thi. buy it. >> i'm melissa lee. see you tomorrow and back here at 5:00. more fast money here. mad money with jim cramer starts now. i'm jim cramer. and welcome to my world. you need to get in the game! going 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 trying to save you a little money. my job is not just to entertain but to do some teaching here. so call me at 1-800-743-cnbc. tonight i'm letting you in on something big, the method to my madness. i know this show is the craziest, most random and frankly bizarre thing on television, but i also know that you won't find investing advice this good anywhere else.

you know that too or else you wouldn't be watching unless you're one of those people who tunes in just to see if tonight -- is the night the show really goes off the rails, which after multiple years of airing is always a possibility any given night. sorry, guys, there is a tape delay. keep wishing. for those of you more interested in trying to make money than watching me go around like a crazy man, some say i am, well, you're going to want to keep watching. i believe you can do everything i do at home if you're willing to put in the time and effort. investing, specifically actively investing, in stocks, running your own portfolio rather than dumping your money with some buy and forget index fund. or worse, fling for the false safety of bond funds particularly with record low interest rates. something anyone can do as long as you can spend several hours a week doing the homework. and i'm including watching the show to research these stocks

because the research is so readily available, cnbc.com, street.com, or ya yahoo or any of the company websites. anything you're thinking of buying or keeping up on you can get info on. in fact, i think actively managing your own portfolio is now essential. especially in the wake of the crash of 2008 which proved the uselessness of index funds that merely try to mimic the market, the academics persist in telling you it's good. it didn't work. mimicking the market's returns is not enough. especially if you're trying to get back to even. you've got to do better. and the only way to do that is to pick your own stocks and actively managing your portfolio. how do you start? well, that's what we're talking about tonight. like i said, this show is all about the method or methods to my madness. how do i pick stocks? that's the question that everybody would love the answer to. that's what i'm asked. tonight you're going to get a piece of that answer. the truth is, i've got far too many methods, far too many ways of picking out great stocks to ever cover all of them in one

show. but i want to give you tools of my trade so you can start to pick stocks like yours truly on your own or do better than i am because you don't have to follow as many stocks as i do to be successful. remember, i've got to be a generalist on "mad money," trying to cover as many stocks as i can. you have the better luck of researching what you own or thinking of buying. at the bottom, this show is about educating you. giving you the ultimate insider perspective on how the market works and can make you money. i'm not here just to dole out stock picks like the proverbial fish you give a man if you're too lazy to shop for them at whole foods. what i like to do is empower you. that starts we many teaching you all the many tricks to pick out great stocks and trade them like a pro. methods that have served me well for over 30 years of investing and that allowed me to generate a 24% annual return after fees at my hold hedge fund. these skills are what refresh this show and guide me as i manage my own charitable trust

which you can always follow along on actionsalertplus.com. now, let's get rolling. one of the easiest way i identify potential cramerica names, the stocks that could but won't necessarily end up on the show is by watching the stocks that appear on the new high list. stocks on that list, the highest of the high obviously have to have something going for them, right? that's especially true when the market is in difficult shape. as only the best of the best hit new highs when the market's falling apart. what does it tell you when the stock is on the new high list? either it's part of a genuine bull market or cohort of it or the company itself has serious momentum. no matter how they get there, many stocks on the new high list often just keep going higher. in a great bull market like the one from the bottom of 2009 and any market that almost doubles has to be considered a great bull market even as we resist such labels. we saw this success of investing in the new high list over and

over again. the same stock hit new high after new high after new high. and following them turned out to be a great way to make money. even as the bears claimed endlessly that the bull market was false and couldn't be trusted, listening to the bears caused you to miss out on one of the greatest rallies in history. obviously the rally since the bottom is more the exception than the rule. but things have worked well and continued -- things that have worked well continue to work well. i am not saying that you can chase stocks that are hitting their highs. i'm sure some of you will no doubt qualify, that's what i'm saying. i'm sure some of you will pickle me for -- it's not. listen, this is subtle. i'm not a bozo the clown offering a bozo behavior. i'm saying that if you want to identify stocks that will be winners in the future, looking at the biggest winners of the present has tended to be a pretty good place to start looking. that's the thing about the

