"street signs" at 2:00 eastern time. there you go. mandy is doing options action tomorrow at 5:00 p.m. thanks for joining us here on i'm jim cramer. welcome to my world. >> you need to get in the game. >> firms are going to 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 to entertain, educate, coach. call me at 1-800-743-cnbc. investing ain't easy, but it can be easier and less daunting than you probably think with a little instruction. the whole business of managing your money is made more confusing and difficult because of all the arcane terminology.

i call it the authentic wall street gibberish. if you're not clued in, it can sound like the pros are speaking a different language. you've got to remember there is an industry of people who want you happily convinced that investing is too hard, head-scratching. that ordinary people like you and me can't do it and the safe thing is to give your money to a pro. now maybe that is the right thing to do for some of you, particularly the time constrained. if you put in one hour of homework per week per stock at least i know you can beat the professionals. the fact is that many of the pros are after your fees. more interested in taking your money than making you money. that often means keeping you ignorant about the market so you will stay in your stock chains. i like to compare them to the wizard of oz. they don't want you peeking at the man behind the curtain.

they don't want you to understand. if you did, then you might very well take control of your own finances. pick your own stocks and not pay someone else potentially sbosh tant fees to do things that you are perfectly capable of doing yourself. that's where i come in. tonight i i'm explaining everything. while authentic wall street gibberish sounds complex it's not rocket science, not brain surgery. you don't need to go to business school or work in an investment bank to understand it. you can comprehend all the mystical sounding vocabulary we throw around as long as you have a translator, a coach like me who can explain what the darn words mean. think of me asdefector, someone who used to work for the other team who's now playing for you, teaching you to navigate your way through the mine field of the stock market every night on "mad money." forget "the da vinci code," the

enigma. to be a great investor you have to break the wall street code. i'm here to help you crack it. that's why tonight i'm giving you my wall street gibberish to plain english dictionary. consider this a grossry of the most important terms you absolutely must understand if you're going to actively manage your own portfolio, words and concepts that many people in the financial industry don't want you to get your heads around. since then you might feel empowered enough to pull your money out of the mutual funds and stop handing over your fees and commissions. even if you're a pro, you may not know enough. i want to take advantage of my 30 plus years of investing experience and give you an edge. let's start with a couple extremely important ideas that go hand in hand. these are the things that baffled me. i had them explained after listening to ten years with the

late great lou rukheiser. cyclical and secular. you hear them all the time but no one except me bothers to explain what they mean even though they are crucial when it comes to picking the right stocks. cyclical has nothing to do with the spin cycle or wagner's ring cycle. some good music there. secular isn't about the separation of church and state or public versus parochial schools. we say a company is cyclical if it needs a strong economy in order to have earnings grow. it depends on the business cycle. who is? u.s. steel. newcor. they fall in this category. ingersol rand, dupont, ppg. that's the pittsburgh plate glass. these companies, even though they are well run, all of them are hostages to the economy. when it heats up, oh, man,

there's no stopping them. do you know what they do? [ ka-ching ] they earn a ton of money and we'll pay more for the earnings. when it slows down -- [ sell, sell, sell ] -- when we shift into recession mode they earn less and investors pay less for the shares. a secular growth company is one where the earnings keep coming regardless of the economy's health. think of eating, sleep, use for medication, brush your teeth with. you have procter and colgate, general mills or kellogg, drugs like pfizer or merck. you want to buy them when the economy slows down and investors flock to stocks that can generate safe, consistent earnings. you don't stop eating food or brushing your teeth because of a recession. but then again we know the stocks don't outperform the others, don't do better when the economy is in full speed motion. why is this secular versus

cyclical distinction so important? why is it the first piece of wall street jargon e i'm translating for you? it helps you understand how much companies will earn. it matters to the big institutional money managers who have so much money to throw around they are buying and selling and it drives stocks up and down. that's the anatomy of the game. the single biggest determinant of where prices go in the short term. the whole hedge fund play book is about when to buy and when to sell cyclical stocks and when to buy or sell secular growth stocks based on how economies in this country or around the world are doing. this is what drives the decision-making process. remember, about 50% of any individual stock comes from the sector, the performance. 50% of it. which is a fan su word for a segment of the economy the stock falls into like tech, energy, machinery, health care, finance. when it comes to sectors much of the moves are driven by whether they are in secular or cyclical.

