>> happy new year. >> long big blue ib m. >> here is to this. live from times square. mummy starts now. happy new year, everybody! ♪ ♪ ♪ 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 and i'm just trying to make you money. my job is not just to entertain you, but educate you so call me at 800-743-cnbc or tweet me me @jimcramer. i've gotten older. you probably can't tell that because we have excellent makeup people who daily make me into

brad pitt, if they have the time. otherwise na go all bradley cooper on me. i'm fine with either. i don't want the girl, i want the stock, but along with my aging has come a change in the way i look at things a change in the way we talk about stocks on "mad money," we still like to highlight stocks pretty much every night, but we do so now within the broader framework of how to analyze stocks how they fit in how they can make you money and how they can hurt you. despite the terrific run stocks have had from the bottom, we developed tremendous respect on mad money, we've seen huge gains wiped out since the show began and we've seen them vanish. we've seen businesses that were smoking like the food business grow frozen only to turn hot again when the wave of mergers and acquisitions swept through their world. throughout this long run, however, i've tried not to deviate from the rules that have

served me well as an adviser and as a hedge fund manager and the manager of a charitable trust with strishth rulect rules and how money management work which is brings me to tonight's show. i want to re-examine some of the most important investing rules i've learned the hard way, investing rules that involve trumping human nature that can often be so counter intuitive to building great wealth. i've often weaved these rules into the show and many of them have been with me for a long time, but they badly need updating for this environment. so that's exactly what i'll do tonight. i'm going to reopen the cannon that gave me years and years of outperformance where i was able to beat the market consistently and now i want to augment these rules to take into account all that has happened since i penned them more than a decade ago and

they were rules that i lived by before i penned them. without further ado, rule number one, bulls and bears make money. pigs get slaughtered. now close viewers of the show know why i have this hog sound -- and why, yes, i have traded in the term pig for hog because so many of you have told me that hogs are worse than pigs when it comes to greed. >> boo! >> and of course after this -- often you hear this the guillotine sound. it's because i never want to forget that taking a gain is a good thing and you can't ever kick yourself for making the money. you should kick yourself for losing money the show may be all about common sense, frankly, which in a world dominated by political people and idealogs

as market mavens and mine marks me as an endangered species. even if i think politics can be far more important to your money then it certainly was when i started the show. it makes sense that a bull can make money when a market moves up. going long or buying stock and going short or betting against the stock. these are disdifferentsly noble endeavors, both of them. i believe people should be able to profit from the down side as much as they can from the down side. it's when you act piggish. when you refuse to take anything off the table after a huge run that you get hurt. >> this style has its doubters and mainly the people that have made money in the handful of generation best stocks and not all stocks are created equal and i'm not take saying take them all off the table and go home. i'm saying take some of it off

the table and my style of investing and it is a style, one that permeates the show and one that's different from what you hear all day is to buy come stocks are down because i believe i'm buying shares in an enterprise and unless that enterprise has faltered in the interim between my decision to buy and my buying i, i stick with it. i use the market's ration ability and randomness that i talk about endlessly on the show and remember how i say the market can be stupid over a short period of time to accumulate my favorite stocks. i'm willing to be very big or own the stock they like if the overall market takes a downturn. we have seen totally domestic stocks like retailers brought down because of european weakness and i urge you to use that weakness to buy. i know that the market is inherently valuing the domestic retailers because they're part of the s&p 500 and the futures rightly or wrongly wrote down at

once, and i recognize the other side of the trade, too. just as the market can take the stock down although far too few individual investors think this way. the difference is when a stock goes downish rationally it's getting cheaper and cheaper, but when the stock goes up irrationally, like it or not it is indeed getting more expensive and yes, the hot stocks of the hour are getting more expensive when they go higher unless it turns out that the earnings are growing at a pace faster than the stocks itself and that is very rarely the pace and in any walk of life other than investing in stocks there comes a price that we should not be willing to pay and a price that would return a seller of goods and only in stocks do we feel we should hang on regardless and that is plain common sense and when you're a hog i do expect you to be slaughtered and people ask me how i knew to take money off the table and right before the crash of 1987 or in march of 2000 and again in the fall of 2007 and 2008 ahead of the great