market, it's not always that hard to play once you understand that there's often more continuity to it than change. things pretty much keep going the way they were going until something major shifts. then, yes, indeed, you have to alter your course. those course changes can be radical, though, and that's why you always have to be reevaluating your ideas and please don't ever dig in your heels when the facts change. two incredibly important disciplines i stress in my best-selling book "getting back to even." it's a book about methodology, not just about individual stocks that were working at the time. but you know what? when you're looking for stocks to invest in, when you're hunting for the next bull market like i do every weeknight between -- at 6:00 and then 11:00 p.m., it's eastern, of course. you have to start somewhere. and looking at the new high list, that's a terrific place to begin. it's a terrific already sorted through list. now, i don't just pluck names off the new high list because i think, hey, these stocks have been going up, they'll keep going up. so why don't i recommend them on

the show? lazy, irresponsible chasing of momentum. i am many things, a lot of them negative, but lazy and irresponsible, i ain't. i apply the same standards of rigger at this show that i used at my hedge fund, so i rarely recommending stocks straight off the new high list unless there's special circumstances. circumstances i'll talk about later in the show. what i like to do hunting for stocks is wait for something to pull back from the new high list. that's a discount from something that's full priced and good. that's when you would pounce at a retail store, that's when you pounce in my store. the pullback gives you a good lower priced entry point in a stock that's probably got a lot of positives going for it. remember, i'm not telling you to chase momentum. you should always be conscious of price and therefore try to buy on weakness just like you want to sell into strength. i'm throwing in these caveats because i don't want you to look at the new high list tomorrow and just buy something. uh-uh, not going to be like that.

poring over the new high list is a fabulous way to identify potential stocks to buy. you only buy stocks have that pulled back from the new high list if you're confident they'll make a comeback for some substantive reason not having to do with the market itself. you're not trying to play the market with these stocks. you have to do the same homework before buying any stock. you must have conviction even if it is a cynical conviction that the stock is going higher that it deserves to go higher. and the biggest caveat of all. when you're shopping for stocks that have pulled back from their highs, make sure they haven't pulled back for reasons specific to the company. be certain you're dealing with a momentarily damaged stock and not a troubled company that's going down, down, down, down. how can you tell the difference? well, if the fundamentals haven't changed, it's pulling back for mechanical reasons. profit taking, some panic in the market in general, macro issues, europe, that kind of thing. now more than ever, thanks to the facts that stocks are traded like commodities by hedge funds, causing huge selloffs that make

no sense in everything or double and triple related etfs more powerful than the stocks themselves, you're going to see the stocks pull back from their highs for reasons with nothing whatsoever to do with the strength of the underlying businesses. those are the buys. but if the picture changes, if whatever made that stock attractive has climbed its way up to the new high list goes away, then it's no longer a viable candidate. the story has to be intact or this will not help you one bit. while it isn't a hard and fast rule, i tend to like stocks pulled back between 5% and 8% from the high. write that down. between 5% and 8% from the high when they're on the new high list is my sweet spot. i've discovered that to be the optimal level of a pullback, less than that, you might be too early. more than that, maybe something indeed is wrong with the stock. you don't know. that's the first method to cramer's madness. watch for stocks that have pulled back from the new high list especially because of a broad market selloff. some of my best picks have come

out of this process and hopefully some of yours can too. let's take some calls. let's go to nate in illinois. nate? >> caller: boo-yah, jim from bloomington, how's it going today? >> real good. how about you, partner? >> caller: pretty good. i've got a question for you. i'm 19 years old -- >> wow. >> caller: and i have a few thousand dollars, and my question to you is how can i bring more growth to my portfolio as the years -- as a young investor to continue with me? >> well, first of all, i want to congratulate you you're interested and this is the right age to do it. if you pick something a little dicey and it goes down, that's okay. second what i would encourage you to do is try to find the companies that are growth stocks that i highlight over and over again on the show. you're going to hear me say growth stock growth stock growth stock. listen up, write it down, pull the trigger if you like it. michael in new york, michael? >> caller: hi, jim. i enjoyed the show and thanks for helping me make money for my family. >> my pleasure, thank you for saying that to me. >> caller: i have two questions and they're somewhat related. what do you really gain by

getting a dividend the share price by the amount of the dividend and then you have to pay taxes on the dividend? and isn't comparing dividend paying stocks to pay your yield not an apples to apples comparison because of the rate of volatility of stock prices and the greater risk of losing your principal of stock as compared to the ten-year? >> let's get empirical. what stocks have outperformed for the last 20, 30 years? stocks that pay good dividends. that's reinvested dividend. greatly outperformed stocks that don't. i'm getting this from jeremy seagal's work, stocks for the long run. go read the book. a pullback can sometimes be the market giving back, okay. i like stocks that have pulled back from the new high list between 5% and 8%. but remember, do the homework, don't chase momentum. it's a starting point, not an ending point. "mad money" will be right back. [ barking ] appears buster's been busy.

