule of all, if you're going to stay in this game. you must stay diversified. diversification, as i say, as i say so often on this show, and people keep forgetting it or they don't understand how -- >> that was easy. >> -- easy it is, is the only free lunch. and it is the first and i think the most important rule for any investor to follow -- ♪ hallelujah you want to stay out of this. >> house of pain. >> diversification is this. >> house of pleasure. >> diversification in one sentence -- never keep more than 20% of your portfolio in one sector. how about five stocks when we play "am i diversified?" when you own five stocks, there should be no overlap between any of the stocks in your portfolio. i'm talking poker. i will use any analogy i can. you can't own two of a kind! and you especially don't want four of a kind.

investing is the opposite of poker. keep that in mind! four of a kind's a winner in one game. it's a loser in another. [ buzzer ] not being diversified has been the ruin of so many investors, [ baby cries ] that i got to repeat this one over and over and over even though i think many of you probably get it. in 2000, everybody wanted to be in the dot-coms. a lot of people owned only dot-comes. it was so hot it was sizzling. oh, you know how that turned out. people lost fortunes in these stocks. i made a small fortune at my hedge fund. i don't run that kind of money anymore. i just run the charitable trust. i made a small fortune in my hedge fund in 2000 shorting these stocks. and, frankly, this is a phrase that is always dangerous to use. if you get a call from someone telling you to buy something, but, indeed, shooting the dot-coms was like shooting fish in a barrel. oops.

i did it multiple times. [ gunshots ] this is what knocked so many people out of the game. i had a lot of people that never got back in. they kept all of their eggs in one vulnerable dot-com basket and at the end of the day, all they were left with was egg on their faces, which you know i would put on right now, but i had a terrible outbreak of pimples the last time i did it. in 1998, all people wanted to be was in the telcos. think about it. what did you end up, in worldcom, global crossing? level three? hey, you never know. intelligence, and a bunch of others that don't even exist, 360-something. they all went belly up. in 2001 it was the energy merchandisers. holy cow. i remember thinking, people saying i own every energy merchandiser! well, yeah, the hottest one was enron. >> ahh! >> enough said. if you were diversified and only

had 20% of your portfolio in these hot at the time groups, you would have lost less money! than all the people who went in and got crushed. i know less money doesn't sound sexy. but do you know what, sometimes losing less money is really the most important thing in the world. another example, how about this? in 2003 do you know what the most hated group was, do you know what nobody owned? oil. if you owned an oil stock pure ly for diversification, you would have had huge gains over the following five years. it's not about losing money, diversification can make you money. the next rule is right out of one of the canons of my investing career, the toughest one, by the way, the one that was written as a guide to working with me. it's rule number three from "real money" the book, buy and

sell slowly on what are known as wide scales. never buy or sell your entire position in the stock all at once. this is something that seems counterintuitive to a lot of people. if you like a stock, shouldn't you buy it here because it's going to go up. but if you space out your purchases and buy at different levels and buy first and wait until it goes down, you can avoid losing money by putting down all of your money at the top which is something that so many people do and is so discouraging, i must stop it tonight. more important is when it comes to selling. when you're up big in a stock, you want to schnitzel some of those gains. strange term? not if you have the glossary to this one. schnitzeling is a proprietary "mad money" term, meaning taking something off the table. sell some of your stock to lock in the gains! >> sell, sell, sell! >> lots of people didn't want to sell in 2000. what were they afraid of? they were afraid of paying the

tax man. rule number two, don't be afraid to pay the tax man. if they schnitzeled some of their gain, they wouldn't have lost so much money. tax man got cheated in the end, because nobody had any gains. you also want to do this because a lot of stocks are like an egg on a red hot griddle. i'm bringing them back again. i'm bringing them back. now, i would say it's the griddle at the holland tunnel diner, but unfortunately, that closed. if you sell at the right time you make a lot of money. but if you wait too long you can get totally charred, inedible burnt eggs which is awful after you've had a night on the town and you need a sop-up. okay. look, this is what happened to natural gas, okay? as in july of 2008. look, it's the fuel. it's the fuel of the future. but the stocks got overheated. and we got burned. now, if you'd been selling slowly in large scales as the natural gas stocks moved higher, you could have already taken some profits before the stocks overheated.

