so twitter is my final trade. >> i'm melissa lee. thanks so much for batch ingwatching. in the new year, we'll have a new set. you can catch more "fast money" tomorrow at 5:00. meantime, don't go anywhere. "mad money" with jim cramer starts right now. "mad money" with jim cramer starts right now. my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere. and i promise to help you find it. "mad money" starts now. >> hey i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you some money. my job is not just to entertain you but to coach you. call me at 1-800-743-cnbc or tweet me @jimcramer. in the face of crushing declines, uproarious rallies, and even just plain jane garden variety days in this market, we

must always guard against our own human emotions, which often get the better of us when everything's going well in the stock market and when things are going badly they seem to grip us totally. when things are too good we tend to take too much risk. and when things are going terribly, we despair and leave the stock market entirely. it's a fact of life. and over the years even as stocks have climbed and climbed there have been swoons that drove people out. and they simply went through securities that gave you little or no return. then they watched the big gains from the sidelines. now, i can only understand your aversion to stocks many people have these days. we have many reasons to be disenchanted. i'm not in denial about them. huge downturns of 2000 and 2001. there was the blood on stocks when they were cut in half from 2007 to 2009. debacles ike the flash crash. or the facebook ipo. >> the house of pain. >> then there's the insider trading cases and the obvious

situations where stock leaders went down and down and then down some more, and it's good that someone knew something, and you didn't. i validate all these feelings right now, right here. but the fact is stocks remain the only game in town. maybe one day when the economy gets strong enough interest rates will go back to more normal levels and we can earn money from stocks as well as good certificates of deposit and bonds, whatever might be attractive in the fixed income markets. but that's not occurred yet, and until it does we need to have our money work for us. we are like the old avis ad here on "mad money." we have to work harder to make our money grow. and that's what tonight's special show is about. how to make your money work harder in a responsible way. and we're using different types of stocks to demonstrate how we can do that responsibly and carefully. yeah, that's like get rich carefully. because look, what sufficientuses the show for years and years is the notion of prudent personal investing. yet we call the shows episodes here. why? because each one is actually

written and thought about as a different entity on its own. and i recognize that because it's something we, meaning me, our fabulous staff at "mad money" are very proud about. this is an episode about better investing for you. now, this is a show about managing your own money or being a better client if you have a full service broker helping you. if you don't want to manage your own money, over the years i've come around to this view. i've become perfectly happy with you buying an index fund. you can be one. or even a big index fund say one that represents the entire s&p 500. then another total return fund that has a smattering of all stocks. i've become a little jaundiced over time about mutual funds in part because so often i find they're about raising money rather than doing well for you and so few of them are beating the stock market. i say what's the point? if you don't have the time or inclination, i propose buying the fund of the index variety. at the same time, though, i know that many of you tune in because

you want to own individual stocks. and i'm not going to talk you out of that. i'm going to just make you better at it. it's something you've decided is good for you. maybe a companion to an index fund. maybe as a way to grow wealth because you think you can do better than an index fund. something that i believe in simply because in the many years that we've been doing the show, thousands, and i mean thousands of people have told me or called me or e-mailed me that they've done better than the market using the show in their own knowledge. they know the two. twitter has validated this principle. what we are doing, though, is giving you directions about how you can pick your own stocks and still not take on too much risk. normally we just say the best way is to be diversified. but too often when i play am i diversified i see people trading everything together in unison and usually in a way that can be derailed in a downturn. >> sell, sell, sell!

>> now, you know that i can't cover all the stocks in the world. i can't. that's why i often use shorthand to tell the story. do i want five stocks like in am i diversified? no, better to have 10 stocks, no more than 15. because you can't do the homework i advise. we have done many shows about the homework it entails. but you know what it means, knowing what the company does, what you're looking for, what the analysts are looking for, how it's doing it, and why it's doing it. home okay's time-consuming. that's not the purpose of tonight's show. what i want to do this evening is give you some ideas to help you explain that there are classes of stocks within the stock market that aren't just by sector. in other words, i am offering tonight a new kind of diversification that can help you guide you toward what kind of stocks i want you to have if you're going to manage your money yourself like so many of you are or you wouldn't be tuning in. first, though, let's go over your mindset. if you're going to manage your own money, you have to recognize the value of humility. so please repeat after me.