yeah, scott. i was just about to use... that's a bunch of ground-up paper, lad! scotts ez seed absorbs and holds water better. it's guaranteed to grow grass anywhere, even if you miss a day of watering. [ scott ] seed your lawn. seed it! arrival. with hertz gold plus rewards, you skip the counters, the lines, and the paperwork. zap. it's our fastest and easiest way to get you into your car. it's just another way you'll be traveling at the speed of hertz. how math and science kind of makes the world work. in high school, i had a physics teacher by the name of mr. davies. he made physics more than theoretical, he made it real for me. we built a guitar, we did things with electronics and mother boards. that's where the interest in engineering came from. so now, as an engineer, i have a career that speaks to that passion.

thank you, mr. davies. we asked total strangers to watch it for us. thank you so much, i appreciate it, i'll be right back. they didn't take a dime. how much in fees does your bank take to watch your money ? if your bank takes more money than a stranger, you need an ally. ally bank. no nonsense. just people sense.

welcome back to tonight's methods to madness show where i'm revealing some of my best tricks for buying and selling stocks. truly timeless investing wisdom for the ages. think of me as pen and teller for the stock market. with a physique more like teller than penn. i want to pull back the curtain,

show you how a professional looks for stocks to buy and knows which ones to sell, sell, sell. no magic or talent, just a bunch of disciplines that can make you mad money if you master them. don't have to be a genius or all that smart to be completely honest, just need to know what you're doing and put in homework. that's where cramer the sad but wise clown comes in. maybe less than sad clown but king leer, something to think about. let's move on to more important things like how to find stocks that are great buys. earlier, i was talking about picking off stocks that pulled baaing from the new highs list because you get a cheaper entry point in a stock that's proven a winner, 5% to 8%. off the new high list because you're paying too much for them. you can get a better deal if you're patient and wait for weakness. given how volatile the market is particularly because of europe, there's very few occasions where buying it off the high list is at all justified. but sometimes it's so sizzling, so hot that you just gotta, buy,

buy, buy whenever you can because it's not going lower any time soon. you won't find these often, they're rare, but you've got to remember not to buy at once. if you want to buy 100 shares of a stock, if you think it's got so much mojo, i'll bless buying 25 shares at the high list. worse thing that happens you grab a quick profit and find another stock. believe me, there's always another stock to find. another train coming into the station. i'm okay buying a stock hitting a new high. if you see insiders buying the stock when it's at a 52-week high, i'm telling you, that's a clear signal. it's a rare thing to see happen. but i have seen it. it's rarer still this method of picking stocks doesn't make you money. i love it when i see insiders buying at the high. it's a great sign of the confidence in the business, not the company, but the individuals. who knows better than the people running it, right? normally insider buying ranges

from meaningless to small insufficient meaning. you'll catch insiders buying the stock because they want to give impression of confidence, creating an illusion of doing better than they are. they aren't stupid. they know if you see them buying their own stocks, they know the market's going to smile upon them. so they play the system. hey, that's fair, but it means we ignore most insider buying because it could be sketchy. what a word. that said, when you get truly colossal insider buying even if it's not at the high, well, then you might want to take another look at the stock. it's a pretty powerful endorsement when the insiders buy a whole lot of stock. it's really the volume of the insider buy that makes it -- that declares sincerity. but we're only focusing on one kind right now. buying at the top. there's nothing more arrogant than when an insider backs up the truck for the own stock sitting at a 52-week high. they're saying we know we rock, our stock is infuego and we're going to buy stock hand over fist, not waiting for a