you don't want to own much in the way of cyclicals when the economy is slowing, breaking. those stocks will be crushed. they always do. there is nothing you can do about it. it's etched in stone. by the same token when business heats up and cyclicals are doing well, nobody wants the boring consistent recession-proof stocks. soap stocks, smoke stocks. you will not make money. you could lose it even though you think they are a consistent grower. this could help you understand a piece of investing technology, what's known as a rotation. that's when money flows out of one of the cyclical groups into a secular group. that's what happens. we call them rotations. has nothing to do with volleyball. this is completely antithetical to what you have been told about the way to invest. if you're going to pick your own stocks, something the conventional wisdom regards as the height of id i candiocy andn si you should find high quality

companies and stick with them through thick and thin. that's the conventional wisdom. if you hold out long enough maybe you will make some money. this is the brain dead philosophy of buy and hold that i spend so much time trying to debunk. a strategy that's not worked for 10, 20 years. they never think it goes out of style. it's a zombie ideology that refuses to die even though it's been discredited by the actual empirical performance of the market. as i explain in the first three chapters of "getting back to even" to get you to deal with the tough market we are in. once you recognize how hourful the secular versus cyclical distinction is you can see why buy and hold is silly. if you're going to own stocks through thick and thin you need to be prepared to lose money in cyclicals when they are out of favor. most people can't do it. you need to trade water or decline a little in the secular stocks while cyclicals are roaring. why take the pain when you can avoid it?

most people can't take the pain so they sell at the bottom. doesn't mean you should play the rotation game and only own the group in style. no. remember the need for diversification. another important piece of investing vocabulary means not making sure you have all your eggs in one sector basket. to me you are diversified with no more than 20% of your portfolio in a single sector. for example a sector rotation takes down cyclical stocks because you have secular growth names that will hold up much better or make you money. here's the bottom line. yes, investing isn't easy. but it doesn't have to be fist identifying. you just need to learn the language. know the difference between cyclical and secular. recognize the secular rotation when you see one and always stay diversified. jason in new york. jason. >> hi, jim. this is me, jason, from harlem. >> good to have you on the show. >> thanks. i have a question. when investing in international

stocks or etfs do you evaluate them like you would u.s. companies? >> yes. provided -- and this is a great question, jason. provided they sell what's known as -- provided they have adrs. you need american depository receipts. why? i have to compare their s.e.c. filings with ours. if they don't have them i absolutely don't even think about them. they are too hard, too opaque. if they have adrs, i will make the compares and we'll be fine. steve in california, steve. >> caller: hey, jim. boo-yah california in los angeles to uh you. >> great. my old city, my old hometown. how can i help? >> caller: first i want to thank you for getting me back in the game. i have been on the sidelines for years. i'm reading your new book and i'm back in. >> that's what i want. you've got to get the dividends going. you can beat the stocks that

don't have the dividends and you can beat cash. >> caller: i'm looking at stocks with good yields for my i.r.a. >> very smart. >> caller: i have been reading the chapter on dividends. i want to figure out the difference between an accidental high yield achiever or something that's too good to be true. i have been doing the homework and i have a couple of stocks that look like they should be bought but i'm nervous. >> you have to go back to cash flow. you can want measure a stock based on earnings or you would have sold att a long time ago. it doesn't look like it is earning the dividend. you would have sold the master limited partnerships i like. look at the cash flow, not earnings. the earnings respect telling the truth. go through the chapter on cash flow and you will understand it. it will take me a half hour. that's a hard chapter, but that's what uh yyou use. bill in new york. bill. >> caller: boo-yah, jim. >> boo-yah, bill. >> caller: some time ago you mentioned the market was going

up and that foreign money was coming into the market. how do you know where the money is coming from be it europe, asia or the sidelines, how do you measure it and its significance? >> federal reserve releases figures about whether money is coming in from foreigners or not. that's how you measure it. what i like to look at is when the currency gets strong you tend to see money coming from overseas. remember, the foreigners want double wham my performance. they want a stock to go up and they want the currency up. when you see the dollar go up and the stock market stabilize that brings in new money but the market has to stabilize or the money doesn't come in. they won't make a bet on currency if it looks like the stocks will go down. mastering the language of the market is key to mastering your domain. don't let wall street gibberish get the best of you. always stay diversified. stay with cramer, too. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter.

