staying humble is important many other than greed, nothing has cost people more money than arrogance. if you own stocks, you have to recognize the fact that you will be strong, perhaps often. the past two years have tout you painfully, your portfolio will get hit with things you never saw coming, things you never imagined, things you never thought possible. at some point, something is going to go wrong and it will

hit you totally out of left field. or even worse, something bad will happen that could have easily been anticipated unless you took the appropriate precautions, and you will end up being run over by a train that you actually saw coming. >> all aboard! >> think of how often we've been clobbered by the mess in europe. every time things look less horrible across the atlantic, every time we begin to wonder, just maybe the worst has finally passed there, is some hideous headline and the euro panic comes back with a vengeance and the s & p 500 gets bashed down by a torrent of selling. that's why it's so important to prepare yourselves for the next catastrophe. so you can make money in any market or lose less and not just when things are going smoothly. you have to build this stuff into what i call your world

view. you have to assume that somewhere, sometime, something will go wrong. i'm not saying you should be a superskeptic perma bear. not at all. over the course of my 31-plus years in the business, i have seen averages crime way too high and see the market make people way too much money to ever be that clinical and close minded. being negative has not been a lucrative strategy and i see no reason why it should change now. there are a handful of sell short sellers out there, and i never recommend short selling in this show, because it's inherently more risky than being long. it's a question of arithmetic. at beast best, the stock goes to zero when you short sell, and you could lose, 200%, 300%, 1,000%, you could lose an infinity amount of money. when you own a stock, the

opposite is true. you could quintuple your original investment. ask anyone who bought apple back in march 2009. when it pulled back to less than 200 bucks, they have snagged a 580% return. i'm not telling you to be so afraid of what could go wrong you pass up on that kind of massive gain, even if you are incredibly bullish it would be silly to not make through are you prepared for the next market-crushing disaster. how many times has the market give and taken away? we should do what we can to protect our investments in advance. how the heck do you do that? get ready for a calamity when you don't know what it will look like? how do you expect the unexpected as an investor? one word, one magic word. diversification. look, diversification, as boring as it might seem, jim, i can't.

i can't make thousands of percent. it's the single most important concept and the key to avoiding enormous losses and the key to staying in the game. and that's why i play my diversification, and why i call it the only free lunch in the original investing gospel. jim cramer's real money. why i push it so hard as the we're getting back even. and if your portfolio is properly diversified, you can handle any setback and come back from any financial disaster. i talk about diversification, making sure your stock eggs aren't in one sector basket like i saw from 2001, 2002, so many people left the building. i go over this again. i can never say it too many times. no one sector, one segment of the economy, should ever account for more than 20% of the portfolio.

if you own five stocks, only one can be tech stock, only one can be a health care, one financial. one can be an industrial and only one a food and beverage maker. what if you are not sure? always err on the side of caution. an oil driller and oil producer, they are both part of the same sector. for a company, they are both techs, whether we like it or not. i am not doing this to make it more difficult to pick stocks. when you get too concentrated in one area, the moment something bad happens, you want to throw yourself off a bridge. think about it. imagine if you own too many industrials from the global economy started dropping. and fast-growing markets started slamming on the brakes. how about if you own too many banks before the financial crisis hit? some people did.

how many too many tech stocks in the dot-com bust. something that soured the entire generation of people. the goal is to spread money in stocks on unrelated sectors. when something happens that makes the rest of them go down hard, the rest are unscathed. some can go down hard, and that's why you have diversification. mandatory in cramerica. you have to make sure your stops don't overlap, but you need those that work in all kinds of market. i want to explain what i call the new diversification, how to protect your wealth and ensure you own something that works in an increasingly chaotic, difficult, nauseating, miserable market. we're diversified by sector alone can often not be enough. it's all about owning the right kinds of stocks. five different areas you need to have covered for maximum upside. and you need something speculative. i believe in that. cover all five bases and you

will have a portfolio you and can win in any market. this is why you will win in all five areas. teach to you analyze stocks, and you can fill every position with the best possible names. here is the bottom line. a good investor knows to expect the unexpected and keeping the portfolio diversified in any one sector. following the new diversification for maximum protection. gold, high yield, speculative stock, geographically safe stock. stick with cramer and i will tell you thousand pick the best place in the crucial categories. loretta in arizona, loretta. >> jim, thank you for taking my call. here is my question. >> my pleasure. >> caller: regarding your suggestion of not investing more than 20% in any one sector, does this only apply to portfolios of individual stocks or do you calculate the stocks within your mutual funds as well? >> that's a great question. we don't talk much about mutual funds on the show. if your mutual fund is

