i'm jim amer, and welcome to my world. >> you need to get in the game. >> he's nuts. they're nuts! they know nothing. >> i always like to say there's a bull market somewhere. and i promise you -- >> "mad money" you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. 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 on something big, the method to my madness. look, 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 on 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 traipse around like a crazy man, some say i am particularly on twitter @jimcramer, 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 the 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, fleeing for the false safety of bond funds, particularly with record low interest rates is 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 or yahoo! or any of the plain old web sites of the actual companies which i love to check. 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 not if you're trying to get back to even. you got to do better. and the only way to do that is by picking your own stocks and actively managing a portfolio. but 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 break to my madness. how i do pick stocks? that's the question that everybody would love to know the answer to. to that's what i'm always asked. tonight you're going to get a piece of that answer. the truth is that i've got far too many methods, far too many

ways of picking out great stocks to ever cover all them in one show. but i want to give you some of the tools of my trade. enough 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 got to be a generalist on "mad money." you have the better luxury of researching what you own or thinking of buying. at the bottom of this show it's about educating you, giving you the ultimate insider's 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 teach him to shop at whole foods. what i really like to do is empower you. that starts with me teaching you all the many tricks i use to pick out great stocks and then 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 old 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 at actionorg.com, which i tell you everything before i ever pull the trigger. now let's get rolling. one of the easiest way to identify cramerica names is by watching the stocks that appear on the new high list. stocks from that illustrious 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 could hit new highs when the market's falling apart. so what's it tell you when a stock is on the new high list? either that it's part of a genuine bull market, maybe a cohort of it, or the company itself has some serious momentum. no matter how they get there, many stocks on the new high list often just keep going higher. now with a great bull market like the one we had in 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 that 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 to you miss out on one of the greatest rallies in history. i got to keep you from ever doing that again. obviously the rally is the exception than the rule. generally speaking things that have worked well continue to work well. now i'm not saying that you can chase stocks that are hitting their highs because they'll keep going higher. i'm sure some of you will no doubt qualify that's what i'm saying. i'm sure some of you will pick only for that. listen, this is subtle. i am 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 there's often more continuity to it than change. things pretty much keep going the way they were going until something major shifts. and then, yes, indeed, you have to alter your course. those course changes can be pretty radical, though, and that's why you always have to be re-evaluating your ideas and please don't ever dig in your heels when the facts change. two incredibly important disciplines that i stress in my best-selling book "getting back to even." the book still holds up because it's a book about methodology, not just 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 at 11:00 p.m., that'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 i do recommend them on

our 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 rigor to this show that i used at my hedge fund where people paid me a lot of money. i rarely recommend buying stocks straight off the new high list unless there's some special circumstances, circumstances that i'll talk about later in the show. what i like to do when 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 pass at a retail store. that's when you pass 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 under strength. i'm throwing in these caveats because i don't want you to look at the new highist tomorrow -- big mistake -- and

just buy something. not going to be like that. poring over the new high list is a fabulous way to identify potential, and i stress that word, potential stocks to buy. you only buy stocks that have pulled back from the new high list if you're confident it will make a comeback for some substantive reason not having to do with the market itself. you're not trying to play the market with the stocks. you have to do all the same homework you ordinarily do before buying the stock. you have to have conviction, even a cynical conviction the stock will go higher and deserves to go higher. and the biggest caveat of all when you're shopping for these stocks, make sure they pulled whack for a good reason 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. how can you tell the difference? well, if the fundamentals haven't changed, the stock probably hasn't fallen from grace, pulled back for mechanical reasons, profit taking because someone's got a big gain. some panic in the market in general. macro issues, europe, that kind of thing. now more than ever, thanks to the fact that stocks