i even used the burnt egg analogy at the time. simply because taking a profit could never hurt anyone. buying and selling in wide scales is particularly important in big dollar stocks that fluctuate pretty wildly. stocks that tend not to split. i'm talking about the apples, the research in motions, okay? because there's rarely a time when you won't get a chance to sell higher or buy loafer, just because the market fluctuates. rule number three for our loss prevention show, this one comes straight, again, from the book that was my hedge fund handbook. your first loss is your best loss. it's important to take losses. to sell stocks you own that have gone down and lost you money. when the reason you bought them is no longer true. your thesis is broken. you thought that something was going to happen, maybe you thought that oil was going to get crushed and it didn't. maybe you thought the fed was going to ease and it didn't. you got to limit your losses. just because you thought that someone was going to have a

better-than-expected quarter and it didn't, don't come up with new reasons to own it. take your loss. gains take care of themselves. i owned fannie mae for actionsorders.com my charitable trust and the thesis started falling apart. i didn't come up with a new reason to own it. i sold in it the '60s. i didn't care that it had lost me money. it would have destroyed me. i just didn't want to buy and hold. and i was right. i mean, that stock made its way down. i mean, single digits. fannie mae was way too painful to own given my fed rant heard around the world when it was clear that foreclosures were mounting. >> buy, buy, buy! >> when it was clear that people thought the stocks -- thought that housing had stabilized. >> buy, buy, buy! >> but then my thesis changed, because housing isn't stabilized. >> sell, sell, sell! >> the thesis changes you go. i never feel bad taking losses when the story changed. cramer's defensive game plan rule number four, dividends. ♪ hallelujah limit losses.

as long as they are relatively safe. this is something i talk about in "stay mad for life." that's my personal finance book for those who say, jim, why don't you ever write about a 401(k), why don't you write about i.r.a.? that's what "stay mad for life" is about. you measure a dividend by its yield versus what treasuries are selling for. ten-year federal treasuries, okay? and you look for stocks that can grow their dividends. they can protect you from the downside. grow means increasing every year. because as the stocks go lower, the dividend yield goes higher and that attracts investors. particularly comparing with bonds. you need to know is it fairly safe? can the dividend be covered? english for let's bust that one, english means can it be paid? do they have to borrow money? does the company have cash on hand and the cash flow to pay out the dividends it's promising? in the first half of 2008, the bank stocks had yields of 9%, 10%, 11%, they were serial flashers.

>> they know nothing! of dividends. especially wachovia and washington mutual. why? they didn't have the money to cover the dividend and it was obviously the dividends were too big. but telco companies and like at&t and verizon and utilities like coned had no problem. you need to protect yourself from the dividends that can't be paid. i got another tip on how to spot a bogus dividend later in the show. here's the bottom line for my first four rules for stopping losses. stay diversified. buy and sell slowly and your first loss is your best loss and dividends can limit your losses as long as they are safe. let's take calls. let's go to justin in texas. justin? >> caller: booyah, jim. >> booyah, chief. >> caller: hey, how you doing? >> not bad. fill me in. >> caller: i'm a new investor with a simple question. >> first of all, congratulate you on being a new investor.

many, many people wait too long. how old are you? >> caller: i'm 25. >> fantastic. you got your whole life in front of you. let's make money. >> caller: yes, yes, please. i've been able to purchase a few stocks with a little bit of money and my question is simple. i'm curious if i need to be able to build those positions now or shy start diversifying and build the positions later? >> never too late to diversify. it's the point-blank answer. the first $10,000 you save should be in an s&p 500 fund because it's the ultimate diversification. here's the thing. if you want to get five stocks you have to buy them one at a time. i don't want to buy ten shares, ten shares, ten shares. you pick a stock and you add a stock and you add a stock. while you're adding two and three, you're still undiversified. get the game plan and figure what you like and figure out the five stocks ahead of time and then buy them. let the market take them to prices that you think they don't deserve to be. tina in arkansas, tina? >> caller: hey buddy, how about i haven't talked to you in a while and i sure have missed you