diversified itself, could you say, why do i even need to pick individuals stocks? that's why we have "mad money." a lot of people like to pick individuals stocks. i'm not necessarily encouraging, discouraging. this is how do you it if you want to. we're talking about individual stocks. great to have a bedrock mutual fund. i'm not allowed to own individual stocks, i don't want you to think you can relate the two. tom in california, please. tom. >> caller: hi, jim. booyah from sunny, warm, san diego. america's finest city. i'm a financial adviser and long-time viewer who appreciates what you do to educate and motivate. i would appreciate if you would share objective criteria for investors in determining best of breed. thank you. >> i start with record dividends and then to how a company has done consistently, good and bad

times and yes, for best of breed i look at the product itself. is there a bank i want to go to. is it to use the great restaurateur, the one that is most hospitable to shareholders, anyway, diversification is important. it's what we're preaching. make sure you have a high yielder, growth stock, a special -- and then you need geographically safe area for one of them. all about how to pick the best ones. i want you to be comfortable with your own portfolio. "mad money" will be right back. >> don't miss a second of "mad money." follow @jimcramer on twitter. tweet #madtweets. send an e-mail to madmoney@cnbc.com. or call 1-800-743-cnbc. miss something? head to madmoney.cnbc.com.

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tonight i'm going to teach you a novel way to fill those slots in the portfolio.

it will diversification and also in style and sector. it will keep you in the game, even when it feels so excruciating you don't want to continue playing, stop looking at your statement, that kind of thing and at the same time, making sure you have positions which can go much higher when times are good. what's the most important category? no question, people. it's yield. you need to own a stock, one, possibly more, with a big high-yielding dividend. unlike when we diversify, multiple high yielders can be a good thing. wouldn't own five dividend stocks, because would you be vulnerable if the big stocks ever spike in a big way. what if you have a really large yield and another have decent dividends, that's not a bad thing. dividend-paying stocks may not be what most people consider

sexy. but dividend make money and that's the definition of sex appeal. i have a pretty warped social life. my perspective might be skewed, but the fact remains, high yielders and reinvesting back to stocks is one of the greatest, most reliable ways to make money, plain and simple. it allows investments to compound over time. over time, the money from past dividends pays dividends, giving what we call compounding returns. there is a huge misconception out there about this people think high yielders are safety or generating income in your retirement. did you know about 40% of the return, 40%, comes from reinvestment dividends, and the percentage is even higher. central dividends, capital appreciation. of course, the income stream,

but that's wall street gibberish. they aren't a place to hide when the market gets rough. think represent a fabulous safe haven. not just for retirees who care about capital preservation. they do a terrific job. awn of the most terrific strategies out there and one of the safest, since stocks have a cushion which we call yield support which helps us hang in there. yielding increases and gets to a level where it's too attractive for most people to ignore. we tell you all about dividend investing. that's the cushion why i like accidental high yielders. ahys. whenever you can find them, they are stocks that yield north of 4%, not because of dividend boost, but because the share price falls, causing the yield to skyrocket. we have seen stocks slow down selling. and we have seen it happen in big industrial stocks hammered by european woes.

once the yield hits 4%, as long as the dividend is safe, these stocks tend to stop going down or slow and fabulous bargains longer term. i also like the stocks in companies that recently raised dividends, and one of the clearer signals management can send about the strength of the business, remember, a company that can raise dividends is one with a steady, reliable growth. and it's one that won't cut the dividend any time soon. even better, they put dividend increases for it 20, 30, or 40 more years. and other than accidental high yields and dividend boosts, how do you analyze a high dividend stock? think safety first. high yields are attractive. but we never reach for yield. a very high yield can be a signal that the dividend is unsustainable and will have to be cut, which is why we have to put stocks through a rigorous safety inspection. yeah, i'm throwing the red flag on too high dividends, maybe the