are traded by commodities by ultraleveraged hedge funds, by causing huge selloffs they make no sense in anything or double or trip -- you're going to see stocks of good companies pull back from their highs for reasons that have nothing whatsoever to do with the strength of their underlying businesses. those are the buys. but if the fundamental picture changes, if whatever made that stock attractive as it climbed its way up the new high list goes away, then the stock's no longer a viable candidate. the story has to be intact or this method will not help you one bit. while it isn't a hard and fast rule, i tend to like stocks that have pulled back between 5% and 8% from the high. write that down, between 5% and 8% from the high when the new high list is my sweet spot. optimal level of a pullback. less than that it might be too old. less than that something may indeed be wrong with the stock. here's the bottom line. that's the first method of 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 for the show 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 got a question for you. i'm 19 years old, and i have a few thousand dollars. and my question to you is, how could 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 that you're interested and this is the right age to do it. you've got your whole life. if you pick up something a little dicey and it goes down that's okay. i would encourage you to try to find the companies that are growth stocks that i highlight you're going to constantly hear me say growth stock, growth stock, growth stock. listen up. write it down. pull the trigger if you like it. mike from new york.

michael. >> caller: hi, jim. i enjoy the show. 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 goes down by the amount of the dividend and then you have to pay taxes on the dividend. isn't comparing dividend-paying stocks to -- not an apples to apples comparison because of rate of volatility of stock prices and the greater risk of losing your principal of the stock as compared to the ten-year? >> all right. let's get empirical. what stocks have outperformed for the last decade for last 20, 30 years? stocks that pay good dividends. that's reinvested dividends. they've greatly outperformed stocks that don't. i am getting this from jeremy siegel's work "stocks for the long run." go read his book and you'll know exactly why. 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. >> don't miss a second of "mad

money." follow at jim cramer @twitter. send him an e-mail at madmoney.cnbc.com or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com.

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>> they say money never sleeps. welcome to tonight's methods of madness. truly timeless investing wisdom for the ages. think of me as penn & teller i'm going to pull back the curtain and knows what stocks to sell, sell, sell. no magic, no hidden talent, just a bunch of disciplines, disciplines that i know can make you some "mad money" if you mention them. you don't have to be a genius. you don't have to be all that smart. just need to know what you're doing and put in some homework.

that's where cramer, the sad but wise clown comes in, maybe less of like the fool from "king lear." enough of the bard or c.r. bard or anything like that. let's move on to more important things, how to find stocks that are great buys. earlier i was talking about picking off stocks back from the new high list because you get an entry point in a stock that's a proven winner. you don't necessarily want to buy names right off the new high list because you're paying too much for them. you can usually get a better deal if you're patient and wait for some weakness. europe, very few occasions when buying a stock right off the new high list is at all justified. but sometimes a stock is so sizzling, so hot that you just got to buy, buy, buy whenever you can as soon as you can because they're not going lower any time soon. you won't find these often. they're very rare.

but when you find them you got to remember not to buy all at once. if you want it, buy 100 shares of stock, listen to me. you think it's got so much mojo you won't get a pullback from the high? worst thing that happens it goes higher you don't get to buy more, find another stock. believe me, there's always another stock to find. always another train coming to the station. i've got one exception where i'm okay to buy a stock that's actually 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. in my experience it's rarer still that 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 buying high but the individuals. who knows better than the people running it, right? normally insider buying ranges from meaningless to a small but on its own insufficient reason to buy a stock. a lot of times you'll catch insiders buying their stock because they want to give the impression of confidence, to gain an illusion that they're doing better than they really are. insiders aren't stupid.

they know if they're seen buying their own stocks, they know they're going to get someone to smile on them. they play the system. that's fair. we ignore most insider buying because it could be sketchy. that said when you get truly colossal insider buying 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 -- our stock has been inflago. we're going to buy it hand over fist. we're going to buy at what you think is the high. arrogant? sure. but bankable. corporate insiders aren't fools. with notable exceptions. if their stock's on the 52-week high list let's assume they probably know what they're

doing. not everybody deserves a benefit of the doubt. after the market meltdown in 2008 i know a lot of people think all ceos are frauds. crooks, liars, especially those of you that got burned by the lehman brothers. but that's the wrong lesson to draw from the crash. healthy skepticism is one thing. if you're going to own stocks you need to be willing to extend some measure of trust to the people who run the companies that you own shares of. that's part of life. you got to have some trust in these companies. now getting their stock to a 52-week high and then buying a bunch of shares is pretty darn good reason to give the ceo the benefit of the doubt. these guys are not going to buy at the high unless they have some unshakable conviction about 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. for us buying at the high is reckless and lazy. most investors are smart enough to wait for pullback before