recession is because i simply was not willing to be a hog and i had made enough money and i made a ton of money in a straight line in each one of the situations and had watched each of the stocks to go to absurd valuations that could no longer be justified by any stretch of the imageination and i didn't want to give back the gains, people and of course at the time many pundit his plenty justifications in rational-sounding justifications for staying in the market and my bears make money, hogs get slaughtered, philosophy got me out in time every time. did i leave some money on the table? absolutely. in almost every single case except 87. there was a little more to gain particularly in 2007. i saw stocks go up without me and it was painful and i had reservations and i had to ring the register because i couldn't justify owning the stocks anymore. again, no. you don't have to sell everything. that's been the way i hear people talk all of the time as if the big crash is right around

the corner. when things get crazy expensive and i know you have a lot of gains you will hear me say that you were being a hog and the bottom line is that i don't want your head to be in the guillotine or guillotine when the party ends and the big wins turn into losses. steve in california. steve? >> boo-yah, cramer. i've been a fan since the first day of cramer. >> holy cow. you're talking about 1987. thank you for calling, steve. >> jim, i would like you to clarify two things first, the limited risk of selling the naked call, and second could you please clarify that buying a stock and selling a car also known as a buy right is equal to selling naked and the same strike put and thank you, jim, you've made a difference for so many. >> i do not like selling puts

why? because in the crash of 87 i saw firm goes out of business because they never thought stocks would sell at a certain level. what happens if i don't like the stock i can't bring the stock back in and i use neither of those strategies and i don't recommend them for viewers. let's go to paul in tennessee. boo-yah, paul. >> boo-yah, this is paul. thank you for taking my call. >> of course. >> i wish you would come to vanderbilt because we love you here. we could eat you with a spoon. >> you're very nice. >> and just to follow you. >> thank you. i hope i do a good job. it's a lot of pressure but thank you. what's up? >> okay. >> with your advice i have three good money and i would sell so to speak would take my initial investments and i have the house money and there is no house of pain when i lose but

still, what do i do? >> you never touch it. you never touch it. it's free. you're not going to give it back. you can give it away but whatever, you're not taking it off the table and once you've taken off the cash you're letting it run, and of course you reach for it and otherwise you let it run because you've been given the opportunity of a lifetime. you've taken out your investment let the rest run. phil in florida, phil. unless the company's changed. >> jim, thanks for taking my call. i'm a big fan and i enjoyed your book "getting back to even". >> thank you very much. >> you're welcome. >> i have a general question of stock market orders and some people call them stop loss. i'm wondering in your opinion is that a good way to protect ourselves and the second part of the question is somebody mentioned that after hours you have no protection.

i want your opinion. >> i don't recommend stop loss orders, why? because i never want to take it out of your lands. if you will have to actively manage your money, you could have a flash crash and you could end up being completely crushed. we just don't do that. it's another no-no that i have preached where there will be days where it will be right and many days wrong and days that it's right will save you. that's what i like to do. i've learned things the hard way, but let me make it ease owe you, and there are basics you can't ignore and bears make money, hogs get slaughtered and "mad money" will be right back. don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer #madtweets. send jim an email to madmoney@cnbc.com or give us a call at 1-800-743-cnbc.

miss something? head to madmoney.cnbc.com.

welcome back to a very special edition of "mad money"

where i'm going back to my original playbook the rules i lived by as the professional money manager and i put it into print before i retired and revising them for the present-day conditions. you know what i'm discovering? some work better than ever. take my second rule. it's okay to pay taxes. in our first rule we went over the concept that bulls make money and hogs get slaughtered and i don't want people to turn profits into losses and i don't like greedy people with big gains and then take nothing off the table. there have been two periods when i said this market is going down and i want to take a serious chunk of capital out of stocks. back in march of 2000 when the nasdaq was at its high i told people that in my hedge fund i hrnt retired yet and i was selling out of most of my common stocks if not all of them including ones that i had liked just a month ago at lower levels and i was going to go buy bonds.