company can raise it, but it seems endangered, you know what you got to do. sell, sell, sell. got to stay away. consider the cautionary tales of two household names. radioshack and supervalu. in the first half of 2012, yields were in the statosphere, nothing accidental about these high yielders. it was a huge red flag. sending a signal that the payout would be cut. sure enough, they both eliminated dividends and stocks fell through the floor. supervalu really hard, and he told us a year before he cut it that the dividend was safe, the ceo. we look at earnings be share. if a company has earnings greater than twice the dividend payout, it can sustain the dividend, even in lean times when earnings shrink. and i think you are almost home free. can't ever be certain. and if not, go to step two. look at the cash flow. important in dealing with companies with a lot of

machinery. which cause them to report high depreciation. the high yielding telcos, and communication networks, they don't come cheat. these depreciation and amortization companies don't come without cash, but they skew the earnings lower and the cash flow, better idea about the health of the dividend, and a lot of callers call and, say, listen, jim, that doesn't even cover the dividend. it's the cash flow, okay? finally, look it he balance sheet to make sure there isn't a lot of debt coming due and it can necessity a dividend cut. last but not least, know how to collect the dividend. forget the jargon like the record date. no, on "mad money" we care about only one date, the must own date. the last day you have to buy the stock to declare the dividend. the bottom line, want to embrace the diversification, if you want to be prepared for every kind of market out there, you must own

at least one high yielder. dividends protect your stocks and also a terrific way to make money, what's not to like? let's go to mary in missouri, please. >> mr. cramer, i read in "the wall street journal" a smart article on the dividend bubble. i would like to know what that is and how it make affect my utilities and income. >> marianne, i'm so glad you asked. most people have been bidding up dividend stocks, a mistake, all going to crash and all that's happened, dividend goes lower, lower, lower, and dividend more attractive. the dividend bubble doesn't exist. not paying out that much. not that much interest in the stock market. and ten-year versus 30-year, i think you're fine. ron in texas. >> caller: yes.

>> what's up? >> caller: how do you know when you get out of a stock. let's say you're doing well, it's got a dividend, but how do you know? >> one of the things we like to do. stay in touch with fundamentals, we don't do buy and hold. if you suddenly see a decline in cash flow and see company has a change, like a cfo leaves, that matters. in general, we don't like to be greedy, bulls make money, bears make money, and hogs get slaughtered. if you can take out enough money to play with the house's money, that's when you are golden. portfolio should dividend, not buy, but dividend and conquer. have at least one high yielder that will help when it comes to diversification. after the break, we'll try to make you more money.

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nobody's perfect. not when it comes to investing. why? not because i'm some kind of man who delights in despair, making people miserable. okay, a little bit. not trying to make you hate stocks more in the flash, crash, grab facebook ipo. i'm trying to help you cope with your own fallibilities to make sure you are as prepared as possible to avoid losses by the slings and arrows of the whips and scorns of the politicians. out of context, also putting yourself in a position to maximize profits, one when things are going well. and you know we have to do that, bulls make money, bears make money, hogs get slaughtered. discipline trumps conviction. by never having all of your stock eggs in one sector basket, you never have to suffer the agony of watching everything you own get crushed when the basket

gets run over by a truck or oncoming train. now, what if you wanted to put an extra layer of protection against the market that has been become difficult to fathom? that's where the new diversification comes in. just by diversifying in sector, being diversified by strategy helps ensure no matter what kind of market we're in, you will likely always own something that's working. i have already said you should reserve one space for a high yielding dividend stock. now you need a good old fashioned growth name. especially a spectacular growth stock on wall street secular has nothing to do with public versus parochial schools or establish claus and the first amendment, which you know i question. no, on wall street, when a company has secular growth, unlike cyclical smokestack growers, they will keep on expanding during a slowdown. when you get your hands on a strong secular grower, that stock can keep lifting higher

and higher, ala jackie wilson, going after new high as long as the growth lasts and think about apple or whole foods and amazon, biotech comes and am zen, gilead, gone like the old drug companies, when big pharma was synonymous with growth, how do you analyze growth? when we buy a stock, we're paying for a company's expected future earnings per share. that's right. i will repeat that. expected future earnings. not past, future. a lot of people calling with the past past. it's the basket valuation, the share price, equals the earnings per share, e, times what's known as the multiple. m. e times m equals p. this tells you what investors

are willing to fork over. remember this blew me away when i got to goldman sachs, we're solving for m. and the most important determiner of what price earnings multiple, the vital ingredient on the size of the valuation? it's the company's growth rate. that's why we pay so much attention. the growth rate is what rattles people more than anything else. earnings will get larger in years ahead. the stock can trade up to a multiple that's as high as two times -- twice the long-term growth rate before it gets too expensive for the vast majority of money managers. they always have a lot of money coming in. and earnings at 20%. and the stock could potentially fly as high as 40 times earnings.