sometimes i'm going to be wrong. come on, say it. sometimes i'm going to be surprised. and not in a positive way. and one more. sometimes my stock picks won't work out despite my disciplines. i want people understanding humility doesn't come naturally to everyone. but staying humble is important. why? because other than greed nothing has cost people more money than arrogance. if you own stocks you have to accept that you're going to be wrong. perhaps even often. as the past three years have taught you, your portfolio will get hit with things you never imagined, let alone thought possible. that's where i'm coming from when i talk about this new diversification. diversifying among sectors isn't enough anymore. you need to work harder than just basic diversification as in an industrial utility, a drug stock, a financial, or a techie. ♪ nalhallelujah ♪ >> my new diversification recognizes that to be a little new age we are at one with the world. stocks trade together in good

and bad times and that's impacting our stocks in different ways. plus electronic traded funds, etfs link different sectors together in ways i never dreamed of when we started "mad money." you need a portfolio that works in all kinds of markets, even ones that import the errors and pitfalls of political and geopolitical events to our shores because these matter much more than they used to. again i've had to change to adjust this. i never used to care about the machinations of washington. they really impacted stocks. they were a side show. but since the great recession we have had election that's brought leaders who directly intervene in the markets, and with the worldwide linkage it's not just our politicians and bureaucrats we care about. who would have thought that we needed to know what the european central bank was, what it was going to, do let alone the person's name who runs it? i didn't used to know that stuff. who would have thought we would have to gauge the strength or weakness of the chinese economy on a week-to-week basis or even sometimes daily? it's been all strength for three

decades. suddenly we have to worry about a forward. who would have thought the cold war would be back on the agenda or there would always be a hot war in the middle east? we need to protect ourselves against these new intrusions that we didn't concern ourselves with when i started the show. and tonight's show is an homage to a changed world and how to pick stocks responsibly in that world. the new diversifications are all about owning the right kinds of stocks that are going to be exploring this tonight. five different areas you that need to have covered for maximum protection and maximum upside. you need some gold. i've been there. we're going to talk about that. that's all right. it's diversification. because it can function as insurance if the world really goes bonkers and inflation comes back roaring as all the smart hedge funds say. you need a dividend paying stock with a high yield, a growth stock, something speculative and something from a healthy geography. cover all five bases and you'll have a portfolio that can win in any market, which is why i'm going to explain what makes all five areas so essential. and teach you how to analyze stocks, each one, so you can fill every position with the

best possible names. the bottom line, a good investor in this new world knows to always expect the unexpected. that means keeping your portfolio diversified with only 20% of your holdings in any one sector and it means following the new diversification for maximum protection. remember, you need growth, high yielder, growth stock speculative stock geographically safe stock. stick with cramer and i'll tell you how to pick the best plays in each of these crucial categories. why don't we start the calls with shawn in florida? shawn. >> caller: jim thanks for having me on the show. >> thrilled that you're on, shawn. how can i help? >> caller: i'd first like to thank you for inspiring young investors including mief. i'm a 21-year-old finance major at the florida state university. and i wanted to get your opinion on investment strategies for your 20s. >> sure. first of all go 'noles. my first job out of school was to cover florida state and florida a&m their football programs, and i loved tallahassee. the people who are in their 20s must take risk. i say that because everyone's so darn risk averse these days in life that they don't understand

you need to own some speculative stocks some high growth stocks, and stocks that are just growth stocks. that will be the mix of diversification if i were back in my 20s. and by the way, let me just say in my 20s when i spent all my money it was at big daddy's in tallahassee on that beat your head in night. it was called beat the clock. the drinks started at a nickel. i should have put the money in the oil stocks. how about helen in illinois, please? helen. >> hi. this is helen, and i'm a retired lady and i wanted to know when you make money in the stock market is it better to take some out and put it somewhere else or lose it? >> i think that's a great question because my mother when i used to go gambling with her said listen, let's take the winnings off the table and go buy a nice cashmere sweater. the way i look at it is you should take some winnings off the table if you've had big moves. some of my books describe how big a move. our goal in life is to play it well. there's many goals. but our goals in the financial life is to play with the house's money. that should be your absolute goal.

at a minimum you can do it. diversification is the spice of life. you need a goal way high yielder, a growth stock a spec stock, and a geographically safe stock. i'm going to help you find the best of each on tonight's special show. stay with cramer. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer. hashtag 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. so ally bank really has no hidden fees on savings accounts? that's right. it's just that i'm worried about you know "hidden things..." ok, why's that? no hidden fees from the bank where no branches equals great rates.