pullback. we're buying at what looks like to be you think the high. arrogant? sure, but bankable. corporate insiders aren't fools with notable exceptions. and if their stocks are on the 52-week high list, let's assume they know what they're doing. not everyone deserves the benefit of the doubt in this business. and after the market meltdown at the end of 2008, i know that a lot of people think all ceo execs are fraud, crooks, liars, especially those of you who got burned owning lehman brothers. as i tell you in "getting back to even," that's the wrong conclusion to draw. the total unwillingness to believe anything positive, that's something entirely different. if you're going to own stocks, you need to be willing to extend some measure of trust for the people who own companies that you own shares in. now getting the stock to a 52-week high and buying a bunch of shares is a darn good reason to give the ceo the benefit of the doubt. they're not going to buy unless they have some unshakable convictions ability their companies or perhaps they've

been contacted by other companies for potential purchase. and they've spurned them betting they can go much higher on their own. most investors are smart enough to wait for a pullback. insider buying at the high tells me these guys don't think there will be a pullback and nothing more bullish than that. sure i want to wait for a pullback after they've bought, but that's the best of all possible worlds. one more method of cramer's madness. when you see insider buying on a stock with a 52-week high, you might want to be buying too. after the break, i'll make you more money. build your future -- >> happy boo-yah to ya. thank you for not just the money, jim, but what the money translates into. in my case, a college education for my son. >> boo-yah. thanks a lot for your passion for stocks. "mad money" does work for the small investor like me. >> "mad money," making me money for college. boo-yah, i love you. >> how many other shows have kids calling in and saying boo-yah? >> one boo-yah at a time, "mad

money" with jim cramer weeknights 6:00 and 11:00 p.m. eastern on cnbc.

♪ you're in luck because you've caught cramer on a real good night. i'm not going home tonight to sip that cheap scotch on the

dirty linoleum floor. i'm in a great mood, a manic mood even. let's just say i'm pretty darn productive in high gear revealing my secrets, the methods to my madness. so pull out your pencil and some paper. yeah, i haven't used that line in a while. start jotting things down because what i'm about to tell you could be incredibly useful for your portfolio. it's better than giving you stock picks. i'm giving you some of the best ways i know to pick stocks. i'm teaching you to invest and trade like cramer. not to be like me because i've got some emotional issues that frankly you probably would prefer not to emulate, but that is off track. so far i've given away two of my precious secrets, two of the tools i've used at the hedge fund and still use at my charitable trust. allowing subscribers to see my trades before i make them. lady gaga's better than pink, though i never mind raising a glass. i look for stocks pulled back

from the new high list, that's not a reason to buy in and of itself, but it's a great place to look for potential buys and i like to buy stocks around the new high list and have substantial insider buying because it says the people running the company believe their stock still has legs. and if they believe it could be good reason for us to believe too. but again, this alone, not enough to recommend a stock. these are pieces, okay? pieces of a puzzle. you've got to do the homework, check the fundamentals, check the websites to make sure you like the story behind the company, that way if the stock goes down, you know to buy more rather than cut and run and lose what i'm teaching you tonight are really tells. there's signals the stock might be worth owning, it's worth your time and effort to go through the incredibly boring process of reading through the conference call transcripts, sometimes 30, 40 pages. there are thousands of stocks out there and any method we can use to narrow down ones that might be attractive, that's a meade worth having. we've talked about insider buying at the high.

and while i don't usually use it as a way to determine whether or not a stock has got it going, there's one other scenario where insider buying makes for an incredibly bullish tell. and that's when you have a stock that has an incredibly heavy -- >> sell, sell, sell -- >> short position. meaning a lot of bears out there have borrowed shares, sold shares, and are waiting for the stock to go lower so they can buy them back. >> buy, buy, buy! >> and profit by returning the stock to the bank they borrowed it from and collecting the difference for the price they sold it and the price they bought the stock back at later. it's hard for some people to understand. i want you to think of shorting as like regular investing only in reverse. we try to buy low and sell high? successful shorts turn that around. they try to sell stocks they think are going to go lower and then they buy them back and collect that difference when a stock has a lot of shorts in it, that means there are a lot of people who have serious conviction, conviction that stock is headed lower, maybe

dramatically lower. in fact, it takes more conviction to short a stock than it does to go long. that's wall street speak for buying a stock. when you're short, face it, potential downside is infinite. when you own a stock, a stock does stop at zero, right? shorts lose money when stocks go higher, and is there a lid to that? no. the other important note about short sellers is if there's a lot of them and a stock all of a sudden gets some great news, we get what is known as a short squeeze, and it sounds exactly like it is, squeezed up. in order to bail up on the positions, the shorts have to buy. that's called covering. buying isn't just -- when you're buying a short back, that's called covering the short. when a lot of shorts cover at the same time in a panic and that happens quite a bit. the stock will surge just like if everyone were to sell at once and the stock goes down hard because what you really have is a lot of people desperate to buy the stock. a lot of demand.