and typically growth stock won't trade down to less than one times it's growth rate. and even secular growth, possibly because of higher interest rates and inflation, it makes multiples shrink, and the earnings become less attractive for the yields so they can get from cash or treasury or plain hard cash because of inflation. in the same token, lower rates make growth stocks more attractive and cause multiples to expand. even more important when you want a high growth stock, you need to be especially sensitive to where earnings estimates are growing and whether they are increasing at a faster or slower pace. they remain cheap as long as analysts are raising the earnings per share quickly enough. and they are being raised, a stock like apparel can double over 12 months. and the earnings estimates increased faster than share price. this kind of earnings momentum allows them to downgrade with

the economic growth. when you are playing momentum, you are playing with fire. if the time comes where the estimates have to come down or looks like growth is decelerating, splat, like driving a fast car right into a retaining wall, or a human -- you got it. number one of the company, the stocks can tumble faster than you can imagine. witness chipotle, earning a quarter of its value in a matter of days. july 2012, a disappointing quarter that suggested the company might be more vulnerable than we previously thought. we thought it was a secular grower, suddenly, there was cyclical weakness. and chipotle up for years, and massive gains still. after a growth name loses its mojo, you have to be cautious. the pain can last for years as the stock goes through a painful

process of george castanza like shrinkage. they pay less and less for slower earnings growth until growth managers get shaken out and multiple sinks to where the value oriented investors become interested. don't hang on for the full ride down. just sell. you can catch it later. bottom line, to build a for the folio that can work in every kind of market, fast grower that still has room to run, when are you dealing with growth, pay up for a company that's still accelerating, once momentum stock starts to slowdown, the multiple can shrink forages before it bottoms. logan in texas. >> caller: jim, a big university of tulsa, oklahoma, booyah. >> i am loving that. what's on your mind? >> caller: a couple of weeks watching a similar show where you told investors about a peg ratio and how you can use that to determine if a stock is expensive or not.

and i was wondering, what does it mean when a stock has a negative peg ratio? is it a company you want to avoid? what other indicators do you want to use to see if a stock has room to grow? >> you always have to worry. like to worry -- this is a complicated concept, there is time you have to go to cash flow. if you think there is no earnings and you say what kind of earnings growth do i have? but if there is cash flow growth, like what cable companies and telcos are, you can figure them out. not as valuable. i like it for traditional earnings, not for the ones that don't have much. frank, in pennsylvania. >> caller: booyah. three-part question. what does risk on risk off mean? what does it mean. >> this risk on risk off is offensive to me.

i think it obfuscates what i need to teach you. who knows what is a risky stock. it's not risk on, risk off. it's do i have cash? or am i borrowing money to buy stocks? do i have cash, or i'm buying high growth stock or value stocks. risk on, risk off, you will never hear it used on this show ever. it just confuses you and tries to make me sound smart, but it tells you actually i'm pretty darn stupid. risk on, risk off, not in cramerica. growing pains? you need a fast grower as part of your diversified pattern. it's worth it to pay up for a company that's accelerating if it decelerates. just go. stay with cramer. [ male announcer ] the 2013 smart comes with 8 airbags,