i had never said anything like that and start-up people, it was a controversial call going right against the grain of the moment and i was viewed by many as hypocritical because each a month before that i had made a call that i had encouraged people in my column to buy the very same stocks i was now telling them to sell. >> i had two answers, go look at the nasdaq composite and that sucker was up pretty mitchuch every day and they were selling all over the place as if indeed, a bell had gone off. i was reviled everywhere i could be reviled those days before twitter and so many social media outlets. you can still be trolled, believe me. when i made that take the money off the table call i received close to a thousand emails that if they took the profits i was advising them to do they would

have to pay a tremendous amount of tax on those gains. federal tax. >> i was feeling so intensely of my view i was running with bonds being the place to be that i wrote almost each person saying look, if you don't take profits you won't have profits. the least of your worries is the tax man. i eliminated readership back then and could be that individual and plus the rules are no different. i no longer run a public fund i run a private trust. i don't advise individuals and it didn't matter anyway. the abhorrent taxes tran end asked the good judgment of most of my readers and years later i'm getting emails of apology that they cared more about paying taxes and taking their profits and that their portfolio his subsequently shifted from being deeply in the black to dripping with red ink. i am sure a lot of those people have subsequently left the stock market entirely. you can't blame them.

i made reviled calls on "mad money" and the today show. i heard the same chatter and people sat back and they don't want to listen to some guy who was saying that you simply had to preserve the capital and take what you needed for the last five years. they were more concerned that so much of it would go to the u.s. government that took the money off the table even if the fed his subsequently slashed the tax rate from 2000 and they just wanted to stay the course. i get that but in both cases you would have saved at least 40% to 57% of your capital if you had listened to the sell and then the subsequent buy calls that we made on this show. at that point the buy call that we made listening to the great, late mark haynes now what we call the haynes bottom. mark and i were good fans and we often duked it out about the markets and when we made big calls you just listened an idea and sure, you could have had it

and most people ended up abandoning the market near the bottom when they tried to stick it out and many of them never came back and a simple strategy taking gains and paying taxes and coming in at a more propicious time was simply mathematically and imperikly the way you had to go. so i say never consider taxes as a reason to hold the stock if the stock has gone up too far, too fast and can head down hard as was the case in 2000 especially when insiders were hand over fist and something that has gotten dangerously overvalued simply so you can wait until the gains go long term and the rate comes down and never hold on to stocks when the systemic risk is at fate like it was staring you in the face in 2008. i don't expect any time soon to make another one of the big calls again, and when i do please take them seriously as i have made two of them in the last two decades. so don't invoke the tax man defense when i do. it's way too risky and downright profull gait and don't be afraid

to trim stocks back and travel to being undervalued in a remarkably short period of time when the stock market got overheated in 2015 for example, and the cloud and biotech stocks seemed to be ramping day after day and more and more companies of questionable orientation were coming public and it was another instance where it was okay to pay the tax man after outsized gains often doubles in a matter of months and it was especially okay when we saw the insiders ring the register in an aggressive fashion as they did with internet security and e-commerce plays with the bioteches that had gotten wildly inflated and not wanting to pay the tax man is the singest most important investment people made in our generation and despite the trillions lost at the turn of the century and in 2008 and in the dips in 2015 we still see people making this error constantly. here's the bottom line. taxes do not trump the fundamentals and stocks can be dangerous whether they're owned

long or short term or the valuations have gone to extremes. during those times, promise me please you can't base investment decisions on the tax man. pay it! barbara in new york. barbara? >> hello, mr. cramer. how are you tonight? >> i'm fine barbara. how about you? >> excellent. my question today is about iras. if i want to convert my traditional ira which has been funded by after-tax money to a roth ira. >> okay. >> do i make subsequent new contributions to this new ira or do i need to open a new traditional ira? >> for roth ira in questions these are personal decisions that you must make in consultation with your tax advisers which is exactly what i do. so i am not going to make a broad generalization because it's not the right thing for everybody. that's really important. personal decisions, accountants and advisers, i like them. all right. listen, you have to pay the tax

man, but remember your investment decisions do not depend on them. they depend on the companies, the price of the stocks. after the break i'll try to make you even more money.