have a question? tweet cramer, #madtweets. send jim an e-mail to madmoney@cnbc.com or give us a call at 1-800-743-cnbc. miss something? head to madmoney.cnbc.com. during mattress price wars,

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tonight uh i'm helping you translate the cryptic and occasionally unfathomable terminologile that makes owning stocks difficult. i'm giving you the phrase book to navigate through the world of investing. you know what? i i call it the cramerica dictionary but it's a michelin guide to fine stock dining. consider it the televised encyclopedia cramerica for tearing back the cloak of mystery that can make managing your money seem like an impossible task when it really is -- [ house of pleasure ] picking stocks shouldn't be as bad as conducting heart surgery on yous. you don't have to be stephen hawking or einstein to figure this out. but with the pros i bet even

einstein would have trouble figuring out what they are saying. i explained the difference between cyclical companies, smokestack business that is need a healthy economy versus secular growth companies and there we are thinking about corn flakes and toothpaste that expand the same pace regardless of if we are in an upturn or a downturn. i told you how to sell cyclicals and buy secular growth stocks when the economy starts slowing down. then you have to do the reverse as it picks up steam. why do i tell you this? it's the play book the hedge funds use and they can often behave like hurt animals who buy and sell the same stocks at the same time we are stock with the play book. they have the big money, so we've got to learn it and i can teach it. the reason for that has to do with another piece of wall street gibberish lexicon that you absolutely must know if you're going to pick your own stocks. don't blank out on me. you hear it all day and you are

probably wondering what it means. the price to earnings multiple or the p.e. multiple or in total shorthand just the multiple. you will hear it. oh, the multiple is too cheap, expensive. they refer to the same thing and it is the way we compare. in fact, when you hear talking heads pontificate about a stock that's overvalued or undervalued do you know what they are talking about? they are talking about the multiple to earnings and whether it is too high or too low. when someone says pepsi is more expensive than coke, they don't mean coke is cheap because it's trading at 55 while pepsi is pricey trading at 65. that's a common mistake people make. the share price tells you nothing about a valuation vis-a-vis another stock. to make a true comparison, you have to step back. when you buy a stock you're actually paying for a small piece of a company's future

earnings stream. so to value a stock you have to look at where -- per share which you will often see as eps. earnings per share. that's what the multiple allows you to do. here is the basic algebra. out's not math. it's algebra. i believe that most people in

high school can do it. maybe middle school. middle school, we had it. the share price, p, equals the earnings per share e times the multiple m. e times the multiple, e times m produces what the share price is. that's how we figure out how stocks get a price. the multiple tells you how much investors are willing to pay. we don't care that coke stock is 55. we care that it sells for 15 times earnings per share. we care that pepsi sells at 14 times earnings we are share. that's how we compare. the multiple is the special sauce of valuation. the main ingredient -- growth. how much bigger the earnings will be next year than they were this year. by the way,hw earnings and the rapidly a business grows the bigger the future earnings will be. if a fast grower like chipotle, the mexican fast food place, sells for 24 times earnings it doesn't make it more expensive than pepsi at 14 times earnings. why? chipotle deserves a higher multiple because it has a 24% growth rate versus 8% for pepsi. we are comparing growth rates using the multiple analysis. this is where it gets interesting. multiples aren't static. another confusing thing for people. in different markets people pay more or less for the same amount of earnings. when they pay more, we call that multiple expansion.

we pay more when the multiple goes higher. when they pay less it's multiple contraction. two more terms that sound more complicated than they are. if you are going to own stocks you have to understand them. that's what hedge funds are trying to gain with a sector rotation. of course, the earnings aren't static either. when you buy a stock you are either betting that the e, the earnings or the m part of the equation is headed higher. what goes into the earnings? how do you make sure they are increasing and aren't about to collapse? here's more vocabulary. when you hear people talking about p t both line, profits or income, they mean the same thing -- earnings. we call it the bottom line because the number is the bottom fig on an income statement. to figure out how quickly earnings grow in the future you have to look for clues when it reports quarterly results. that's why i tell you to listen to conference calls. if you want to do it yourself, you have to do the homework.