pulling the trigger. insiders buying at the high means they don't think there'll be a pullback. sure, i want to wait for a pullback after they bought. that's the best of both possible worlds. it doesn't happen all that often. here's the bottom line, one more method of cramer's madness, when you see a stock running at 52-week high, buy, buy, buy, you might want to be buying, too. after the bank i'll try to make you even more money. >> taking control of your financial destiny is smart but why would you go it alone? >> something that has a much larger bearing on you and th stock market as a whole. >> let cramer be your guide, your sounding board. >> caller: i'm having a hard time with my favorite stock. >> i know you can beat these professionals. >> and your coach on the road to financial independence. "mad money" weeknights on cnbc.

♪ no, they can't read in my poker face ♪ >> 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 my dirty linoleum floor. i'm in a great mood, a manic mood even, which is me at my best. i am pretty darn productive and prescient when i'm in high gear, revealing many of my secrets with methods to my madness.

pull out your pencil and some paper. i haven't used that line in awhile. and 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. if not to be like me, because, okay, i got some emotional issues. frankly, you probably would prefer not to emulate. but that is off track. so far i've given away two of my precious secrets. they use for my charitable trust where unlike lady gaga i play with an open hand not a poker face, allowing subscribers to see all my trades before i make them. lady gaga is better than pink, though, although i never mind raising a glass except when i'm stock picking. i look for stocks that have pulled back from the new high list. that's not a reason to buy in and of itself, and i like to buy stocks that are around the new high list and yet have substantial insider buying because it says the people running the company really believe their stock still has legs. and if they believe, there's -- 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 still got to do the homework. you still got to check the fundamentals, check the websites to make sure you like the story behind the company before you dive in and buy. 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. they're signals that a stock might be worth owning to go through the incredibly boring process of read iing through the transfers, sometimes 30 or 40 pages and the quarterly filings. there are thousands of stocks out there and any method we could use to winnow, narrow down ones that might be attractive, that's a method worth having. we've talked about insider buying at the high. while i don't usually use insider buying 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 sort -- >> sell, sell, sell. >> -- position meaning a lot of bears out there have borrowed shares, sold those shares and are now 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 between the price they sold it first 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. what do we try to do, buy low and then sell high? successful shorts just turn that around. they try to sell stocks they think are going to go lower and then they buy them back and they 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 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 because when you're short, let's face it, the 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 really a lid to that? no. the other important note about short sellers is that if there's a lot of 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 on their positions, the shorts have to buy. that's called covering. in other words, buying isn't just -- when you're buying a short back, that's called covering a short. when a lot of shorts cover at the same time in a panic and that happens quite a bit, the stocks 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. remember, 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

a 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 short saying, hey, come on, you can keep shorting our stock but we think it goes no lower. right here and no lower. this is an explosive combination. one that often leads to a short squeeze that sends the stock much higher. shorts are smart. they tend to be smarter than regular long-side buyer. but they usually don't know more about a business than the insiders who run it. if a lot of people are shorting a stock and management is buying it in sizeable amounts, not just in hundreds of shares worth, then you should start doing some homework. it's a great starting point, and usually you're going to want to side with management, believe me. then you can ride it high and higher true jackie wilson style. as the shorts panic and push stocks up big in desperation to buy. maybe they want to ring the

register all at once. similarly, when a company with a heavily shorted stock announces a gigunda buyback, that's another line in the sand situation where management is contradicting the shorts. companies often repurchase their own shares. some of them turn out to be wastes of money. i teach you how to identify these bogus buy-backs in my charitable trust bulletins. a substantial new buy-back that is active in the face of the shorts is often a good reason to take a closer look at stock. you don't find out it's active until the end of the quarter. it's one of the reasons why i like to read the quarterly reports. this tells you how much they've bought back. here's a note of caution. got to be very careful when dealing with a company that's 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 s.e.c. both under the democrats or republicans that looks the other way when shorts raid stocks with bogus stories about accounting issues and management blunders. that's called fomenting a decline. it's not allowed but gets done, anyway. plus, it's pretty easy to drive stocks down as stock owners no longer have the benefits of rules that slowed short selling and make it harder to create bear raids. waiting for an uptick, something from the 30s. that was like waiting for a higher price before they could short stock. boy, that was a good rule. somehow the government got talked into abolishing it. in order to make trading quicker. of course, it just made things more fair for the shorts. a lot of good that did us. it is a leading 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, something that happened during the great depression. but the government now in all of its wisdom seems to think that panics are no longer possible. actually of course we know they're more prevalent than ever. so we got to be more careful