they have to buy unless they want their years wiped out. many short sellers in 2010 hedge funds, they got their years blown away when the market refused to quit. so where does insider buying fit in the short-selling equation? first, what you're looking for is the stock with a high short interest, that means a giant percent of the float or what trades is shorted or sold short. when some of the people who run the company, they start buying shares for themselves, bingo, that's your chance. it's almost like drawing a line in the sand for the shorts saying, hey, come on, you can keep shorting our stock, but we think it goes no lower and no lower. one that often leads to a short squeeze that sends the stock much higher. shorts are smart. in fact, a lot of times they tend to be smarter than long-side buyers. but they don't know more about the business than the insiders who run it. if a lot of people are shorting a stock and management is buying it in sizable amounts, not just in hundreds of shares worth,

then you should start doing some homework. a great starting point. and usually you're going to want to side with management, believe me, and then you can ride it higher and higher. as the shorts panic and push shares up big in their desperation to buy or cover their positions. might be big losses, may be they want to ring the register all at once. when a company announces they're going to buy back, that's another line in the sand situation where management is contradicting the shorts. companies often repurchase their own shares and while not all are bullish, some of them turned out to be outright waste of money. and i teach you how to recognize this. a substantial new buyback that is active in the face of the shorts is often a good reason to take a closer look at the stock. you don't find out it's active until the end of the quarter. one of the reasons i like to read the quarterly reports. now, here's a note of caution, you've got to be very careful when dealing with a company in the cross hairs of the shorts. especially when people are nervous and the market is in bad shape. because the shorts do have the

ability on their own legally or not to wreck a stock. even if the fundamentals, the underlying company are fantastic. these days, the shorts they got tremendous fire power. more, i think, in part because of an sec both under the detectives and republicans that looks the other way when shorts raid stocks with bogus stories about accounting issues and management blunders. that's called fermenting a decline. it's not allowed, but gets done anyway. stock owners no longer have benefit of rules that slowed short selling and making it harder -- rules like waiting for an uptick, something from the '30s. boy, that was a good rule. somehow the government got talked into abolishing it in order to make trading quicker, of course it made things more fair for the shorts, a lot of good that did us. it is a leaning reason why so many home gamers have left the building. but the government doesn't seem to care. we established these original

rules, the uptick rule in order to stop the fomenting of panic. but the government now in all of the wisdom seems to think that panics are no longer possible. actually, of course, we know they're more prevalent than ever. we've got to be more careful than ever not to succumb to panic orchestrated by short sellers who need prices to go lower. it's easier to panic people in a financial than it is in a regular business that doesn't involve credit. without those protections, the shorts were able to run wild and practically assassinate the stocks of the financial companies during the crash of 2008 until the generational bottom in march of 2009 did put the bulls back in control. but the shorts came back with aggressive negativity in 2011, this time using weapons of mass stock destruction. one of those etfs like the financials, we've learned you've got to tread carefully. you can still find great opportunities where the shorts have overreached and the

insiders are buying. but before going into one of these situations, i've got to warn you that the balance of power has shifted against you in recent years and in favor of the shorts. against the regular investor and in favor of the hedge funds that like to bang down stocks. that means even if the short sellers are wrong about a company's prospects, they can still demolish it. they can demolish the stock. please don't underestimate the amount of damage the shorts can do. although, remember, the best protection against these raids is offer from stocks that pay good solid dividends. short sellers have to borrow stocks to short and that means they have to pay the dividends to the real owners. that's a terrific term for those who are pernicious in the way they go about shorting. believe me, it is the best protection you can get against short sellers. bottom line, insider buy plus heavy short interest can equal good investing opportunities as long as you avoid situations where the shorts are determined to crush the stock at any cost. let's go to bart in georgia.