that means to look at the top line. another unnecessary piece of gib rich. i'm translating everything tonight. it's interchangeable with revenues which is the same as sales. you hear the words. they should say only go to sales but they mean the same thing. you want to see strong revenue growth, strong sales growth which tells you there is demand for the product. this is the key to the ability of most businesses to grow earnings long term. makes sense, right? that's why it is important for younger smaller companies to have fast growing revenues. investors will pay for accelerating revenue growth. that's arg. that means sales are growing at a higher rate than the previous years. with a more mature company it should turn revenues into profits by cutting costs and returning the profits to shareholders in the form of a dividend or potentially a buyback, but we think dividends are more attractive as they put money in your pocket and the other helps only when you sell a stock.

beyond the top and bottom line consider the gross margin which is in no way disgusting and not the least bit marginal. it tells you what percentage of every dollar of sales is profit. it's super important to figure out how much money a company can make. to figure the gross margins you have to consider the competition, cost of production, the cost of doing business in general. businesses with cut throat competition like supermarkets or airlines have terrible margins while microsoft has margins that are down right obese. in some ministries the margins can vary widely. in oil the margins swing up and down with the price of crude. you need to know the vocabulary before you look at a stock. you need to look at the growth rate, the top line, the bottom line and the gross margins. that's how we do it. you can do it, too. stay with cramer.

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tonight i'm going into penn & teller mode, demystifying the technical sounding wall street gibberish that you hear all the time. but might never actually understand. i'm translating the most overused under explained terms in the investing business into language you can comprehend which reminds me of in football the dime package, nickel package. you have to know what that is if you're going to coach. tonight this is your wall street to english dictionary. it's a televisedglossary to help navigate through tough markets. much more important than the nickel and dime package and more important than the words people think are too hard. it isn't. i will explain it.

all the terminology sounds difficult because the pros want it to sound difficult. they want you terrified. they want you feeling ignorant, at a complete loss when it comes to managing your own money. my mission is the opposite. i'm hear to enlighten you, to teach. i know you can do better for yourself than the professionals who many just want your fees and commissions. i'm from the business, all right? it's not enough for me to tell you which stocks i like. that's what i did when i started. that doesn't work. i need you to understand. you can't own them without understanding. knowing what you own is a must. it's one of my cardinal rules on the show. if you don't have a good grasp of how your holdings make money you won't know what to do when stocks turn against you. you don't know when to hold them or when to fold them many the immortal words of stock sage

kenny rogers. say you're holding. what makes you want to fold? in this case, sell the stock. along with what would make you think the story is still intact and maybe at the lower price you should be buying, not selling. now, the fact is the profusion of arcane terminology on wall street makes it harder to know what you own. let's continue with another piece of verbiage hardly ever explained to uh you though it's used constantly. it's called risk-reward. the analysis defines the short-term stock picking that's all the professionals do. what's it mean? let's break it down into component parts. assessing risk is about figuring out the down side. how much you potentially tend to lose in a given stock, how far it can fall in the near term. assessing the reward on the other hand, is all about figure out how the potential upside could be, how many points of gain the stock could give you. many people analyze a stock and

they only focus on the potential upside. because of this, that's a grave mistake. in fact, it's more important for you to understand the risk side of the risk reward. because the pain from the big loss hurts a lot more than the pleasure from an equivalent-sized gain. take it from me. it's something i -- let me translate the pain of my losses to you. how do we figure out the risk and reward? these are determined by two different cohorts of investors. the reward, the upside is defined by how much growth oriented money managers could be willing to pay for a stock -- well, let's say they create at the top. the risk, the downside is created by what value oriented money managers would be willing to pay on the way down. they create the bottom. growth guys, top. value guys, bottom. figure out the risk. you need to consider where the value guys will buy on the way down. to solve for the reward you have to think about where the bullish growth guys start their