than ever not to succumb to panic that's orchestrated by short sellers who need prices to go lower. it's easier to panic people in a financial rather 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 those 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. when you're dealing with a heavily shorted stock that's in one of those etfs like the financials, we've learned you got to tread carefully. you can still find great shorts on stocks where they've overreached and buying. but before going in, i 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 offered from stocks that pay good, solid dividends! short sellers have to borrow stocks to short. that means they have to pay the dividends to the real owners. the borrower pays that dividend. that's a terrific deterrent 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, a big boo-yah from clarksville, georgia. >> man, i'm 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. >> right. >> caller: but is there reasons

that are not so obvious here in the u.s. or abroad? and does this have any effect on stocks? >> no, not really. when i was -- a couple of years ago at the street.com, i'll just give you this example, i'm a big shareholder and founded the company. similar tscm and ceo wanted to do a little facelift so he changed the symbol to tst. i picked the symbol. it was a change of face, that happens a lot. companies want to change their names, it's really the fundamentals that matter. rich in new york. please, rich. >> caller: hi, jim. for a beginning investor, new to the stock market, would you advise shorting stock and could you explain how one would make money trading in that manner? >> no, i do not advise shorting stock because losses from shorting can be infinite. i would prefer you to buy puts, and that way you protect your upside, so-called, meaning you protect your downside actually. it's a mirror image.

go to "getting back to even." i describe 100 pages about how it's better to buy puts than it is to short stock outright. on the very handy new high list, insider buying is a key. particularly when there is a heavy short position. that can be a combustible situation that can explode to the upside. stay with cramer. ♪ dirty little freaks >> sitting on the sidelines because of all the uncertainty in the market? >> thanks for turning my portfolio from mean to green. >> that's what i want to hear. >> with over 25 years of experience in bull and bear markets, let coach cramer show you how to play to win. >> thank you to you and your staff for keeping us in the game. >> "mad money" weeknights on cnbc.

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spectacular moves, winning strategies. jim cramer does it all the time on "mad money." watch jim on cnbc at 11:00 p.m. eastern. and during the olympics you can also catch jim at 6:00 p.m. eastern on cnbc world. capitalize on it. welcome back to my method to the madness episode of the craziest. most enlightening, perhaps entertaining show even though i

am an egomaniac crazy man. we're talking about the little tricks i use to find you opportunities to pick stocks, to know when to sell. all the methods that made me a pretty darn good money manager and helps me put together the show every night. trying to enlighten you about what's behind the scenes to make the most money. today we're transcending the usual model. i want to teach you how to do what i do. i want to teach you about a way to trade them now. we were doing some investing now we're doing trading. this is a discipline that's incredibly useful especially in volatile crazy markets. and it's called -- this is the thing i get the most about at g jim cramer on twitter. it's called trading around a core position. another rap on me i know more about trading, i'm all short term. hey, that's entirely untrue. this show is mostly about long-term investing. come on, think about it. get dividends? you can't do that if you short term. however, to put aside a little humility of what i have left, 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.

i'm not allowed to short sell or use options. and those were two weapons that i advocate that you use when you think it's right. but be careful, these are not for beginners, and more important, if you want to be a good investor, it pays to put trading disciplines into practice. that way you can buy more shares of the stocks you like at better prices. trading is about profiting from short-term fluctuations in prices. sometimes these moves are caused by a catalyst or topsy-turvy market. that's when i really want to take advantage of it. knowing how to trade makes you a better investor. trading a core position is one of the basic and useful disciplines out there. like markets we've had in 2011. remember when we were subject to the gigantic swoons, even intraday swoons? i want you to profit from them when they come back. what's 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 got an opinion about, one where you have a bias, a directional bias. you think it will ultimately be headed higher if you are patient.