tonight i'm teaching you a novel, a novel way to fill those five slots in your portfolio that i always talk about. the five types of stocks that now represent what i call the new diversification. not just by sector. but also by style and strategy. so if executed correctly you'll always own something that works and holds your interest keeping you in the game even when it feels so excruciating that you don't want to continue playing. while at the same time making

sure you have some positions which can go much higher when times are good. what's the most important category? in a world where even central bankers raise rates of course with such low levels, you can't get enough income from bonds or certificates of deposit to live on. you need a stock that gives you a good yield. and by the way this isn't a fuddy-duddy way to approach things. you need to own a stock, possibly more-w a big high-yielding dividend. but unlike when we diversify by sector, two or three high yielders but no more than that. it can be a good thing. they're not the same. i wouldn't go on five high dividend stocks because then you'd be extremely vulnerable if the return on long-term treasury bonds, the competition to high yielders, ever spiked in a big way. you can get hurt. on "mad money" we always respect the bond market and the power it holds to influence stocks. if we don't, we are being imprudent investors, and when interest rates rise, particularly if they rise fast, your dividend-related stocks will get smashed. no matter what industry they might be in.

we've seen this time and again. the diversification recognizes that verizon can trade with a computer package group company like procter and a high-yielding oil like conoco phillips. all because they have high dividends. so it's important to consider that after a period of time all three at the same time. we must always be concerned that the favorable tax rate on dividends, that it could go away. and therefore the most competitive bonds is to give these fixed income equivalents, as we call them, a real whacking. as it did by the way, in the spring of 2014. but if you own one stock with a really large yield and one or would of the other yields that support decent dividends, that's not a bad thing at all. i know dividend-paying stocks may not be what most people consider sexy. but you know what? zfds make you money for heaven's sake. and to me that's the definition of sex appeal. admittedly i've got a warped

social life. from my perspective it might be a tad skewed. but the fact remains buying high yielders and reinvesting your dividends back into stocks is one of the greatest, most reliable ways to make money out there plain and simple because it allows your investment to compound, that's the key word compound over time. in other words, over time the money from your past dividends pays dividends giving you these compounding returns. riefded you keep reinvesting. there's a huge misconception out there about dividends because they're like 32% 3%. how can they add up? people think high yielders are only about safety or generating income in your retirement. but let's do a little history here. if you go back to january of 1926 do you know that about 40% of the return s&p 500 has come from these reinvested dividends that i'm talking about? 40%. the last decade the spernlg even higher. that's how essential dividends are to capital appreciation. wall street gibberish for growing your money. don't i know it. i run a charitable trust as part of a teaching tool called

actionalertsplus.com. i think the inability to compound them has truly hurt me over time. hurt the fund. i don't get the money. the charity does. dividend stocks aren't merely a place to hide when the market gets rough. although they do represent a fabulous safe haven in difficult times. they're not only for retirees that recommend capital preservation. investing in high yielders is first and foremost one of the smart jest strategies out there for making money period. it's also one of the safest since dividend stocks have a cushion. we call it yield support. as the share price falls the yield increases. and eventually gets to a level where it's too attractive for most investors to ignore. that cushion is the reason why i like to talk about accidental high yielders, a.h.y.s, whenever i can find them. knees are stocks that yield north of 4% not because of dividend boosts but because they're share price is falling so far so fast causing the yield to skyrocket.

time and again we see stocks bottom at this crucial 4% level. even in tougher times. it happened during the financial crisis. and we've seen it happen in big industrial stocks that have been hammered by european woes, emerging market downturns, and yes, a debilitated china. at least relatively speaking because it still grows faster than most of the world. once the yield hits 4%, as long as the dividends are safe, these stocks tend to have a magical way of stopping their downturn, and they often turn out to be fabulous long-term bargains. i also like the stocks of companies that have recently raised their dividends. as a dividend i just want to clear a signal that management can send about the strength of its business. a company that can raise its dividends is one that has steady reliable growth. and eke l. important it's a company you can be pretty darn sure won't be cutting that dividend anytime soon. come on, you cut it after you raise it. it can cost the ceo his neck. so dividend ip creases are serious business, not easily repealed. even better are the outputs put through dividend increases for