>> here we go. continuing the odyssey of going back over the rules and

disciplines that infuse the show and my thinking as a manager of money, that now spans four decades. i have ever been around. there was a mistake i used to make when i first bought stocks in the early '70s and '80s that i had made on jim cramer on twitter and they send you in the direction of important articles under the direction of others. i call the rule. don't buy all at once. arrogance is a sin. i have to admit that at one time i was a pretty good market timer back in the day when there weren't high frequency traders at every term and i was able to accumulate not by being aggressive but by betting against my impulsiveness. it comes naturally to all of us we have to guard against it at all times. when it comes to buying stocks when i ran money professionally or in the new ones i never buy

all at once. i buy increments on the way down spaced out gingerly -- >> buy buy, buy! buy, buy, buy! buy, buy, buy! to avoid emotion. let me give you a real-life example of what can help you. for my retirement account, i like to put away a 12th of my commitment and if i catch a break of 7% to 10% i speed up the next contribution and if i catch a decline in excess of 15% i put in the next quarter's contribution and that doesn't necessarily produce top-notch results in a bear market but it allows me to take advantage of the sales and average it in at better prices and i do it this way because i know that i'm fallible. i also know behavior and i know common sense. i know that if i commit my money at one level and then the market takes a huge tumble i would be so angry at myself that i believe like many of you do that

the market is rigged and it can't be tamed and this can be a simple proposition that such a judgement is untrue and yes, the market can be rigged short term and act like a ban gee, and if you take the longer term i am advocating you will not be betrayed. i know it can only be combatted by humility and the recognition that the market can be an unpredictable morass at times and it can be a garden of common sense. when i want to build a position in a given stock i never buy it all at once as readers of my alerts.com know too well. i recognize that there is an inherent falliblity in my first moment of being and perhaps the market was going to take a huge tumble and it could occur that would make the buy seem lewdious a few minutes later, that's why

i say space them out even though it often drove my brokers up the wall. they hated it instead of going up to buy 50,000 shares of caterpillar caterpillar in one fell swoop. i might buy 5,000 in and wait to get the next 5,000 and i wanted to get my order right. for everyone watching the show and remember we could be talking about 100 shares of katrina and i would be making the same spacing judgment. don't let anyone rush you. don't let anyone make you put all your money to work at one level. how do you know that tomorrow the market won't take a major hit like so many pundits have been aing forever, how do you know you can't buy one of your stocks at a much better level, but you've already committed your capital, accept the falliblity of your own judgment and embrace it and use it to your advantage. the worse that happens you don't

get the big move up and you don't have as big a profit that you would like and you know what? i call that a high-quality problem and this can lead to the battle frequently with the trust, we might buy the first tranche of a stock or early if you want to be diplomatic about it which we are in the bulletins. what we will do then is buy down the stages and take the chance at a certain point that thingses are so cheap that it is worth committing more at a lower level and what we will do is trade out on the stock when the typical oversold bounce like we often talk about in the off the charts segment each week. we know when stocks do their bouncing which they almost always do we use that moment to trim to get the position in the balanced position okay? the arrogance of being too big in one position is almost as dangerous to your financial health as buying all that once. i know this method backs up big commissions and i'm not afraid to pay the commissions and mostly because they're such a small part of an electronic trade and quite a difference when i traded the 50,000 shares

of caterpillar back then. we call this process right sizing a position so we don't take on too much risk as a stock goes higher. it worked lower for that matter. now right sizing is a very delicate thing. because when the stock starts going back up you most likely want to buy more not trim. that's your instinct. that's the falliblity. that's just chasing. it's an instinct that must be fought. under that method you know what you're doing? you're simply playing momentum. under my method you're simply getting back interest shape if the stock slips back down again and retests the low which often seems to be the case in the off the chart segment. >> with my method you'll be ready at that point and that dip to buy that stock back and it's a better level and that's something you couldn't do if you acted impulsively instead of trimming back into strength and thereby making the position so big you can't take advantage of

the dip and do some buying and you have to trim on the way up. not buy! you're just chasing. okay, look here's the bottom line. please don't buy all at once. that's plain arrogance and when it comes to stocks like life arrogance is a very bad sin and one that more often than not will cause you to lose a lot of money. >> boo! wend ney new york. wendy! >> hi jim. >> how are you? >> good thank you. >> jim, i inherited a portfolio from my father who watched your show for many years. thank you for that. >> of course. thank you. >> i'm a second-generation cramerican. there are quite a few forced income bonds in the portfolio and what in the future will affect the value of my bonds and how can i protect their value? >> okay. i have to step up in basis. i don't like bonds here. and i think that many of them are what's known as being well above par and they make 110,