[ sell, sell, sell ] when asked i boil it down to quick and dirty like five up, three down. how do i get there? how can you know where growth money managers start selling? and where the value guys start -- [ buy, buy, buy ] to do it you need insight into how they think. i have been a value guy and a growth guy. i have changed my stripes oy accordingly. it requires translating another piece of lingo called growth at a reasonable price, aka, garp. when we talk about growth at a reasonable price it's not a subjective criteria. it's a method of analyzing stocks i read about first from peter lynch, the great money manager at fidelity. it's comparing a stock's growth rate to the price to earnings multiple. growth rate to p.e. multiple. if you want to figure out the maximum the growth guys would pay before they start selling

you need to look at the world according to garp. this is a quick and dirty rule of thumb that's hardly ever let me down. some exceptions, but that's okay. this is a rule that can help us figure out when a stock is overvalued or undervalued based on what the money managers will pay. if a stock has a price to earnings multiple lower than the growth rate to p.e., the stock is probably considered cheap. any stock that's selling at a multiple which is twice the size of the growth rate or greater is probably too expensive. when i see it, you call. i see twice the growth rate. i don't even think. i'm going to miss some winners, but it's okay f. a stock is trading 20 times earnings and has a growth rate of 10% i don't think it will go much higher. it's reached the two times growth ceiling. here's another piece of wall street gibberish that can simplify the process. the p.e.g. ratio. what's that?

that's the price to earnings to growth rate or the stock's multiple divided by long-term growth rate. a p.e.g. of one or less is cheap. two or higher is expensive. a high octane super fast grower like google in its heyday from 2004 to 2007 could sell for 30 times earnings and still be cheap. that's right. it had a 30% plus long-term growth rate. that's a p.e.g. rate of just one. right at the cheap end of the spectrum. the growth kept accelerating sending the stock to new highs. people say why do you think it could keep going up? i do p.e.g. rate analysis. where do i come up with the numbers? observation. the value investors who will be attracted to stocks selling at p.e.g. rates of one or less create the floor. you should be able to find a buyer if the stock's multiple is at or below the growth rate.

the growth investors hardly ever pay more than twice the growth rate, the p.e.g. of two. that means there is almost no way the stock goes higher. to stick with the example of google with the mega growth mojo it would have become a sell if it traded up to 60 times earnin earnings, twice the growth rate. too high. like with my methods or anyone else's, this is a rough aprostate cancer sags. o -- aproclamation. it's useful. a lot of times the stock gets cheap based on earnings estimates because they need to be cut. that's what happened to the banks and brokers before the financial crisis. they looked cheap. or it looks cheap relative to the growth rate because the growth rate is slowing like the dell during the dot bomb collapse in 2000 to 2003. as the competitors copied the business model. the stock could trade well below the one times growth floor.

the p.e.g. could be sinking and the fact that it looked cheap wasn't a buy signal. it was a value trap. 2340r7 on the other hand, the best time to buy cyclicals is when the multiples look expensive because the earnings estimates are too low and need to be raised to catch up with reality. uh you need to know these things. they're not easy. i try to milwaukee ake it clear. you need to understand the risk-reward, the potential down side and the potential upside before you purchase anything by figuring out where the growth investors put in the ceiling and the value cohort creates the floor. "mad money" will be back.

managing your own money is a lot less daunting than it seems when you have a translator. someone like me who can help you decode the arcane and obscure terminology that the pros used to talk about stocks all the time. that's why i have been giving you my televised wall street

gibberish to english dictionary so you can see through the mystery, understand the essentials of investing without being buffaloed by the talk. so far i have been explaining the complicated sounding pieces of jargon that are essential to making money in the market. i say unfortunately because it is difficult and it's not an easy thing for me to translate. i have been doing it for 30 years but the difficulty goes in two directions. as there are many concepts that seem complicated there are plenty of terms that are more simple than they appear. i want you to take the notion of a trade versus investment. a lot of people would say they are interchangeable. trade investment. no difference. that could not be further from the truth. it is a reason why people don't make money in the market. trade and investment are distinct in the words of offspring you've got to keep them separated. isn't out splitting hairs, something not recommended for the folcally challenged like

myself? isn't it something that may send you searching for a dictionary? don't forget wiki cramer. a trade isn't the same as investment. if you treat one like the other, if you turn a trade into an investment you are breaking one of the most important commandments, the first commandment of tradingi g from real money. i will tell you what happens if you break the commandment. my prediction for your portfolio is pain. when we buy a stock as a trade you are buying for a specific catalyst, some event you think will drive the stock higher. maybe the company will report quarterly results and uh you think it will deliver better than expected numbers. i don't recommend it on the show. there is so much chaos and confusion. that can cause a stock to be clobbered. that's a catalyst. it could be news about an event you are predicting. if it is a pharma stock or