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tonight i'm focusing on different kinds of stocks, showing you how to put together a portfolio diversified by strategy. the toolbox is something that can work in any and every market, no matter how tough or difficult. so far i've talked about dividends, what else is essential for a truly balanced portfolio? how about something interested in focused in keeping your statement in the end of the month? you want to own something speculative. even if speculation is the dirtiest word in the business. except in cramerica, where it's part of investing orthodox. not only okay to own these tempting, risky, broken stocks that trade in single digits. i guard it as a necessity, as

long as you follow rules and speculate wisely, don't fear criticism, talking about this. made my investors a lot of money in my old hedge fund. i realize this is the exact opposite of everything have you been told by the usual purveyors of investing. and they tell you to focus on the dow jones industrial average because it's filled with blue chip names. that didn't help you with the gm or citigroup when they were an annihilated. there is a place for speculation, place for index funds, which is another thing that the gray beards tell you to do. i want you to pick some stocks too. let's do it right. these so-called experts say to stick the index funds. they assume that home gamers like you are brain dead and incapable of analyzing the

prospects of publicly traded companies like yours. they don't think you can pick your own stocks. if you play with big household names and sometimes they even tell you it's okay to own etfs, if they are not crazy enough sometimes. that's the smug, conventional wisdom. and i'm a grizzled veteran, and i have been at the stock game 32 years. these pros who dismiss speculation are ignoring the human almost, the emotional component. and a lot of people invest and are fully engaged. they fin the whole process boring, and they don't stay on top of what they own. it is true, if you neglect your own stocks and you don't have the motivation to do homework, you probably won't do too well, either because buying stocks is no better than gambling or you think frankly that you can roll the dice and somehow get lucky and that's not the way it's played.

and that's where speculation comes in. you need something speculative as a tonic against boredom. high risk, high reward have an undeniable mystique. i can't fight it. they allow to you stay engaged and keep your head in the game. you hear the speculation is the height of your responsibility. i say a portfolio without speculation, a long shot so to speak is a portfolio that won't catch your fancy it will have you surrender to people who only take your fees. speculation doesn't just keep you interested. if you do it wisely with the right rules and discipline, i actually think you can generate enormous games. you can look at larger, well-known companies deemed safe. some of the biggest wins of my investing career came from speculation. when done wrong it can also lead to truly gut wrenching losses. i'm not saying this isn't

dangerous. i know you want to speculate, speculate wisely. how do you identify the winners and avoid the losers? you can look at the hated broken stocks left for dead by big institutional money managers and the stocks of undiscovered companies. you can get an enormous edge, the kind virtually impossible to have with household names. some of the big boys won't touch anything under 5 bucks. you're benefiting what i call from classic mispricing from overly pessimistic money managers. they don't want to own single digits stocks, they think they are too dangerous and they will be questioned by their clients about why they own the junk and why they risk money foolishly when there are safer stocks out there. the money managers fear. you can buy the stock, and some of the big boys won't go until they go to higher levels. and that's foolishness, and

that's what happened with ford. when ford was deutsched down to $4 in the great recession, sally mae. and sprint left for dead, played down nearly 2 bucks and there were fears about bankruptcy. if you paid attention to bonds and preferred stocked were trading the bond buyers believe the company is viable, and if you hasn't looked at that, you look at preferred, you might have looked what doubled and spiking 20% on a single day in much better than expected quarter. these stocks were dumpster juice, but if you went dumpster diving, caught doubles or triples. deals like these don't come around every day. most of the time, we speculate on tiny companies and looking for sectors that seem like they can capture the imagination of the crowd, the next hot fad, and sometimes, but not always, the fad will be backed up by genuine earnings power, which is what we saw with the little companies that make smartphone components.

skyward solutions, and sirius logic, to name some of the biggest ones. and the trick is to remember lock in your profits when you have them so you don't get burned, and, second, cut losses before they become too large. and when you speculate, not trying to find a stock that can buy and hold. not looking for buy and hold. and we want something that shoots higher, and when you are disciplined and you ring the register, doesn't matter if it comes back down later. don't take that as license to own stocks with bad or deteriorating fundamentals. here is the bottom line. own something speculative. key part of the new diversification i outlined.

something that will help you to stave off boar dome, something to capture your fancy. a lot of starter speculations and just because it trades at 3:00, doesn't mean it's a three card monte. it could be a triple waiting to happen. stick with cramer. sitting on the sidelines because of the uncertainty in the market? >> thanks for turning from portfolio from mean to green. >> with over 25 years of experience in bull and bear markets, let coach cramer show you how to play to win. >> keeping us in the game. >> "mad money," weeknights on cnbc. now, that's what i call a test drive.