120, 130. i would take the profits and maybe try to offset with losses but get in better shape because bonds don't represent a lot of value and you may be getting this fantastic opportunity to trim them right now. >> karen in california. karen? >> yeah jim. hi. i was wondering -- i was recently fired from my position by my employer and i had outstanding 401(k) loan. >> okay. >> and i wanted to know if i had the means to pay the loan off would it be beneficial for me to pay the loan off and roll over my balance to a roth ira? >> i don't like -- i do not like taking loans from 401(k)s and iras. it's just not my style. i think you shouldn't do it. i think it's too risky. >> all right. >> you risk going before a fall? buying all at once is plain

arrogance and that -- could lose you money! stay with cramer.

we've covered how bulls make money and bears make money. we've addressed how we don't want to fear the tax man and we don't want to buy all at once because arrogance is a sin. now we'll tell you how to separate a stock from a company from a rule which you may have heard me say now and again, look for broken stocks not broken companies. most people feel like the stock of a company with the company itself in their minds and they can't tell the difference between the two. they're interchangeable. the stock is the company, no? and in a market dominated by exogenous events and it's simply no longer true anymore. stocks divorced themselves from the fundamentals even more when i wrote real money more than a decade ago and something that i had in my latest book get rich carefully and there are also a lot of good companies with very

bad stocks. your job is to know the difference between the former and the latter because the former is no bargain and the latter defies a bargain. after any slolell-off of any magnitude there will be stocks that will be crushed and crushed unfairly. many people use these moments to try to find stocks that look cheap typically because they've fallen under $10 which is the level that draws them to the light or the stocks that have fallen the most from their highs betting you have to get a bounce, right? wrong! i go after the stocks with the best fundamentals that have to have been beaten up even as nothing's wrong at all at the companies. i spot these stocks by circling back the companies that have just reported earnings so we know that the fundamentals are intact because we just heard from them. i particularly like the stocks of companies that have just given you numbers that cause wall street estimates to take up their estimates -- "hallelujah ♪ and they've added to the

voluminous buyback because that means management has great conviction something you have to be on on the lookout if buying a stock periodically. you can find stocks that have done all three and then there's insider buying on top of it. that's the true holy grail of stocks. >> house of pleasure! >> i say don't buy damaged goods. buy damaged stocks of companies that are strong. this is where the homework does come into play because if you're not following the stock you're interested in buying during the sell-off and you are going to be too unsure of yourself and if the sell-off continues, you know what happens? you are more likely to blow out of the stock than do this. >> buy, buy, buy! it's gotten cheaper before sell-offs and build a shopping list of what you want to buy and then stick to that shopping list. you must stay on top of these companies on the shopping list to be sure that break isn't because they just reported weak

numbers or the events that drove the stock down aren't directly related to the company itself. many banks, for example, during the great recession were intimately involved with the sell-off and they were no bargain at all no matter how much they were marked down. the cloud stocks are different and biotech have nothing to do with it and they bounced back hard and at the same time others, if you really want to know what to buy in the downturns without having to do too much work on the difficult situation like the biotech, how about dividends, right? the ones that have dividends producing ever greater yields on the way down these, i really like accidental higher yields they should move to the top of your shopping list. it's tough to gig you are out between broken stocks and broken companies against a tough market. that's why i like to rank my stocks and rank my shopping list and the stock i already own, each one on a one to four basis, something we use and update every week on the actionableorders.com website. it's the number two category that is most relevant here.