booyah? >> it's one of the most encouraging booyahs. >> caller: although i love trading the market day in and day out, i follow all the rules and aown a few energy trusts and one large core position stock for dividends only. now, when the market is really ugly and the stocks are down a few dollars and it is so very hard to separate facts from rumors, i need you to tell me exactly the things that you look for while doing your homework that lets you sleep at night, knowing that your energy trust dividends will stay intact, jim. >> all right. all right. the most important one is to know what you own! people don't know what you own and so, therefore, they get freaked out. secondly, understand why you bought it. you buy an oil trust because you believe that oil is going to stay higher. if you think or if the thesis changed or if oil goes lower, you got to change your thesis and you got to skedaddle. the key to all of these situations is knowing what you

own so you can buy more if it goes down versus knowing what you own and having the thesis change. and if the thesis changes, it goes from -- >> buy, buy, buy! >> to -- >> sell, sell, sell! >> and i think, tina, for the kind words. my defensive game plan starts with following my rules to save yourself from losses. i got a lot more rules coming up. so, stick with cramer for more defense.

defense, defense, defense,

defense, defense! >> no matter what kind of day we had in the market, you must keep one thing in mind. you must always be on defense. that's right, up day, down day, i do not care. i'm here tonight to help you play defense. that means avoiding losses. it means generally trying not to lose money so you can focus on making it. for 25 years i've run money, whether it be for my charitable trust or for wealthy people, i always focused on defense. tonight i'm trying to help you do the most important thing an investor can do. i'm trying to limit the amount of money you lose. you control your losses, and, believe me, your gains will take care of themselves. when you go to the bank, you can't say, oh, yeah, you know, i really did well, but there was one stock that i lost money on. no! so, let's get back to our "mad money" defensive game plan. 25 points of light, as i like to call it.

here's rule number five. please don't look down on cash. it's always good to have a little cash on hand. hey, this is real money. this is a rule in the book "real money." and it's something that separates the pros from the amateur. it's a rule i keep talking about, pros, people who do this for a living, they always have cash on hand. amateurs every time i talk to them, they're fully invested. the only way they can buy more stock is to borrow money. they have no cash! too many people look at the rate of return on cash and say, darn it, they scoff. but we think you have to have -- look at cash as a tool. one way that lets you buy stocks that get sold down by the market when they don't deserve to be. no cash, you can't take advantage. so, you may be only making 2% on your cash. while at&t might be yielding 3%. okay? but let's say the market gets bad. and at&t starts dropping, all

right? i use at&t, because it's a high quality company. so, it drops and then because the dividend's constant, it begins to yield 5%, not 3%. you can buy it down there, because you've got the cash. and then you've more than doubled your return, particularly after the tax-favored treatment that dividends get. so, stop looking at the cost of being in cash. and start thinking about the price you'd pay for not having cash when you need it. you can't do this -- >> buy, buy, buy! >> without any cash. "mad money" defensive rule number six, don't own too many wildly swinging stocks. this is so important because people get involved with stocks and then they just say, i can't take it. i can't take the swings. we talk about being diversified all the time on the show. but if you're diversified among a bunch of high fliers, the natural gas companies, the copper companies, the steels, the fertilizers, some of the techs and the railroads, and then the stocks are over $100 --

again, i'm not caring, by the way, i'm not caring about what the companies do. i'm just saying if all the stocks were over $100, all groups that can be very volatile, you aren't really diversified when it comes to the radical swings your portfolio will have. i'm not saying it's verboten, but you got to ask yourself can you handle the swings? most people can't. this is a psychological diversification. be honest with yourself, if every one of your stocks went down ten on the day, would you decide to sell everything and go home? i can't have that happen. here's rule number seven. know what you own. we talked about that earlier. this idea is in all my books "real money," "mad money," "stay mad for life," because there's nothing worse than not knowing what you own. people who don't really know the stocks they own, will go like this -- >> sell, sell, sell! >> when the stock goes down and not like this -- >> buy, buy, buy! >> they don't know if they have damaged stocks or damaged companies. stocks are damaged by the stock market. companies are damaged by the management. you're just not in a position to make decisions, let alone good