bart? >> caller: yes, big boo-yah from clarksville, georgia. >> man, glad to have you on the show. how can i help? >> caller: i know there's obvious reasons why a company might change their stock's sticker symbol. but are there reasons that are not so obvious here in the u.s. or abroad? and does this have any affect on stocks? >> no, not really. when i was a couple years ago at the street.com, i'll give you an example, i'm a big shareholder, founded the company. tscm, and the ceo wanted to do a little facelift so they changed to cst. it seemed good. it's still on the nasdaq. it was just a change of face and that happens a lot and companies want to change their names, it's really the fundamentals that matter. let's go to rich in new york. rich? >> caller: hi, jim, for a beginning investor, new to the stock market, would you advise shorting stock? and could you explain?

>> no, i do not advise shorting stock because losses from shorting can be instant. i would prefer you to buy puts and that way you protect your upside, so-called, protect your downside, it's mirror image. go to "getting back to even." i describe 100 pages how it's better to buy puts than short outright. on the new high list, we know the key things to look for. interim buying is one of them, particularly when there's a heavy short business. that could be a combustible situation that can explode to the upside. stay with cramer. >> constantly taking the pulse of the market. you need someone who has the street cred, the track record, and the marketing tuition to be your guide however the market moves.

let jim cramer be your man on the street. carfirmation.

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welcome back to my methods to the madness episode of the craziest most enlightening perhaps entertaining show even

though i'm a crazyman if i say it myself. we're talking about the tricks i use to find you opportunities to pick stocks, to know when to sell. all the methods that made me a darn good money manager, frankly, and one that helps me put together the show every night. trying to enlighten you about what's behind the scenes. today we're transcending the usual model. i want to teach you how to do what i do, you can do it yourself. i focused on some of these interesting methods. i want to teach you about a way to trade them now. we were doing investing, now we're trading. a discipline that's incredibly useful in volatile, crazy markets, and it's called -- this is the thing i get the most about @jimcramer on twitter, it's called trading around a core position. i'm all about trading, i don't have any advice for regular investors, i'm all short-term. hey, that's entirely untrue. this show is mostly about long-term investing. think about it. get dividends, you can't do that if you're short-term. put aside whatever humility i frankly have left, i will admit

i was a darn good trader. now i can only trade for the charitable trust. and that's really longer term. much different from my hedge fund. and i'm not allowed to short sell or use options and those are two weapons i advocate you use. it pays to put trading disciplines into practice. that way you can buy more shares of the stocks you like at lower prices, sell more shares when they're flying high. >> sell, sell, sell -- >> trading is about profiting in short-term fluctuations in stock prices. sometimes these are caused by a catalyst, sometimes it's a result of a topsy-turvy market. and trading around a core position is one of the most useful disciplines out there. especially like markets in 2011. remember when we were subject to the gigantic swoons. what does it mean to trade around a core position? let's go through it step by step. first you need a stock. so why don't you pick one you

like? one you've got an opinion about, one where you have a bias, a directional bias. find a stock you believe will be going higher over the longer term. what you're really looking for here is a great company with a stock to get tossed around by market volatility but that you think ultimately will be headed higher if you are patient. so we know it's getting shot at, we're going to take advantage of it to buy. if you were just investing, then you'd set a position in the stock, buying in increments, remember, levels like i talk about. we know buying all at once is the height of arrogance. let's use amazon.com as an example right now. over the longer term i like it, over the short-term, it's rocky. let's say you want 300 shares to amazon, then buy 100 shares three times over a period of weeks or months. that would be your core position as an investor. let's say you want to trade. i know many of you want to but feel discouraged because you remember how all the amateur day traders got blown out when the tech bubble burst. the key here is amateur.