a two stock is my classification of a stock that would look good to me if the price came down. well voila, the price comes down. remember in the end the stock market is just one big story where inventory has to be moved and sometimes the markdown merchandise at the department store and supermarket is indeed broken and an imperfect sweater that may not hold up after it leaves the store and day-old stuff, and don't waste your time feeling spoiled fruits here and there are other times when it ordered to much purchase and it has to clear it for more vanable items. we used to call the buy straw hats. these days you should think of good merchandise knocked down to lower prices as the clearance of warm weather goods come well let's say, a different season all right? in spring you can't have all of those heavy jackets, right? you can wait to use them again, but the stores can't. they'll have terrible if they do, take advantage of the clearances.

please, please don't waste your time speculating on broken companies and the ones with the bad balance sheets and the ones that look cheap that aren't or ones with failed phase three drug trials that were the only thing they had going for them and there are enough healthy companies out there whose stocks have been knocked out for unfair reasons and the rotted companies that are crumby at any price. don't forget no company wants to fall to the single digit levels and that's the sound of weaker merchandise and not more exciting and enticing and chances are more companies deserve the low prices and won't go up unless you get real luck pep don't forget luck or hope don't make them part of the equation and think, it can be true, too. we keep the list of stocks that call the threes. part of the one, two, three and four stage rating and these are stocks where the fundamentals seem to be on the age and not just that great, not just not that great, but also not that bad and we want the capital to be better deployed elsewhere with stocks we really like when

the market gives you a big run up because of what they have with the questionable companies themselves and that is often the chance to unload the stocks at better prices than you deserve. remember always that stocks and fundamentals of the companies underneath can divert wildly stress times and your disk cardless ready, too. and i need you to unload solid stocks of companies that may not be solid at all when the market has a spirited rally and a part of the stock that takes up the rest of them and here's the bottom line. use the occassional swings in the market to buy the companies that are good or mediocre. you must tame yourself to let the market work for you. that's how the best investors always work and that's what i want you to become and, believe me, i know you can do it. stick with cramer.

hey amanda sorry to bother you, but i gotta take a sick day. vo: moms don't take sick days, moms take dayquil. vo: the non drowsy coughing, aching, fever, sore throat, stuffy head power through your day medicine. ♪ ♪

tonight we're going over the disciplines and rules that infuse this show and my life's investing history. we are doing so to mack you a better investor in good and more importantly in bad times and that's why i want to spend time on the phrase that's inspired the game we play every wednesday, you know what it is. am i diversified. i call it the diversification rule which is the only free lunch in the stock market firm. once again, we'll have to combat our natural instinks and nobody wants to be the first in real life. we all want to be 100% in tesla and we want as much netflix as possible and we don't want to own a share of either when they're going on the periodic swoons such as the nature of our own investing falliblity and the answer is because rocket ships. they can crash and they can burn, but portfolios aren't like that. you have to be diversified to

play the risk and i take it back to the supermarket and would you put all of your eggs in one basket and to use a heinous gambling analogy because i would wantn't to have any chips on rule eats i am an invener at black jack player and then i ask you, how can you make such a big bet on one stock? of course it's not just about one stock. you could have all your eggs in one sector and may not each know it and that can be equally as egregious and think about the money lost by those that had the hottest dotcom stocks in the year 2000 and those people have long have left the building and their yields were sky high. of course, the company forced them to slash their dividend altogether and someone called in not that long ago and it seemed like a great idea to the individual and one big swoon in interest rates and the individual could have decimated and the portfolios that are related to oil to take advantage

of the nation's energy boom they could get slaughtered if oil goes on a retreat. why do people realize this? why do i have to play the am i diversified game? there is a simple reason. most people don't process the down side effectively. they don't understand that you can lose everything if you are concentrated. you know that the same people who would be buying nothing, but tech quickly realize that a meal made of dishes and another bad idea, why don't you talk to the people that work at enron or nortel, and remember these are pieces of paper, people for heaven's sake and will turn out to be worthless even ones that you think are worth a lot. some indeed do go to zero and at least they stop to zero and the only way to ensure you're not destroying your nest egg is to diversify the cartons you place them in.