ones. if you're not familiar with the companies behind the stocks, you don't know whether they're buys or sells, but if you do know what the company really does and whether it doesn't borrow too much money, whether its balance sheet is good, its product line is a good one, you should be fine. i often say this about some of the big franchise names like where your kids would go, disney, mcdonald's. you go there, and if they're still there, they're in good shape. now, take a second and think. do you know what a sandisk does? how about an invidia? a zoran? how about a zolpec? western ditch? do you know what cellgene does? a lot of people didn't know what it did when it lost 30 points at the end of 2007. then they ended up selling it at the low. not something they had have done if they knew what the company does. i met auto couple in a diner and they had cellgene. anything about revelmid?

that's a drug. uh-uh. can't play it that way. rule number eight in my game plan, try not to lose money. it's generally not defensive to own $2 and $3. they don't get there because they're doing great. the little under $5 speculative names are some of the least defensive ones out there. sirius was at $3 before it went to $2 and $1 and if you bought 1,000 shares, you lost a lot of money. this is the reason for rule number four in "stay mad for life." low-dollar speculation can wipe you out. take it from me. i bought charter communications for actionalerts.com. and i sent out the e-mails over and over, my charitable trust, hey, listen how much could you lose at four bucks? what was i thinking? i lost a lot. how about the biggest loss i've ever taken in my charitable trust? the stock dipped below $2 i was lucky to be able to sell it on a little rally. but it occupied all my time and it lost me money. don't think just because the stocks have prices in the single

digits they can't hurt you. trust me. chances are they didn't get to the single digits because they were blowing the numbers away. by the way, in london, they like single digit stocks. we're not in london! and if anything, these are stocks that can do the most, not the least, damage to your portfolio. the rule does not apply to the uk. rule number nine for protecting your portfolio from losses, accounting irregularities equal sell and stay away. i've never seen a company with accounting irregularities that recovered until we saw a big management change and the next quarter's earnings and those are a rarity. until then, i consider these stocks radioactive. i used to have a sign on my quoteron, we used to call them quoteron that say your accounting irregularities equal sell. i needed to remind myself over and over again. and the stock went down and i thought i should buy more or sell more. rule number ten. when a company reports an earnings shortfall, you need to stay away from its stock for at least two quarters. i have almost never seen a turnaround until after two quarters.

that's the max -- minimum length of time the company can right itself. it takes six months for heavens sakes. it could take nine quarters, ten quarters. i ask you, can you wait it out? stay away from companies with recent earnings shortfalls unless you think you have a real edge. and believe me, you probably don't. bottom line, limit your losses. always keep cash on hand. don't own too many wildly swinging, volatile stocks, you'll get spooked. know what you own. recognize the danger in $2 and $3 stocks. remember, it takes a company at least a quart are to recover from acting irregularities if not more. at least two quarters, sometimes many more, to recover from an earnings shortfall. drew in arizona? drew? >> caller: jumping jimmie. >> oh, man. thank you for that appellation. and what be shaking with you, sir? >> caller: hey, jim, i got smoked back in the year 2000 when the tech stocks and when they tanked. >> you're not alone! many, many of our viewers left the table. thank heavens i'm bringing them back on this show!

>> caller: and then i got buried on 9/11, 2001, because i didn't hold any cash in my portfolio. i was fully invested. >> right. >> caller: so my question is during a bear market, what percentage of my portfolio should be in cash? >> well, i mean, remember i often talked about how we really don't want to view the market as bear or bull, because it's a market of stocks. not a stock market. some areas, as i end my show every night, there's always a bull market somewhere. but if you feel that the pain and pressure's too great, i would up my cash position which, you know, i don't mind having it be 10% in tough times as i do for my charitable trust, i would up it to 15% to 20% if i really felt that i couldn't take the pain. again, i care about the psychology. all the gray beards, all the people i see on tv who are distinguished people, i was going to say extinguished people, are people who feel like you have ice in your veins because they do, too. i know the truth. i want to beat the psychology of