you home gamers can make money trading if you do it right. like a professional in the old days when commissions were higher. it wasn't true then. the commissions would eat into your profits, it wasn't worthwhile to trade. that hasn't been the case for ages. let's cut back to our core position. let's say it's trading $800 a share for purposes of the show. every time it jumps three points, 3%, you sell 50 shares. once it reaches 109, you own 150 shares. then something knocks the stock down as long as it doesn't change the company's prospects, in other words the market knocked it down. that shouldn't take long given that we're in a world where stocks can get crushed by all kinds of factors that have nothing whatsoever to do with selling of the merchandise, the books, the entertainment stuff, selling on the fundamentals. as the stock comes down, you buy it back in increments just like you purchased it, okay? we started with 300 shares, let's keep using increments of 50 to buy it back. if it comes back to 103, you buy

back 50 shares, another 50 at 100 and so on. up 3%, sell 50 shares, down 3%, buy 50 shares, up 3%, sell them again. over time, these profits add up and i've seen it happen. that's what trading around a core position is all about. a lot of people think it's incredibly exciting and it can be. if you're good at trading around a core position, i want you to be bored. you're watching the stock move and trimming and adding accordingly. contra the image of trading as reckless and irresponsible, trading around the core position is the height of prudent portfolio adjustment and discipline. we do have some rules to follow. in my example, we started with 300 shares of $100 stock. if i was trading around that, i don't know, i would to own more than 300 shares or less than 100 because trading around a position for less than 25 shares isn't going to make you enough money to be worth it. obviously you can scale these numbers depending on how big your position is, but the basic idea is avoid putting yourself in a spot where you have too

much on the table in case the stock gets swatted down or too little on the table to take advantage of any upside that comes your way. trading around a core position is an important basic trading strategy that everyone can use even those of you who find the notion of trading as opposed to investing abhorrent. if you want to take it to the next level, the ultimate level, then i recommend reading the two chapters on how to use options in "getting back to even" for the strategies i used at my old hedge fund. the material's too sophisticated for "mad money," but if you're willing to put in extra homework, it's more -- it's really worth the effort. the stock i used to demonstrate on google is one i would never do on common stock and always do with stock replacement. a cheaper and less dangerous way to create a google at a more reasonable price than it currently sells at. i think they're too risky for the vast majority of people out there. bottom line, you know the basics of how to trade around a core position, yet another method to

my madness, allows you to generate small gains to add up, i promise, over time. stick with cramer. let's go to kentucky! >> caller: boo-yah. >> a hillbilly boo-yah. holy cow. >> here's a las vegas, bing, bing, bing boo-yah. >> a big staten island, new york, hey now, forget about it boo-yah! >> boston, massachusetts -- >> california. >> georgia. >> boo-yahs come from all across america. let cramer help you channel yours. "mad money" with jim cramer weeknights. [ barking ] appears buster's been busy.

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i've got one more trick to teach you tonight. one more method to my madness. and this time i want to talk selling. which along with when you buy may be the most undervalued in your whole arsenal. how do you know when to sell the stock? how do you get out so you're not one of the last people around to get stuck cleaning up the mess? there's a lot of money to be made owning hot stocks with lots of momentum. but when you play the momentum game, you've got to know when it's time to leave the table. there are always naysayers and almost always proven right as

sooner or later eventually all steaming hot stocks implode. the process happened in recent years such as netflix and research in motion. both at one time were among my favorites and made a lot of money with them for you i hope. but usually later rather than sooner. and all the negative talking heads with the recklessness disguised as prudence cost you an opportunity to make money. people shy away from the stocks because they don't know where they're going to top out. it's understandable and i'd be afraid to buy them too if i didn't have the discipline to let me know when to get out. lucky for you i do have one. and you're about to learn it. when i'm talking about hot stocks, i mean hot speculative stocks, okay? not blue chips. stocks with companies that are low capitalization, tiny or tinier. usually the stocks begin with very little research coverage from the wall street brokerage houses. they can go up and up for a long time, catch fire and stay on fire, even for months for years even. the key for figuring out when

interest has peaked and it's time to sell is by watching the analyst coverage of all things. yeah, you've got to use your own judgment here. a good rule of thumb is once one of these hot stocks has at least a half dozen analysts covering it, the run is going to peter out. it'll no longer be the hot little speculative stock. it's rare it doesn't behave like this. you can look it up on the internet, isn't hard to find information. this formula's worked for me as long as i can remember. as far as i can tell it works because the number of analysts on the stock is a good gauge of how much awareness and interest there is in a hot, speculative stock. hot stocks get tapped out when there's nobody left to be attracted to them. when all the people who would be interested come out of nowhere attracting more and more attention, more and more backers and everyone has a piece of the stock. when that happens, sorry, guys, run's over, time to go home. one of the best examples of this process plays out is a company formally known as anthem natural, the hottest stock in 2004. the hottest stock in 2005, the