the toughest thing about diversification. i find it's a real party spoiler. when will the cloud stocks rally and they jump up during a period of swath and no one wants to hear diversification is a free lunch. ask yourself would you be afraid to call in on wednesdays am i diversified because you know you would hear this and then be the butt of many jokes at jim cramer on twitter although i will entire you that indignity having eviscerated you ever so gently on the show. so let me give you the bottom line. i know you will hate me when the market is going straight up and you're stuck with some defensive stocks that i recommended. you will despise me when you don't have every dollar in the stock that does go on a historic run, but believe me you will love me when the market gets clobbered or the sector you own gets decimated or the individual stock that looks so amazing to you turns out to be worth far less than you ever could have

imagined. stick with cramer.

here we go with our very

special show devoted to classic rules for good investing. we've covered so much ground from bulls make money into bears make money and hogs get slaughtered to buying all at once, to hunting for broken stocks and not for broken companies and diversification being the only free lunch. now i have one more be able to explain your stock pick to someone else. one of the worst things that ever happened to solid stock picking was the internet. you know why? it took away one of the most important breaks on the process, talking to someone about what you're going to buy. buying stocks now is often a solitary event. too solitary in my book as i love to say we're all prone to make mistakes sometimes big ones and one way to cut down those mistakes is to forced your to articulate why you would want to buy something for someone else and i would make them sell me the sock idea look a sales

person before i would buy it. if you're in a position to pick stocks by yourself or articulate your reason to them the philosophy. why, why, why? the simple selling of that idea and the notion of flushing it out often reveals the flaws. you may not understand what the company really does. how many of you can buy rocket fuel at the high? do you know why micron is different from intel? can you identify who the main parts are and who they're sold to and how they're really doing? >> i always ask people the following eight questions. yes, eight questions and first, what's going to make the stock go up besides the stock market itself? >> second why is it going to go up? what is the thinking behind it? is there something that's time sense tifr that it will go up now? third, is this really the best time to buy a stock? shouldn't be be waiting for an

unemployment number and maybe a dicey event that could being you are. haven't we missed a lot of the move? how has the darn thing gone up already without us? is it extended on a technical basis? fifth, shouldn't we wait until it comes down a little more? what's the harm? six, what do you know about the stocks that others aren't aware of or don't know about? if your working in a herd mentality. have you heard the conference calls and developed the research or are you flying blind? serveth, what's your natural edge and the personal knowledge of the sector? do you know how the cloud works and do you know where the stock trades with and where it fits into the sector's food chain and why it's better than the others even as other participants don't like it? is there something we ought to get rid of before we buy it knowing that it just adds to the task level to keep on an

ever-more securities on the sheets, as we call them and something else might be superior to it or inferior to it. let's get rid of something if we have to buy this one. the last question was particularly crucial because we never like to add a stock without subtracting one because it's dozens to haveimpossible to have a dozen good ideas at once and you have so many stocks that you own are following. that's valuable advice and you simply aren't being rigorous enough and you can be impus you have and we know that impulsiveness is a profit killer. if you're in a jam call me on the lightning round and i'll try to give you a straight up and down answer about it but the exercise is about your knowledge and convict, not mine. baying a stock should be like buying a car. there is a lot that goes into it. here's the bottom line. don't short circuit the process or as we always would say look

for reasons not to do it because, believe me they believe certainly surface soon after you buy the stock. stick with cramer.

follow the rules or be humbled. i like to say there's all a bull market somewhere and i promise to find it just for you right here on "mad money." i'm jim cramer and i'll see you next time.

lemonis: tonight on "the profit," greenville, south carolina is home to west end coffee... ...a regional roaster with great product... that's pretty awesome. ...but even better margins. -we sell it for how much? -john: $48. lemonis: that margin's killer. co-owners are living proof that you should never mix business with pleasure. john: [bleep] you're horrible at doing the right things until you're forced to do it. lemonis: i not only have to put the right process in place... you made a huge inventory mistake. ...i have to figure out a way for the owners to coexist. you're so busy fighting that you're not busy selling. if not, west end coffee will grind to a halt. all right. rookie mistake. my name is marcus lemonis, and i fix failing businesses. if you don't like money, don't follow my process.