more consecutive years. now, that stability, which is why i always emphasize my love for what we call the dividend aristocrats. companies like 3m, park and gamble, johnson & johnson with a long history of dividend raises. ♪ hallelujah ♪ but other than k37b89 high yields qunlt high yields and dividend boosts how do you ieblz it? just like when you're leashing to drive you've got to think safety first. high yields are attractive but a very high yield can be a signal a dividend is unsustainable and will have to be cut. you'll see me throw the red flag around here. that takes away -- let's put it this way. you need a rigorous safety inspection. if the dividend is sound. maybe the company can raise it too. but if it seems endangered, no. uh-uh. it ain't worth it, people. you've got to stay away. consider the cautionary tales of so many of what we call these bond arbitrage funds. monster yielders, 10%, 11% based

on strategies that involved buying gigantic amounts of bonds with with borrowed money. >> boo! >> that's why so often when you're against them don't take the bait. there was nothing accidental about these high yielders. in each case yield was a huge red flag sending a signal that the payout would be reduced in a very short period of time. it's not worth risking. don't risk holding on that to capture a juicy dividend. by the way, we saw that happen a couple years ago. both of us lamented radio shack and vooup valsupervalu. supervalu was able to bounce back. given that i am biased against what seems to be too good to be true high yielders what do you look for to tell if the dividend really is secure? first above and beyond everything else you look at the earnings per share, the eps. my rule of thumb is that if a company has earnings that are

greater than twice its dividend payout we know it can sustain the dividend even in lean times when you think the earnings are going to shrink. in that case i say you're home-free, the dividends are secure. if not you need to go to step two. you have to look at the cash flow. especially important when dealing with companies that have a lot of machinery or other heavy capital equipment investments which caused them to report what's known as high depreciation and amortization costs. think high-yielding play at teleplays like verizon and att because communication neblths don't come cheap. people say jim they can't afford that yield. wait a second. these appreciation amortization costs don't come out of a company's actual costs but they do skew the earning lower which is why the cash flow can often give you a better idea about the health of the dividend. i know @jimcramer on twitter people ask how i can recommend these stocks, aren't i being reckless when the earnings barely cover the dividends? but it's because of the cash flow that i like them. if you can't understand the concept of cash flow please get "getting back to even" where i

actually go over the drill of finding out what a company's cash flow really is. maybe you just want to stick to earnings per share if you don't understand it, though. finally you have to look at the balance sheet to make sure there isn't a lot of debt coming due. in other words, that the 2018, 2019 bond, it's too close. if the company can't raise it with a bank or the public, it may necessitates a dividend cut. last but not least you need to know how to collect a dividend. i want you to forget all the jargon like the declaration date, the x date, record date. on "mad money" we care about only one date with dividends. i call it the must own date. that's the last day you have to buy a stock in order to claim its next dividend payout. the must own date is always the date before the x date. and that's all you need to know. bottom line, if you want to embrace the new diversification on top of the mandatory old-fashioned sector kind that we still preach, if you want to be prepared for every kind of market out there, then you sbloolt must absolutely must own at least one high yielding stock. they protect your stock and they're also a terrific way to make money. what's not to like? ralph in missouri. ralph! >> caller: hello, mr. cramer.

>> yeah. >> caller: thank you very much for all you do in your charitable trust. >> you're really kind. couple mill given away. thank you. >> caller: i know that. i have a son 35 years old. he has a roth i.r.a. all with the s&p 500. my question is do you think it might be a good time to go to a cash position, buy it back on a dip, or go to a fund with dividends? and if so, what category would you suggest? >> no, at his age i want him to stay in. i want him going in and out. what happens if that's the one month where the market really takes off? peter lynch taught us that. the great fidelity manager. one up on wall street. describes how if you get in and get out like that when you're a younger person you may miss the one window where all the growth happens that year. tell him to stay the course. dividends and conquer. if you want to be prepared for every kind of market out there, make sure you own at least one high-yielding stock.

and of course stick with cramer.