fear and panic. derek in washington, derek? >> caller: booyah, jim cramer from the pacific northwest. >> one of my favorite areas. although the north and southwest is good and i like that northeast a lot. what's up? >> caller: are you coming to the university of washington anytime soon? >> you know, it's so up to some woman that i work with. i don't even want to go into it. but she does look darn nice. maybe we'll take a quick look at her. cameraman, cameraman, she's got a nice saks outfit that she got for next to nothing. anyway, that's -- there you go. anyway. let's bring it back to reality. what's up? >> caller: i want to know what's better for me, somebody who got burned a couple years ago in the market, is it better to buy a handful of well-established stocks like a google or a procter & gamble, or is it better to buy a lot of the speculative stocks? >> no, no. look, first of all, i'm the only guy out there who will ever -- the only professional i know that will ever say i'm willing to let you buy a speculative stock. as a matter of fact, 1 out of 5 stocks be speculative, why?

i need you to be excited and in the game. sometimes a speculative stock keeps you in, but the other four, i want the equivalent of what's blue chip. i don't like to say blue chips, because blue chips change. look at the way the drug stocks went from great to bad. utilities from our parents great to bad. i like one speculative stock to keep you in. my 25 rules to play defensive so you can control losses and you can take care of yourself. we've got a bunch more rules ahead. stay with cramer. you don't have to wait for midnight for the madness to start. catch cramer at 11:00 every night of the week. take your dose of cramer at 6:00 and 11:00 eastern on cnbc.

the hardest part of managing your own money is dealing with the really malevolent market that crushes stocks. >> ahh! >> house of pain. >> and makes you feel like there's really no way you'll ever make money again. and, believe me, every time -- and i've been at it since 1979. every selloff at a certain point i doubt myself. if i doubt myself, i know you

doubt yourself. i say, can i ever make money again? but if you know what you're doing, then you should be able to turn anything, ranging from a short-term selloff to a month-long bear market into an opportunity. tonight i'm making sure you know how to handle bad markets. enter the "mad money" big "d" game plan. now, you probably thought that on this show there was nothing more important -- >> defense, defense! >> just a sec. make it penn state. [ panther growl ] there's probably nothing more important than making money. i'll repeat it. there's nothing more than making money is wrong. i learned this from my old boss at goldman sachs. richard mensch. a great man. over and over again he said, i need you to know how not to lose money when things get rough. you can't asterisk your portfolio and say, wow, i was doing great but it weren't for that one stinker. no, you can't asterisk things. now we're up to rule 11. this one applies to anyone who

uses a broker, okay? when your broker stops informing you about a stock that you own that he suggested. when you start hearing nothing from them about it, it pays to sell the stock, especially if it hasn't been performing well. i saw this all the time when i was running my hedge fund. often your broker will be too embarrassed that you own a stinker that the situation changed that the analyst no longer likes it. especially if it's a stock that your broker had been really positive on. when i stopped hearing about things about the stock and it was going down, i booted it. here's a good one to remember. silence isn't golden in the stock markets. silence equals sell. number 12 for those of you with an interest in avoiding losses. after a big run, get defensive. this one is so hard. you start feeling really great at the card table and you think you can't lose, uh-uh. i use two instruments to figure out if we've had a too big a run and it's gotten where the air is thin. one is called the standard & poor's proprietary oscillator which shows you the swing of the market. this is available from their website for a fee.

that's why i don't give the number at night. because i don't own it. s&p does, and i pay for it. i also get the charts that show the oscillator hand delivered to me every saturday. i've charted the oscillator since 1987. and every time it reads plus five, it updates daily -- and i'd give you the phone number but that would also violate the rules. it's paid to sell. the oscillator measures the swing. it measures how overbought and oversold when it's negative that the market is. when it gets to plus five, what does that mean? it's a signal that too many people are too positive and they're paying up, they're reaching to buy stocks never reach. you want to sell before the flurry of buying ends and stocks start heading lower. as people take profits and sellers come in to take advantage of higher prices. does it always happen at plus five? no, sometimes it can go up to plus ten. but it always has made sense to me because i don't like to give away profits. now, if you sell when the oscillator hits five, you might miss the top. there's every chance.

