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Jim Cramer’s 25 Rules of Investing (Rules 6 – 10)

I started this look at Jim Cramer’s 25 Rules of Investing with the first five rules [3] a little while back. The first five didn’t bring anything new to the table but did remind me of some good adages to remember. Let’s check out the next five rules, rules 5 – 10, and see if they will yield more enlightening investment advice.

Rule 6 – Do Your Stock Homework [4]
This sounds obvious right but as Cramer mentions: how many people listen to conference calls or investor meetings? Many are available from Yahoo! Finance, I’ve listened to a couple (literally two) but for the most part I don’t really listen to them, I just read the summary afterwards. Cramer believes you must do as much as an hour of research per positioneach week. He warns that you shouldn’t fall into the two traps of not wanting to do homework: not enough time and “if I hold it long enough, it will recover.” The advice he gives in this rule is very good.

Rule No. 7: No One Made a Dime by Panicking [5]
This sort of reinforces and rolls into Rule 4 of buying damaged stocks, not damaged companies. People are bound to panic and if you can take advantage of it, you can make money. This makes great sense and this is a good rule to remember. He has some good, recent, examples that bring this point home.

Rule 8 – Buy Best-of-Breed Companies [6]
The rule explains itself, buy the best of the best and don’t look back. Is it a good rule? I’m not sure… some people like buying the turnaround story (KMart?) and others like the blue chippers they can lean on until retirement. I suppose this rule depends on your situation. The company could be the next Enron (now unlikely with Sarbanes-Oxley) but never say never, right?

Rule 9 – Defend Some Stocks, Not All [7]
My own interpretation of this rule: You can’t win them all so don’t play every single game you can get into. If you pick and choose the ones you like the most, but not necessarily all of the ones you like, then you will have enough capital to take advantage. Since I don’t have that much money in the markets, this rule is really the status quo for me. I can only pick a couple positions I like (otherwise commissions eat me up).

Rule 10 – Bad Buys Won’t Become Takeovers [8]
Cramer believes that buying that crappy stock in order to try to catch a buy-out is a bad move because bad stocks don’t be bought out, good stocks at low prices get bought out. The rule is: “Never speculate on companies with bad fundamentals.” Cramer tells a story about how he broke this rule in getting Nortel and was burned. I like how he tells bad stories as often, if not more often, as he tells good stories.

This set of five starts getting into some interesting rules that are still common-sense-ish but stuff you don’t think about on a daily basis. How many times did you buy into a crappy company because you thought they’d be acquired? I know I have. How many times did you try to buy too much and “diversify”? I have. So these rules have thus far proved their worth to me anyway. 🙂