the discipline of a new diversified portfolio always, always trumps your convictions about where stocks are headed. by never having all your stock eggs in one sector basket you'll never have to suffer through the agony of watching everything you

own get crushed when that basket gets run over by a truck. [ baby crying ] you need old-fashioned growth names, specifically a secular growth stock. on wall street secular has nothing to do with public versus parochial schools or the establishment clause in the first amendment, which you know i can live without. no, on wall street when a company has secular growth it means that unlike cyclical smoke stack growers ones that need a strong economy perhaps here and abroad to beat the estimates stocks growing higher, the earnings for secular growth stocks aren't hostage to the health of the economy. and they'll keep on expanding even during a slowdown. when you get your hands on a strong secular grower that stock can keep lifting higher and higher a la jackie wilson, going on to new high after new high for as long as the growth lasts. think about stocks like apple google, facebook, or some of the high growth organic and natural food stocks we discussed on the show white wave, hein, or power tech names like gilead, celgene

what i call the four horsemen of the big farm apocalypse. companies growing like the big drug companies of old back when big pharma was synonymous with growth. so how do you analyze growth? how do you judge it? how do you find out what's growing well? remember when we buy a stock we're paying for a company's expected future earnings per share. first we have to learn the basic evaluation algebra that controls all professional investing. the way we arrive at the real cost of the stock, not just the dollar cost of it. we know we need to understand this because we need to compare stocks not an apples to apples basis, not just at a pepsico worth 90 bucks call it 90 or coca-cola's worth 40, so therefore pepsico's $50 more than coca-cola. not. apple's not worth less thafr a seven for one split is it? so let's go over what a stock price really means. here's the simple algebra. the share price, also known as the p as in the p/e ratio, short for how we value stocks, the p equals the e times what's known

as the multiple, or em. e times m equals p. we're trying to solve for m. what we're going to pay for the earnings stream. what's the multiple we're going to pay? the price to earnings multiple is the key. it tells us what investors are willing to fork over for a company's future earnings. and the most important determiner of that multiple the vital ingredient that has the most effect on the size of the valuation special sauce is -- ♪ the company's growth rate, which is why i'm constantly talking about growth of sales and earnings. will pay a bigger price teernings multiple for businesses with faster growth because that growth means the earnings will get larger and larger in the years ahead. often you hear guests say this stock is cheap. and what they mean by that typically is it is cheaper than the average stock in the s&p 500. the benchmark for all stocks. and yet it grows faster than the

average stock or somehow more special than the average stock because of the catalyst that's about to occur. so it's cheap versus the s&p. we use this p/e ratio as the backbone for much of what we do when we think about a stock being a bargain on "mad money." as a general rule of thumb when it comes to a high octane secular grower that doesn't need the economy to get strong the stock can trade up to a multiple that's as high as twice the long-term growth rate. the percentage gain of its year-over-year earnings growth before it gets too expensive for the vast majority of growth-oriented money managers who've determined the pricing break. if the company's growing its earnings per share, say at a 20% clip you know what? these guys would pay as high as 40 times earpings. that's right. and typically a growth stock won't trade down to a multiple of less than one times its growth in that case 20 times earnings, unless there's something seriously wrong with the fundamentals we don't know about or won't find out about until later. maybe we're in a nasty market that soured on growth for the moment. even secular growth. that does happen. possibly because of a sudden spike in interest rates, which

make the multiples of all growth stocks shrink as their larger earnings in the future become less attractive relative to the increased yields that people can get from cash or treasuries. by the same token lower rates make growth stocks more attractive and cause the multiples to expand. we pay more for that m. or perhaps like in the spring of 2014 when so much supply hit the stock market in terms of new offerings and secondaries particularly for growth stocks like biotechs and cloud stocks, big gobs of stocks sold all at once by insiders. the secondaries were nasty. that the buyers were overwhelmed. and what happened is the cloud internet and biotech stocks almost all faltered. even more important when you're on a high growth stock you need to be especially sensitive to which direction the earnings estimates are going. and whether those estimates are increasing at a faster or slower pace. these stocks can soar to new high after new high. but remain cheap as long as the analysts who cover them keep raising their earnings per share estimates. and they've got to do it quick. when the estimates have momentum, a stock like facebook

can double over the course of 12 months. we saw that. and the price to earnings multiple would be lower than where it started because the earnings estimates increased even faster than the share price did go higher. this kind of momentum allows a stock to resist even the downward gravitational pull of an ugly economy. but be very, very careful. because you're playing with earnings momentum. so therefore you're playing with fire. for the truly high-octane growth stocks out there if the time comes where the estimates have to come down or it looks like growth is decelerating, then i've got to tell you. it looks like what's at the bottom of this. it's like driving a fast car right into a retaining wall. the moment one of these companies stumbles, the stock could fall faster than you could ever imagine. witness the great chipotle dropping more than 100 points in a day, losing a quarter of its value. it was actually a couple of days. but it was at one point down 100 in an individual day when in july of 2012 it reported a disappointing quarter that suggested the company might be more vulnerable to economic weakness than anyone thought. we thought it's a great secular