looking for one that gets tossed around but ultimately think will be headed higher if you are patient. we know you're getting shot at. we're going to take advantage of it to buy. if you were just investing you'd set a position in the stock. buying at increments. remember levels like i talk about. because we all know that buying all at once is the height of arrogance. let's use amazon.com as an example right now because over the longer term, i like it. over the short term it's rocky. let's say you want to own 300 shares of amazon. the best way to set up that position is buy 100 shares three times over a period of weeks or even months. that would be your core position as an investor. but let's say you want to trade. i know many of you want to but you feel discouraged because you remember how all the amateur day traders got blown out when the tech bubble burst. the key word 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. so let's come back to our core position. we own 300 shares of amazon. let's say it's trading at 100 bucks a share for the purpose of the show. i know it's nowhere near that. every time the stock jumps 3 points, 3% you sell 50 shares. once amazon reaches 109 you own 150 shares. then you wait until something happens to knock 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 than we're in a world where stocks can get crushed by all kinds of factors that have nothing whatsoever to selling with the merchandise, selling the books, selling the entertainment stuff, selling on the fundamentals. as a 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. so if amazon comes back to 103, you buy back 50 shares, then another 50 at 100 and so on. this might appear to be small potatoes. up 3%, sell 50 shares, down 3% buy 50 shares.

but over time these profits do add up, and i've soon it happen. that's what trading around a core position is all about. a lot of people think that trading is incredibly exciting. and it can be. if you're good at trading around a core position, i want you to be bored. all you're doing is watching the stock move and trimming or adding to your position accordingly. contra the image of trading as something that's reckless and irresponsible, trading around a core position is really the height of prudent portfolio adjustment and discipline. we do have some rules to follow. in my example we started with the core position of 300 shares of $100 stock, amazon. if i were trading around that as my core position, i don't know, i would want to own more than 300 shares or less than 100. trading around a position 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 to avoid putting yourself in a position where you have too much on the table in case the stock gets swatted down or too little to take advantage of any up side 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, ultimate level, i recommend on using the two chapters how to use options in getting back to even at the strategies i used at my old hedge fund. it's the only place i've talked about them. material's too sophisticated for "mad money." if you're willing to put in some extra homework and have the time and inclination, it's more -- it's really worth the effort. the stock i used to demonstrate in google is one i would never do in common stock if i could avoid it and would always do with stock replacement. a cheaper and less expensive way to create a google at a more reasonably amount dollar price than it currently sells it. i don't want to talk about options on the show. i think they're too risky for the vast majority of people out there. bottom line. you know the basics how to trade around a core position. yet another method to get lots of small gains that add up over time. one that allows you to generate lots of small gains that add up i promise over time. stick with cramer. >> jim cramer. looking out for you.

>> thank you, sir, for helping us average joes on the road to financial freedom. >> thanks for all you do for us small investors. >> thank you for helping all us home gamers. >> i want to thank you for sharing your knowledge with the every man. >> i love doing it for you. and any time anyone says it, i like to say thank you. it's great. >> anywhere, anytime, any place. answering the call of cramerica. weeknights 6:00 and 11:00 eastern on cnbc.

i 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 important, undervalued tool in your whole home arsenal. how do you know when to sell a hot stock? how do you get out before the party ends so that you're not one of the last people around who gets stuck up cleaning up the mess? this is a question that needs to be answered because there's a lot of of money to be made owning hot stocks with lots of momentum. when you play the momentum game you got to know when it's time to leave the table. there are always naysayers. and eventually the naysayers are almost always proven right as sooner or later virtually all steaming hot stocks implode. this process happened in netflix

and research in motion. one time they were among my favorites. i made a lot of money with them. for you i hope. but it usually happens later rather than sooner. and all the negative talking heads that kept you out of the stock with a reckless neness disguised as prudence cost you an opportunity to make money. people shy away from the stocks because they don't know where we're going to top out. it's understandable, and i'd be afraid to buy them too if i didn't have a discipline that let me know when to get out. lucky for you i do have one and you're about to learn it. first, when i'm talking about hot stocks, i really mean hot, speculative stocks, not blue chipsment stocks like companies with low market capitalization. low research coverage from wall street. they can catch fire and stay on fire, even for months, for years even. the key to figuring out when interest has peaked and it's time to sell is by watching the analysts' coverage of all things. you got to use your own judgment here. but a good rule of thumb is that