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the old-school diversification that i push endlessly, this ensures stocked won't key off the same bad news and get beaten to bits at the same time. in the new diversification, it means whatever the market is doing, you will always have at least one approach to investing paying off big time. now, remember what we've gone over so far, in case you missed it. dividend paying stock with high yield and a growth stock and something speculative. what else? when i originally came up with the new idea of the new diversification, i said you should have foreign exposure to the portfolio. given how the mess crushed all things international and hammered other stuff too, and i need to look at those in a safe geography, and at times, you need something international, and i am talking about a company space in a foreign country. at other times when the rest of the world seems to be staying apart and the u.s. looks pretty

darn good by comparison, you need domestic security. something confined within our borders, because at those moments, being exposed to the rest of the world is down right dangerous. what die mean by domestic security? anything usa all the way. you could own a phone company like at&t or verizon, con ed, and put the regional to national restaurant like dunn ink brands or dollar general. how about a real estate investment trust? something along the lines of tanger factory outlet. why? they have been winners. or you could own the iyr. i don't like ets. it's a real estate investment trust and gives you exposure to the whole group. in times of international exposure this slot should be filled by something all

domestic. when the rest of the world is much better shape, which is where we were after the financial crisis, then you want to own a foreign company. bottomline, always earn a stock from a safe geography, sometimes that means a foreign company. you always have to pay attention to the facts, it means domestic security all american. and believe me, you want to go domestic for the foreseeable future. "mad money" back after the break.

all night, i've been talking to you about the new diversification, a way to diversify by strategy, not just by sector. we still believe in the old kind of diversification by group, but we have a new prism going here. you need a high yielder, a big dividend paying stock for downside protection, and the massive money gains should become from reinvesting, second, you need a way to profit a whole

lot when the market is in good shape. sometimes it is, and still potentially keep delivering gains if things get worse, which you must have exposure to growth. preferably a high quality secular growth stock where the earnings have powerful momentum. then you need a speculative stock, something that trades for less than $10. a company left for dead by big money managers or one they have never heard of. speculation defends against boredom. it keeps you from not opening your statement. i hate that when people put the statement in the drawer. fourth, you need something from a safe geography, from a foreign country if the united states is weak or a domestic security play if the rest of the world is stinking up the joint. and last but absolutely not least, you need some gold. because gold has a special property. one that makes the metal precious to any diversity. consider it your insurance to

economic or geopolitical chaos. consider it insurance against uncertainty or inflation. all things that cause most stocks to decline. i like to think of the gold position as contained of stock insurance. would you own a home without homeowner's insurance? a car without car insurance? you shouldn't invest without gold exposure. because gold pays off when everybody else fails. it's also been about the best-performing asset year after year for the last decade. wracking up gains at a period where every other asset class has truly disappointed. it's not about the upside, it can be considerable. it's about minimizing risk to the downside. there will be a whole host of sectors poised to outperform gold. none that works like the insurance policy that gold does. it's insurance against currency. how should you own gold? the spdr gold shares. you probably have heard of it as

symbol gld, right? which owns the metal and does a terrific job of tracking its price. could potentially call your broker and buy bullion, but that only makes sense for investor who's can afford to buy gold in bulk. i have to tell you, i like it, if you can do it. what about the gold miners? if you pick the right company, one with low cost, then it can outperform the combed commodity for a period of time. and gold, the scarcity, hard to get out of the ground, it makes gold miners perilous. and they have debt, finding costs, management teams and a whole geography that has gold that are you afraid to go to. virtually every time i have gotten behind gold, i have gotten burned. higher than expected cash costs and expropriations and the stocks get hammered. i gave up on the entire group and decided to stick with the gld, or the physical commodity. if you want exposure to gold and not only want it, you need it, it's portfolio insurance policy, and everybody should have some.

and then you should just do the easy thing and own gold through the gld. not some gold miner only loosely connected to the underlying commodity. that's too dangerous. this is gld. stay with cramer.

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there for you, night and day. ally bank. your money needs an ally. >> i like to say there's always a bull market somewhere, and i promise to find it for you right here on "mad money." i'm jim cramer, and i will see you monday. >> it's crunch time at frito-lay. the push for the 4th of july holiday. in the next week, the crew will make about three million pounds of doritos... fritos... and the all-american classic... >> this right here is a perfect potato chip. >> they'll run 12 production lines, 24/7, then bag, pack, and ship out to the grocery shelves. it's a rac