grower no matter what. of course if you've been riding up chipotle for years you still had some truly massive gains. and 23 you broughtought it when it cratered you made out like a bandit. but when a growth name like chipotle loses its mojo you have to be cautious because unlike chipotle the pain can last for years as the stock goes through a painful process that we joke about of george costanza-like multiple shrinkage. i still like to refer to "seinfeld" because it seems like some kind of universal language given the endless reruns. yet it can take years as momentum and growth-seeking investors gradually pay less and less for progressively slower earnings growth. so all the growth money managers get shaken out entirely and the price to earnings multiple sinks to levels where value-oriented investors become interested and bottom fish. that's been what the long ride down's been for old line pharmaceuticals like merck or similarly hobbled stocks like mcdonald's or general mills.

when you see multiple compression beginning don't hang on for the full ride down. just -- >> sell, sell sell sell! >> to build a portfolio that can work in any market you need a fast grower preferably a secular growth stog that still has lots of runway ahead of it for years to come. and remember when you're dealing with growth it's worth it to pay up for a company that's still accelerating. it's worth selling a zel raittor very quickly, dump it, because once the momentum starts to slow down it can shrink for ages before it bottoms. and most paibts patients can't hold out that long. mohammed in texas. mohammed. >> caller: hello, jim, how's it going? >> all right. how are you? what's up? >> caller: my question is i am a new college graduate. i graduated from college for a year now been in the workforce and i invested in a 401(k) in my outside brokerage account and was wondering how should i partition my investment in each account and what my investment partitioning should be in bonds and stocks. >> okay. no bonds.

all right? in the 20s first congratulations for graduating. when you're that age here's what you do. you've got to pay down your loans obviously if it has high interest rate. but you need to be in growth, growth, growth, because you've got your whole life ahead of you. if it doesn't work out you can always make your money back with your paycheck. the discipline of a new diversified portfolio trumps wherever you believe a market could be headed. to build a portfolio that works in any market you need a fast grower, preferably a secular growth stock. stay with cramer.

tonight i'm focusing on different types of stocks and showing you how to put together a portfolio that's diversified by strategy. a toolbox that's something that can work in any and every market no matter how tough. so far i've talked about dividends and growth. what else is essential for a truly balanced portfolio? how about something to keep you focused? something to keep you interested. in my view you always want to own something heretical something speculative. even if speculation is considered to be the dirtiest word in the business. except of course here in cramerica. where it's part of investing orthodoxy. not only is it okay for you to own these tempting risky broken-seeming stocks that trade in the single digits it's a

necessity. as long as you follow my rules and speculate wisely. you need something as a tonic against -- with a huge amount of up side if things break your way. high risk high reward stocks are enthralling. there's also an undeniable mystique to something that trades in single digits. although many stocks trade at higher levels. they allow you to stay engaged and make it easier to keep your head in the game. you always hear the speculation is the height of irresponsibility. but i say a portfolio without speculation, without a long shot is a portfolio that won't capture your fancy, one that will have you bored with your money and anxious to surrender to people who only care about take your fees or making you feel frankly you're just not focused enough to do what's right with the rest of your stocks. now, speculation doesn't just keep you interested. when you do it wisely with the right rules and disciplines these stocks can generate enormous gains truly massive returns that are almost unheard of in the stocks of larger well-liked and of course well-known companies that are often deemed safe.