there's every chance that this could be the golden one. but believe me, my experience it's gone down. and here's an even more important, it's going to go down hard when it's overbought. you won't be able to get out when it's happening. selling when the oscillator hits plus five has stopped me from taking some really serious losses. i said i used two indicators. the second is the investor's intelligence bull/bear ratio. it comes out on wednesday. it's proprietary to the outfit, investors intelligence. i can't share it with you on the show. you have to look it up. i hate it. but do you know what, these people work really hard to put together these things and i can't steal them. it's not right. when there are too many bulls, when more than 50% of the investment professionals polled are bullish, even in the high 40s, it's time to play defense. and take a lot off the table because if everyone a bullish, who else is there to buy stocks? too many bulls spoil the pot! they're already in. you're not going to find new guys to come in and take you out. rule number 13 in the "mad money" game plan to avoiding losses is if you own a stock

with a dividend yield that's twice that of the yield that you would get for owning u.s. treasuries of the ten-year variety, sell it. i'm going to repeat that. a dividend that you're getting that sells for twice the treasury, what the treasury's yield is, sell it. dividends that reach that level have almost always led me to believe that there's something wrong with the stock and that it will soon slash its dividend. we like high dividends on "mad money," but a dividend that's too high, that's a warning signal. there are a couple of general exceptions to this rule. tanker stocks. the big frontline kind of things, they pay dividends depending on the current rate of business and also they have to adjust them each quarter, so it may look high and then be low. master limited partnerships, trusts that do the same thing for oil and gas, it's okay. they can violate the rule. if you just use this rule of thumb, sell any stock with a dividend yield that's twice the yield of u.s. treasuries or greater, you would have flagged many of the bank stocks before they crushed you. you would have flagged the autos

in late 2007 and 2008 before they decline. good rule, right? 14th tip for trying to avoid stocks that will lose you money. if a company has a new ceo in his or her first year on the job, i don't want you to buy the stock. i don't trust these stories. a new guy comes in, he's usually unseasoned. needs time to develop. kind of like investing in a quarterback the first year after the draft. it's so rare that they are ready. think eli manning, he's fabulous? he wasn't ready. a few years later he was winning the super bowl. all the greats spend the first year on the bench and watching and they take risks and get hurt. i believe you should do the same for ceos. don't rely on companies with rookie ceos. yes, again, there will be someone who comes in and shocks you from the get-go. there will always be exceptions to the rules, i'm worried about losses. rule number 15 in our defensive playbook, if you're trading, meaning you're buying a stock because of a specific catalyst, something that's going to happen in the future, you have to sell it no matter what when the catalyst occurs! no excuses here.

in "real money" investing in a sane world, this is my handbook for people who joined me at the hedge fund. this for the people that i dictated over, okay? i call this rule never turn a trade into an investment. if you don't sell after the catalyst, the event, you're owning a stock for no particular reason. and now i'm going to guarantee you something. i guarantee you there are better uses for your money than that. the only time i recommend trade on my show is the weekly event on fridays. the media says i do the game plan every day. it's not true. on fridays i make suggestions ahead of next week's events. whether the event occurs, right or wrong, unchanged, up or down, you got go! don't create excuses for why you should hang out because the reason you bought the stock has come and gone. here's the bottom line. to keep your investments as safe as possible, remember to sell when your broker stops talking about a stock. sell after a big move as dictated and indicated by the standard & poor's oscillator. go to the website to subscribe. or the investors intelligence bull/bear ratio. i get it from investors business daily. sell anything that yields more

than twice what u.s. treasuries yield unless it's a tanker stock or master limited partnership. stay away from companies with ceos in their rookie year, and never, ever turn a trade into an investment. stay with cramer! [ female announcer ] new swiffer wet jet cleans so deep,

you'll love it. your old mop will just have to get over it... [ engine rattles ] [ man ] love stinks! ♪ love stinks! ♪ yeah! yeah! [ female announcer ] new swiffer wet jet is redesigned. it cleans deep in corners. its solution penetrates layers of dirt and its absorbent pad locks it away to clean better than a mop. the newly redesigned swiffer wet jet.