biotech there are potential catalysts when they release clinical trial data. you can get a view on those or when the fda decides whether to look at a given treatment. these are data points to send a stock soaring if they go your way. when you make a trade you know there is a moment to buy before the catalyst and a moment to sell. that's after the catalyst happens. sometimes your trades won't work out. most don't. the event you're waiting for won't happen or the data point is less positive than expected or the stock does nothing on the news. doesn't matter. either way when you buy a stock as a trade it has a limited shelf life. there is only a brief window where you want to own it. once the window passes, once the event happens, once the catalyst is done, you must sell, sell, sell. doesn't matter. hopefully you will will right and the catalyst will rack up a nice gain. if that happens, ring the register. lock in your profits before they

evapora evaporate. if it's wrong you still need to sell. you can't just say, oh, that didn't work. i'll go invest. when you buy milk you throw it away after the expiration date and trading is the same as milk. you can't just buy more and call it a longer-term vem. without the catalyst you have no reason to own it. you should never own anything without a reason. the market is too hard. i watched a parade of people lose money by turning trades into investment. they come up with alibis for staying in too long. the expiration date of a trade. they feel themselves into believing they are doing the rieg thing and more often than not get crushed. remember, without a catalyst you don't have a trade. if you find yourself in that position you better sell and cut your losses. now, an investment -- check the cramerican distribution their. investment is different. it's based on a long-term thesis.

the idea a stock has the potential to make serious money over an extended period of time. you are not banking on an event, a specific catalyst. you're expecting many good things to happen in the company's not too distant future. that's not an excuse to buy a stock and forget it. we don't do that stuff which is also known as buy and hold. investments can go wrong, too. i'm always telling you to do an hour of homework per week per stock to be sure. get as much research as you can. when a stock you like as an investment goes down in the short term it makes sense to buy more as long as the fundamentals are sound. you don't have to cut your losses. you like out. it got cheaper. don't ring the register after the first time the stock jumps in price. you are looking for larger gains over time as you invest. this is going to sound like uh did something good but it was a mistake. the mistake was with apple. my charitable trust bought the stock when it was 26.

that was before the u phone was a glimmer in steve jobs's eye and the ipad wasn't a distant dream. then i sold it after a quick five-point gain. i threw the thesis out the window for a profit. turned out to be tiny given the gains i would have had if i held it long term. the investment was meant to make more. i turned it into a trade. bottom line, not all wall street gibberish is complicated. some of it is simple like the distinction between a trade and investment. remember, they are not the same. it's a mistake to turn a trade based on a catalyst whether successful or unsuccessful into an investment. don't do it. expiration date. think milk. assad in arizona. >> caller: hey, jim. how you doing? >> not bad. how are you, sir? >> caller: good. i think your show is fabulous. i have a question. >> yeah. >> caller: i have $2,000 saved up. i have a teenager going to college in a few years. i'm looking for a long-term

investment. what should i look in a company for? >> well, when we make a long-term investment we are looking at the ability of a company to pay increasing dividends over time. that's why uh i recommend procter & gamble or 3m. they have been the best dividend boosters in the world. uh like federal reality. that's what we are looking for to save with. dividend plays where we reinvest the dividends. don't take the dividends and do something else. reinvest them and make your money. jim in georgia. >> a big down south boo-yah from atlanta. >> stuttering peach boo-yah back at you. >> caller: thank you. i'm a short-term trader more than investor. >> okay. >> caller: but my entry point often becomes the new resistance after a rise and a pull back. it's happened several times. at least gains but sml gains. can i use it to my advantage or get in earlier? >> well, i would say the

antidote is it sounds like you are putting all the money to work at one level. that's a mistake. you have a good idea. you believe in the idea. you buy a little bit and hope it comes down so that's your floor. here's what matters. the worst that happens with my philosophy is the stock shoots up big. you know what? that's a high quality problem when you have made only a little bit of money instead of losing money. don't do investing buying levels all at once. space them out. pyramid style. michael in idaho. >> caller: hey, jim. my question is based on your advice that we scale out of our investments. >> exactly right. >> caller: what i want to know is how and when -- we can't do that indefinitely. how and when do we get the money back into the market without acquiring too many positions? >> these are real portfolio questions. i ought to do a show about this question. i want you to take half off the table in stages. you have a $20 stock that gets to $30. you should be done with half of