did you know at one point in the 1980s that solid stocks like home depot and comcast parent of this company, were considered to be ultra speculative stocks? home depot. dow stock. actually failed the first time around. and the idea of paying for television when you get it with rabbit ears seemed like lunacy. these were specs. some of the biggest wins in my investing career came from speculation. you can see some of them. he detail them in "real money," the equivalent of my teaching to new researchers who came on my hedge fund in the old days. that's the fund i retired from more than a dozen years ago. of course the corollary is true too. when done wrong swimming in $10 water can also lead to truly gut-wrenching losses. understand, i am not glossing over the risk here. how do you identify the winners and avoid the losers? two kinds of stocks to trade in single digit territory. the hated broken stocks of troubled companies that have been left for dead by big institution money managers and the relatively unknown stocks of undiscovered companies. in both cases you get an enormous edge. the iend that's impossible to

have in the household names. simply because so many of the big boys won't touch any stock that trades under $5. you're benefiting from classic mispricing created by overly pessimistic worrywart money managers. the large institutions, the mutual funds don't want to own these stocks. they think they're too dangerous. they're afraid to be questioned by their clients about why they own this junk, why they risk money foolishly when there are so many safer stocks out there. these money managers see the down side of stocks that look broken. i'm talking about stocks like sprint which we identified at 2 bucks. 3. both panned out. both were eschewed by any of the big mutual funds out there because of the ramifications of owning sick single digit stocks that go kerflooey as they do. you don't have pressure over your shoulders to not invest in these kinds of stocks. we examine the bonds of sprint which stopped going down when the stock was two bucks. that's also an important part of the equation because sprint's in so much debts debt.

the bond buyers considered these instruments investable and worthy and we bet what these bond holders saw would trickle down to the common stock. that's what happened. for rite aid we saw the changes in merchandise, we understood that remodeled stores were doing better than the older ones and we saw how well rad was doing with private label merchandise through parigo. it all came together in a successful speck. so when the fundamentals of one of these companies starts to turn you can buy their stocks at terrific prices. so many of the big boys won't go near them until they start climbing to higher levels. i don't like it at 4 but wake me at 8? deals like these don't come around every day though. more often when we speculate in stocks of finy companies that most people have never heard of and with them we're not trying to catch a turnaround week, trying to look for sectors that seem like they can capture the imagination of the crowd. the next hot fad it's okay, we work in fads too they will sweep through the wall street fashion show. sometimes the fad will be backed up by ginn earnings power. which is what we saw with all the little companies that make cell phone components in 2009

and 2010. cyprus semi and cirrus logic to name some of the biggest of the period. we saw it again in the tiny companies that seemed to be sitting on huge oil and gas holdings. or with some oil and biotechs we like that got bids from big pharma companies or fda approvals for important new drugs. these speculative situations do often, however, have the life cycle of a mayfly, though. so the trick is first alsz always remember to lock in your profits when you have them. so don't get burned when interest rates -- when interest rates cut some of it down. second, your losses, those you've got to cut before they become too large. when a spec you thought would work wasn't panning out, just leave it. when you speculate you're not trying to buy a stock you're trying to hold forever. you just want something that's going higher. and as long as you're sxlind ring the register, doesn't matter if that stock comes back later. don't take that as a license to own the stocks of companies with bad or deteriorating fundamentals. as that's the essence of stupid

speculation. for instance, we said we like high max and celdex, a tech and biotech, for trades. when we did them on speculation fridays. when lightning struck, we said take all the gains, please. >> sell, sell, sell, sell, sell! >> they subsequently cratered and we never looked back although callers tell me listen, jim, you loved it. i say we loved it for trades. you need to own something speculative that's a key part of your diversification, something that will allow you to stabilize boredom and lock up huge gains. lots of stocks started as speculations and just because the stock trades at 3 bucks doesn't mean it's three card monte. it could be a triple waiting to happen. "mad money" is back after the break.

all night i've been preaching and teaching, trying to show you how to build a portfolio of stocks that can work in any and every type of market, from the bears to a euphoric pamplona style running of the bulls p you will always own something that's right by following what i call the new diversification. when i came up with theed of the new diversification i said you should always have some foreign exposure in your portfolio. but given the relentless mess in europe, the slowdown in china and the emerging markets getting crushed repeatedly and frequently i think we've got to do a little refining of the concept. what you need is a stock in a safe geography. at times when the united states is growing more slowly than the rest of the world you need something international and not just something that does business overseas, i'm talking about a company based in a foreign country.