tonight i'm talking about one subject and one subject only, and in a tough market it is really important. it's how to limit your losses, okay? hey, but, listen, you know what, it applies to good markets, too, especially, though, the bad ones. we're digging into the "mad money" defensive game plan. hey, listen, tivo this one, okay? tivo this one. i mean, because it's everything i know about what made me compound to 24% after all fees when i was a pro. and it's everything i use to run charitable money for actionalerts.com. these are my 25 rules. so, let's get into it. now we're at rule number 16. i don't want you to ever to sell call options or put options -- boy, every broker is going to hate me for saying this. never sell call options or put options.

i don't talk much about options on the show. but i know many of you were talked into trading options. here are my rules for not getting burned while you use options. never sell calls against common stock. your common stock is called away. because selling a call option is really like agreeing to sell at a set price no matter how high the stock goes. you're giving someone else your upside. you sell a call for rohm and haas and they get a bid for dow chemical, hey, you don't get any of that gain. never do it! how about selling put options? people are talking about how much money they can bring in by doing that. you're limiting your upside because you can only make as much money as the put is worth. but giving yourself almost unlimited exposure to the down side, this is the most dangerous single strategy. i saw people in '87 close the doors in the '87 crash close the doors because they did this strategy. often puts do seem overpriced. they look fat and juicy, so selling them can look like a good idea and the brokers will

pitch it over and over again to you. great commissions on options. trust me when i tell you that i think those are the most dangerous strategies ever. and brokers will say the worst that happens is you create the stock at a much lower price. one you might like. nonsense! you have no idea how low the stock can go. this strategy of put selling has really wiped out a lot of my friends and i just feel like it's really important to emphasize it because my friends would still be in the business if they hadn't done it. rule number 17 in the "mad money" game plan, a game plan about capital preservation. oh, boy, i had to lecture someone close to me recently about this one. this is really painful. never use margin. so many people get talked into borrowing money from their brokers because it's so lucrative for the brokers. it's such a dangerous idea. do not buy stocks on margin. these are not homes. you can't live in them when the price goes down. when you use margin, it's not a mortgage. the stocks go down, you got to put up more money. when i was a broker, i had a

very rich woman as a client who did this strategy endlessly with margins. and she did great for so long. the market was fabulous. then she lost it all in a couple days. and she had to send me the key to her house to pay it back. i'm not tony soprano, but she had to do it. once you get in the hole, let me tell you something, you never get back. i believe margin is worse than even credit card debt and that's saying something. i believe it's pure evil. a quick ticket to the poorhouse. don't use it. even as a professional, i very rarely used margins. too dangerous for me? definitely too dangerous for you. tip number 18 to help you avoid losing money. never buy a stock at its all-time high. i never do this. not ever. every time i have tried, i kicked myself, because it ended up lower and i didn't have enough capital to buy more. anytime i have even bought near the high, i've immediately lamented it with the first correction. this happens pretty darn near every time, so i don't do it anymore. be prepared to miss the stock. just say, i didn't get that one. rather than paying upward or

reaching as we call it. once a stock starts coming down from its all-time high, i like to wait. these are my guide rules. until it falls between 5% and 8% before i pull the trigger. [ gunshot ] if you don't get that pullback, hey, too bad. you missed it. i just don't think it's worth it. number 19 to "mad money" defense handbook, whenever you can, i want you to play with the house's money. ♪ hallelujah nothing's more gratifying or defensive -- >> that was easy. >> -- than to take a lot of your position off the table when you have a big win. so, you're using pure profit. nothing else to continue investing in the stock. this is what we did with apple and a bunch of things before the first iphone, before the second iphone. i suggested you buy a ton of it in the second one at $120, $130, when it got to $180, i said to sell. sell all but a quarter of your position, which meant you were playing with the house's money. ♪ hallelujah after that it just didn't matter. you couldn't lose because you

already booked most of your gains. playing with the house's money is one of your primary objectives and if there's such a thing as a true home run in the investing business, it's that, remember bulls make money, bears make money, hogs get slaughtered. tip number 20, keep your head clear. this will be very difficult for a lot of you. in times when it's hard -- and i have really, really screwed up -- i'm willing to consider throwing in the cards. or at least the low card. the ones that i think i have doubts about. and starting over. okay, poker hand. i got an ace and a king and three bad ones. i throw back the three bad ones even if i liked them when i bought them. you can always buy them right back if you think they're that good. but i bet you won't. sometimes you can't think with all these losses in your portfolio. it pays to get a fresh start. it's a clear your head psychology and it's very defensive. bottom line, my advice for avoiding potential losses, never sell call or put options. never use margins. never buy a stock at its