once one of these hot stocks has at least a half dozen analysts covering it, the run is going to begin to peter out because it will be too big and too well-known. it won't be the hot speculative stock. it's rare it doesn't behave like this. you can find out how many guys are on the stock on the internet. this formula's worked for me as long as i can remember. 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 interest ed in buying them have already bought. they come out of nowhere attracting more attention. more and more buyers and eventually everyone that wants a piece of the stock has a piece. when that happens, sorry, guys, run's over, then it's time to go home. one example is a company formerly known at hansen natural, which was the hottest stock in 2004. the hottest stock in 2005. the hottest stock for the first half of 2006. i mean number one. hansen went from $18 and change in the beginning of 2005 to $200 when it peaked in july of 2006.

the whole way up there? people telling you that hansen, a beverage company that really got its momentum from its monster energy drink, so much momentum with its 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, but it took years for the momentum to run out. i called the top at hansen back then because i knew how stocks work. it peaked in july of 2006. this was in part due to the fact that the company did a 5-for-1 split. even though splits aren't supposed to do anything, this encouraged people who had been in hansen for a long time to take something off the table. but there was another reason i believed it would peak. that was that it picked up its fourth analyst on may 10th of 2006. that's when goldman started covering the stock. you had two months to sell between goldman's initiation and the stock peak. there was still some upside left after goldman started its coverage, but prudence dictated we sell once the stock had four analysts. better to clear out early with your winnings than wait for them to fade away. and hansen as with pretty much all other hot stocks

started to cool off once it hit that critical mass of an rift lift coverage. incredibly once hansen fell off the radar screen and people stopped talking about it, the stock recharged and powered higher again. it was an amazing renaissance and a testament that when analysts stop covering a company in a desultory -- the companies earnings start speculating again as with hansen in 2011, a story lazarus-type move can happen especially when it turns out that the fad drink quickened the competition from major soda brands that everyone said was going to wipe out monster but didn't materialize. after its dramatic fall from grace, hansen took out the high in 2011 they renamed the company monster the drink that became so important to the story. bottom line. small speculative steaming hot momentum stocks are often worth owning.

but you must know when to sell. that moment comes when you see too many analysts jumping on the bandwagon. use four is a good rule of thumb, six when you definitely have to sell sell sell. start trimming the position. stay with cramer. >> where do the world's most powerful ceos turn to be heard? >> we truly believe we should be great citizens of the community. >> listen to consumer and be responsive to the consumer. >> we are really fighting for the soul of american manufacturing. >> they turn to cramer. "mad money" at 6:00 and 11:00 eastern only on cnbc.

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 that a peg of 2 is too high. what about a peg of 1.7, 1.8 or 1.9? i approach your teaching, oh, wise one. it's a rule of thumb. i think a 2 is a red flag. for stocks that are 2.1 people want to own but i don't like it because i've had too many mistakes made over 2. it's just 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 -- i like to ring it immediately. immediately because i am not an arbiterage, and you shouldn't, either, there's always a chance you'll give back the gain. what we do is we look for the next big win. let's take some tweets. this one is from @kendoggy. i'm just starting a portfolio. is it better to buy one position at a time or small amounts of all five at once? absolutely the latter because

one of the things i've learned when you're just starting, i mean, it just happens to be the luck of the draw here. almost everyone i know just started immediately 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. okay. here's -- this one's from @motorrat. how do you determine target prices for your action alerts.com portfolio? that's my charitable trust. stefanie lincoln and i talk constantly about it. what steph likes to do and i like to do is try to figure out where we think the stock would be really too expensive, either on peg ratio or price to earnings mobile base is that we're afraid we're going to start giving things back. if the fundamentals improve while we own a stock, then we can revise our price target up. ee 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. jc, you were tweeting at 4:30 a.m. when do you sleep or better

question do you sleep? i have very strange sleeping habits. i admit to that. i get very little sleep. i usually try to get four hours' sleep on a given night. i would like to get more sleep. many ask me, what are you doing up? the answer is, why can't i sleep? that's why i'm up. stick with cramer.

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