hottest stock for the first half of 2006. number one. it went from $18 and change in 2005 to $200 when it peaked in july of 2006. the whole way up there, people telling you that hanson, a beverage company that got its momentum from the monster energy drink, so much momentum with the monster drink that it renamed the company ultimately monster. ultimately it was a fad that would dry out and crash, though. well, it did do that. i called the top at hanson back then because i knew how stocks worked. it peaked in july of 2006. and this was in part due to the fact that the company did a five-for-one split. and even though they're not supposed to do anything, this encouraged people who had been in hanson for a long time to take something off the table. there was another reason i believed and that was it ticked up the fourth analyst. that's when goldman started covering the stocks. you had two months to sell before the initiation and the stock peak. there was upside left after goldman started the coverage.

but prudence dictated we sell once the stock got four analysts. and hanson as was pretty much all other small hot stocks started to cool off once it hit that critical mass of analyst coverage. after it fell off the radar screen and people stopped talking about it, the stock then recharged and powered higher again. it was an amazing renaissance and a testament that when analysts stop following the company and the company's earnings start percolating again as was the case with hanson in 2011, a move can happen. especially when it turns out that the fad drink which was monster ended up vanquishing the competition of major soda brand that said was going to wipe out monster but didn't materialize. ultimately after the fall from grace they took out that high in 2011 and never looked back. that's when they renamed the company. here's the bottom line, small speculative stocks are often worth owning, but you must know when to sell.

and that moment comes when you see too many analysts jumping on the bandwagon. start trimming the position. stay with cramer. stay connected to cramer on madmoney.cnbc.com. high schools in six states enrolled in the national math and science initiative... ...which helped students and teachers get better results in ap courses. together, they raised ap test scores 138%. just imagine our potential... ...if the other states joined them. let's raise our scores. let's invest in our teachers and inspire our students.

let's solve this.

let's do some mad mail and some mad tweets. jim, says jen in texas. i'm trying to understand when peg is at a level that means it's time to trim a stock.

i know p.e.g. of 2 is too high. i appreciate your teaching a wise one. it's a rule of thumb, okay, kind of a guideline. i think two is a red flag. now for the stocks that are 2.1 that people want to own, but i don't like it because there's been too many mistakes over two. it's an odds game. here's one from ben in pennsylvania. jim, i'm a newer home gamer and have a question regarding takeover bids. is there an ideal time to ring the register? >> immediately. immediately because i am not an arbit arbiter. there's a chance you'll give back the gain. we look for the next big win. let's take some tweets. this one is from @kendoggy. i'm starting a portfolio, is it better to buy one full position at a time or smaller amounts of all five at once? absolutely the latter because one of the things when you're starting, it happens to be the luck of the draw here. but almost everybody knows just start immediately the first

stock they bought went down very big. this is an insurance plan against that happening to you. so no, i don't want you buying all at once. buy in stages all five. here's -- this one's fro from @motorrack. how do you determine prices for your actionsalertsplus.com portfolio? that's our charitable trust, we talk constantly about it. we try to think of where the stock would be too expensive either on a p.e.r. ratio or priced to earnings multiple basis that we're afraid we're going to start giving things back. if the fundamentals improve while we own a stock, we can revise our price target up. we only give that to people who subscribe because we want to give them a sense of why we would take something off the table because we always want you to have the move before we make it. that's part of what i like about doing that charitable trust portfolio. all right. here's another tweet. this one is from @paulsullivan. when do you sleep? do you sleep? very strange sleeping habits, i admit to that.

i get very little sleep. i usually try to get four hours sleep in a given night. believe me, i would like to get more sleep. many of you ask me that. what are you doing up? and the answer is, why can't i sleep? that's why i'm up. stick with cramer. it's very important to understand how math and science kind of makes the world work. in high school, i had a physics teacher by the name of mr. davies. he made physics more than theoretical, he made it real for me. we built a guitar, we did things with electronics and mother boards. that's where the interest in engineering came from. so now, as an engineer, i have a career that speaks to that passion. thank you, mr. davies.