all-time high when you can -- and when you can play with the house's money, ooh, i like that, and when you have a lot of losers, come on, clear your head. own up to it. that may mean selling stocks you have doubts about to see if you would buy them back. if you don't buy them back, i think you're a winner. stay with cramer. what's on the minds of independent investors? let's ask. when i trade, i want a straightforward price. they lure you in with a $5.99 trade, then charge you 15 bucks. you get a low price, but only if you make a ton of trades. at td ameritrade, every online stock trade is just $9.99. period. no matter how often you trade. no matter how much money you have in the account. i hate those hidden fees buried in the fine print. surprise! it's a maintenance fee! i hate surprises. at td ameritrade, you never pay a maintenance fee. you get low, straightforward pricing, so you always know exactly what you're paying. hey, that works for me.

are you ready to declare your independence? independence is the spirit that drives america's most successful investors. announcer: trade commission-free for 30 days plus get $100 cash when you open an account.

tonight we're all about big "d." my 25-point plan for helping you contend with a rough market and avoid losing money. it is not as radical as this ten-point plan the black panthers used to offer. black panther party, pajama party? who cares? don't invest the money you have marked for your 401(k), your i.r.a. all at once. space out your contributions over 12 months, so that every month you're putting in one-telt of your annual total. i do it ritualisticcally. then if the market declines, double down for that month. i need you to take advantage of the declines that are going to occur. because they're always going to be a part of investing.

this is our defensive retirement strategy. always invest in a systematic fashion. rule number 22, if you're invested in mutual funds make sure you don't have all your money in the same kind of mutual funds. small cap growth is typically a trap. you should be able to buy just one diversified fund. but if you are going to have money in ult iple funds, don't have it all in small cap growth. i reviewed a bottom's portfolio. i usually don't do this thing, but it was for a mother of a friend. one was aggressive growth, one was small cap and one was a technology fund. when i looked through the labels, closer look, they were practically the same fund. beware of the names and objectives when you look at mutual funds. the funds can be the same even as the titles are quite different. how about pointer number 23 for playing defense? stop waiting for a stock to come back in a tough market. come back to where you bought it. you don't have the option of waiting around when the market's

being difficult. you have to be defensive. if you own a stock that's down and you don't like it, come on, don't wait till it comes back to even before trying to sell it. stocks are not kids in the mall who know their parents will always come back to them. they're stocks. the bad once are more likely to go even lower than they are to come back. stop hoping. that's not part of the equation. number 24, pick stocks with good buy back. a ton of cash flow that believe in and buy their own stock. especially when there's a decline to be taken advantage of. a buy back can stabilize the stock for other buyers to come in and stop the decline. consider it a safety cushion. that's what you need to see. we make jokes on the show. we call it the sir hiks mix-a-lot, i like buy backs. don't stop looking at your statement. the worst thing that people did in 2000 was they put their monthly statements in their

drawers. the losses were so big and painful they couldn't stand to watch. you have to stay current no matter how much it hurts. the moment you stop looking, is the moment things go really bad. you could have saved fortunes if you looked in 2000 and figured out which companies were falling apart from the losses. if you don't look, you can't. their stocks went down after those losses and you could have avoided a ton of pain by paying attention and getting out before the losses hit. here's the bottom line. you can't play defense with your eyes closed, so keep them open at all times.

i like to say there's always a bull market somewhere. i promise to try to find it just for you here on "mad money." i'm jim cramer. see you tomorrow. [ female announcer ] new swiffer wet jet cleans so deep, you'll love it. your old mop will just have to get over it... [ engine rattles ] [ man ] love stinks! ♪ love stinks! ♪ yeah! yeah! [ female announcer ] new swiffer wet jet is redesigned. it cleans deep in corners. its solution penetrates layers of dirt and its absorbent pad locks it away to clean better than a mop.