but the rest of the time when the world seems to be falling apart and the united states looks pretty darn good by comparison you need a stock that gives you domestic security. something that's entirely confined within the borders of ow country because at those moments being exposed to the rest of the world can be downright dangerous. what do i mean by the concept of domestic security? anything that's usa all the way. you can earn it for a company like a tooernt or verizon, a utility like con edd or duke. you can pick a regional or national restaurant chain like popeye's louisiana kitchen. a little overseas exposure not much. or dollar store, dollar general dollar tree. how about retailers? macy's isn't overseas. home depot hasn't pulled back. it's here. or a real estate investment trust. factory outlet. iyr. the real estate investment just etf to get exposure to the whole group p. the point is in times of international turmoil this slot in your portfolio should be filled with something that's all domestic and in times of domestic turmoil when the rest of the world's in much better shape which is where we were after the financial crisis, for example, then you do want to own a foreign company. here's the bottom line.

always own a stock that's from a safe geography. sometimes that means a foreign company. sometimes it means a domestic security that's all-american. depending on the outlook. and believe me i think you're going to want to go domestic, at least for the foreseeable future. "mad money," it's back after the break.

all night i've been talking about the new diversification. a way to diversify by strategy not necessarily by stock so you can fly in any market. last but definitely not least you need some gold because gold is a special property, one that makes this metal precious to any diversified portfolio. now, i don't want this one to be 20% of your portfolio. that won't work. it's way too much. i think 24510% is the upper limit because i consider gold as an insurance policy and no worthwhile insurance policy should be 20% of the money you invested. why do i like gold? because gold tends to go up when everything else goes down. it's your insurance against economic or geopolitical chaos, uncertainty, and inflation. all things that can cause most stocks to decline but also cause the price of gold to rise.

before you curse me out because gold's done nothing for a couple of years remember you wouldn't own a home without homeowner's insurance, you wouldn't own a car without car insurance. it's also been the best-performing asset year after year for the last decade. over a period where at some point every other asset class has disappointed you. it was a winner for a long time, lately it's cooled. earning gold is not about the upside, though. it can be kshlg. it's just about minimizing your risk to the down side. at any given moment there will probably be a whole host of factors that are -- they'll be sectors from international minerals that will outperform gold. but none of them work like an insurance policy. the easiest way is through an etf. it's called the spider gold shares. most of you know them as the gld. which owns the nettal and does a significant job of tracking its price. some of the dealers i deal with say it doesn't always track with. you can always potentially call

your broker and buy it in bullion. bars of gold. aopposed to the bowel yob i like in my soap. but that only makes sense for investors who have lots of money and can afford to buy gold in bulk and then pay to store it in a depository bank, you can't keep it at home. what about the gold miners? if you pick the right company one with low costs that's growing in production, then it can outperform the commodity for a period of time. but remember it's not going to trade in lock-step with the commodity and the same things that make gold valuable here, its scarcity, the fact that it's hard to get out of the ground cheaply and there aren't a lot of new mines, that makes the gold mine business perilous. plus gold miners can screw things up in countless different ways. they have debts. they have finding costs. they have management teams that can and often do make mistakes as i know all too well. virtually every single time i've gotten behind a gold stock in recent years i've been burned. they have shutdowns at mines, startup irz issues, delays, higher than expected cash costs and things just seem to go wrong and then the stocks get hammered

even if gold goes up in val cruze yue. so i finally just gave up on the entire group and decided to stick with the gld or the physical commodity. the bottom line, if you want exposure to gold and you not only want it you need it, it's your portfolio insurance policy and everybody should have them. then you should just do the easy thing and own gold through the gld. not some gold miner that's only loosely connected to the price of the underlying commodity. stick with cramer. ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪

the evolution of luxury continues. the next generation 2015 escalade.

i always say there's a bull market somewhere. i promise to try to find it for you right here on "mad money." i'm jim cramer. see you next time!

lemonis: tonight on "the profit"... andreas: meat in the gyro? lemonis: ...my big fat greek gyro is a small franchise with a growing footprint. are you guys still in love with this business? -mike: i am. -kathleen: i am. lemonis: already, there are five locations up and running. -how long have you been here? -jace: a little over 3 years. lemonis: and as the business has grown, so have the problems. mike: you're my partner. you can pick up the slack, as well. kathleen: you're gonna put it on me now? lemonis: husband-and-wife team who started it have no idea how to run it. rich: i've lost respect for mike as an individual. lemonis: their food misses the mark. they're actually terrible. andreas: you don't like them? lemonis: no. their branding is all over the place. hamburgers and hot dogs? and the franchisees aren't getting anything close to the help they need. kane: the only help we ever got from them was on the first of the month, they came and picked up their royalty check. lemonis: for this business to survive i'll have to put a clear process in place and fix what's broken.