it. you can let the rest run. own the gold. get the house's money and forget it. never forget. take the house's money and then you have the freedom to let it run further. that's how we know when we are done selling when what's left is the house's money. even the simplest sounding jargon can be misleading. remember cramer's first rule of trading from the book "real money" now in paperback. keep them separated. never turn a trade into an investment and vice versa. you will do better than everybody else. stay with cramer. why not take a day to explore your own backyard? with two times the points on travel, you may find yourself asking why not, a lot. chase sapphire preferred. there's more to enjoy.

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[ all ] i'm with scottrade. welcome back to the wall street gibberish to plain english translation guide edition of "mad money." this is the book in hard back. uh i prefer the tv version. all night i have been explaining overly arcane and esoteric investing concepts and financial jargon. i'm trying to help you become a better investor, make the process of managing your money seem less daunting. what else do you need to know? all right. here's one of the most dreaded and poorly understood terms in the business. ready?

the correction. what a euphemism. a correction is when after the market has been roaring it turns around and gets crushed. maybe a decline of as much as 10% is a correction making you feel the sky is falling and you never want to own stock again in your life. that's precisely the wrong reaction. it may feel horrible but stocks can and do come back from corrections. they bounce back from the big declines all the time, especially coming off a major run. think of it like this. when the market goes on a 56-game hitting streak a la joe dimaggio and doesn't get on base the next day it doesn't mean you will never make money again. it doesn't mean your money will be pulverized. i want you to build it in. i want you to expect corrections. they can happen to an individual stock, index, the market. even to bonds and you will likely never see them coming. you shouln't beat yourself up

for not anticipating it. sell-offs are a natural feature of the stock market landscape. we need to acknowledge that they will happen no matter what. so don't get so flustered or, worse, i never want to see -- because no one made a dime doing it -- panic. when they inevitably smack you or whip you in the face. finally, one last piece of i vesting vocabulary you must master. the idea of ke kpuexecution. this one's subjective. we mean management's ability to follow through with its plans. ones laid out in the board meeting and the annual report. when you own a stock there are risks associated with execution. messed up mergers, bad cost rolle controls. the number of ways a bad management team can screw up a company is infinite. that's one of the reasons i like companies with proven management

teams. they are much less likely to make these kinds of unforced errors. it's a big reason why it is so important for you to pay attention when i bring ceos on the show. nobody knows a company better than the people running it. since you can't get the ceos on the phone yourself you want to see what they say about the businesses first hand on "mad money." the notion is crucial when it comes to understanding why it is worth paying up for best of breed companies. almost always with proven executives. hard to find a best of breed in the first year of an executive's career. i don't like ceos in the first year. too dangerous. best of breed stocks are almost always more expensive than cheap competitors. people don't want the expensive ones but they're wrong. it's worth the price. a good management team is less likely to make mistakes, more lukely to turn them into opportunities. here's the bottom line. do not be afraid of corrections or intimidated by people who use

the word a sharp sell-off after a big rally has to be built in and expected. remember, it's hard to quantify execution is a crucial factor when it comes to picking stocks. you want companies with proven seasoned management teams that are less likely to drop the ball. "mad money" is back after the break.

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investing is confusing.

i have road rules. when you run out of cash you are in trouble. as a rule of thumb keep at least 5% of your money in cash. when the market comes down, nothing feels as good as having cash around. investing is tricky. i'm here to help. "mad money" at 6:00 and 11:00 on cnbc. >> announcer: next, gop luminaries preview the big speech on "the kudlow report." then, mitt romney makes it official with his acceptance speech. your money, your vote tonight. expression of power... xe control. [ engine revs ] during the golden opportunity sales event, get great values on some of our newest models. this is the pursuit of perfection. there's natural gas under my town. it's a game changer. ♪ it means cleaner, cheaper american-made energy. but we've got to be careful how we get it. design the wells to be safe. thousands of jobs. use the most advanced technology to protect our water. billions in the economy.

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