Cramer's "Playing Defense" Rules

1. Diversify. Cramer’s not afraid to be a nag about this one. If you spread out your risk, you’re less likely to lose large amounts the money. So never keep more than 20% of your portfolio in a stock or a sector. This isn’t rocket science. Just think back to all those people overinvested in tech stocks in 2000.

2. Buy and sell slowly on wide scales. You don’t ever want to get in or out of an entire position all at once. Looking to buy a few shares of your new favorite stock? Then do so in increments as it increases in price. That way you don’t buy it all at the top. The same goes for selling. Take at least some profits when you’ve made some gains. Then scale out of it as the price comes down. This is especially true, Cramer said, for names like Apple or Research in Motion that fluctuate wildly. There’s rarely a time when you won’t get the chance to buy lower or sell higher.

3. Your first loss is your best loss. When the thesis that drew you to a stock isn’t working anymore, get out. Even if you’ve taken some losses. Cramer sold Fannie Mae when it was in the $60s, after a decline, but never regretted it. Especially not when he watched the stock plummet into the single digits. Never feel bad about taking losses if the thesis has changed.

4. Dividends limit losses as long as they are relatively safe. Measure a dividend yield against Treasurys. If a company’s payout is better than Washington’s, you’ve got a winner. And look for companies that have the potential to increase their dividends than cut them. AT&T
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5. It’s always good to have cash on hand. might pay more, but the extra money will come in handy when the market takes a dip and you want to buy some broken stocks. As Cramer said, stop looking at the cost of being in cash and start thinking about the price you pay for not having cash when you need it.

6. Don’t own too many wild swinging stocks. Sectors like natural gas, copper, steel, fertilizer, rails and tech can be very volatile. A portfolio full of these plays can be a bit much for the average investors. Be sure you’re up to the challenge if you want to own these names.

7. Know what you own. Cramer’s said this before, but if you really haven’t done the homework on the stocks you hold, you’re not in a position to make smart investing decisions. Think about it: Do you really know what Celgene

8. Stocks under $5 can be dangerous. These names feel to these lows for a reason. Keep that in mind when you’re thinking you can make a quick buck off single-digit stocks. They can cost you just as much money as your other holdings.

9. Accounting irregularities equal sell. This is another Cramer maxim you’ve probably heard before. His bottom line is that these stocks can’t even be thought about until the next quarter’s earnings are out.

10. Steer clear of any company that reported a earnings miss for at least two quarters. They number can actually be much higher depending on the situation – nine or 10 quarters if need be. The only reason Cramer said two is because he’s never seen a turnaround quicker than that.

11. If you’re broker stops talking up a stock that you own, sell it. Especially if it’s no longer doing well. He might be embarrassed to tell you that you own a loser, even more so if he’s the one that recommended it to you.

12. Get defensive after a big run. Cramer uses to indicators to measure a surge in stocks: the S&P Oscillator and the Investors Intelligence Bull-Bear Ratio. You can read more about the S&P Oscillator here. But basically it estimates how oversold or overbought the market is. When there’s too much buying, Cramer takes profits. The Bull-Bear Ratio is released every Wednesday. When more than 50% of investment pros are bullish, Cramer recommends playing defense. Too many bulls spoil the pot, he said.

13. Sell a stock with a dividend yield that’s twice the Treasurys. Any company with a dividend that high is usually on the verge of making a cut. Think of it as a warning signal. The only exceptions here are the tanker stocks and oil and gas master limited partnerships and trusts. They both pay dividends depending on the current rate of business.

14. Don’t buy stock in a company with a rookie CEO. They still have too much to learn. So let them pay their dues before you buy in.

15. You must sell a stock as soon as the catalyst you’re trading on has passed – no matter what. It doesn’t matter whether you made money or lost it. Never turn a trade into an investment. Or worse – a lottery ticket. The old “dollar and a dream” schtick doesn’t work on Wall Street. Know what you’re buying and why you’re buying it. And know when it’s time to move on


16. Don’t sell call or put options. Selling calls against common stock is like giving you’re your upside. Selling puts exposes you to almost unlimited downside. Don’t do this.

17. Never use margin. Sure, you can borrow to buy a house. But when it comes to investing, you can’t live in a stock when the price goes down. In fact, you usually have to kick in more money. And once you’re in a hole, it’s very hard to pull yourself out of it.

18. Never buy a stock at its all-time high. A pullback is almost inevitable. So wait for that – Cramer recommends 5% to 8%. If the pullback never comes, don’t buy the stock.

19. Play with the house’s money whenever possible. Be smart about taking profits. If you have the chance to get your original investment back, then do so. Then roll the dice with your winnings.

20. Keep your head clear. Sometimes the best thing you can do after a string of losses is to clear them out of your portfolio and start fresh. That new perspective can be the best defense you have.

21. Spread out your retirement investing. Cramer’s talking about your 401(k) and IRA here. Make sure your contributions happen at least every month rather than dumping one lump sum into your account. That way you can take advantage of any dip – 10% or more, he said – in the market by boosting that month’s contribution.

22. Buy one diversified mutual fund. OK, you can own more than one, but make sure it’s not a small-cap growth fund. And if you want to own multiple funds, make sure you haven’t bought the same kind of fund three times over. Often times funds have different names, but their holdings are very similar. Watch for this.

23. Know when to cut the cord. Don’t wait for a stock to get back to even during a tough market. It probably won’t happen. Take the loss and move on.

24. Buy stocks with good buybacks. A company with a good stock-repurchasing plan will keep their share prices steady during tough times. So look for firms with large amounts of cash to make that happen.

25. Don’t stop looking. Stay current on your portfolio no matter how much it hurts to look. If you don’t, it could end up hurting a lot more.

Bulls make money, Bears make money. Hogs get slaughtered.

Play with the houses money.