5 of Jim Cramer’s best rules for investing

How to invest for capital gains and keep them

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Jim Cramer is an American television personality, former hedge fund manager, and best-selling author. He is the host of CNBC’s Mad Money and a co-founder of TheStreet, Inc.

Of his published 25 rules for investing, I think these five are among the best.

1. Bulls and bears make money. Pigs are slaughtered.

This rule advocates top slicing a winning position as it goes up so that reversals don’t take all the gains away. That seems a useful approach in today’s volatile markets.

Jim Cramer says that he reminds people every day:

“Have you taken your profit? Have you booked anything? Or are you being a pig? Because you never know when things you own are going to crash. You never know when the market could be wiped out. You can’t have certainty.”

Taking profits and allowing a reduced position to run in order to capture further upside is like running an insurance policy that protects our gains. We can always reinvest our winnings, perhaps even into the same company if a setback produces a better value buying opportunity.

2. Don’t buy all at once.

I like this rule because it chimes with Jesse Livermore’s approach where smaller positions (or ‘probes’ as he called them) test the validity of an investing decision before committing too much capital. If a small position goes well, we can add to the position. If it goes badly, losses are relatively small.

Cramer says:

You must resist feeling like you are making a statement. I have bought and sold billions of shares of stock. Do you know how often I got it in at the right price? Do you know how often the last price I paid was the lowest and it was off to the races? Probably one in one hundred. And I’m pretty good at this game.

3. Buy damaged shares not damaged companies.

Look for fallen share prices representing strong businesses. Don’t make the mistake of searching through the dustbin of struggling enterprises.

Jim Cramer reckons he keeps a watch list of great companies and buys during general market sell-offs or when sentiment drives a share price down when the fundamentals of a business remain sound. He says:

“I particularly like to be ready when we have multiple sell-offs in the stock market because of events unrelated to the stocks I want to buy, a major shortfall of an important bellwether stock, or perhaps some macro event that doesn’t affect my micro-driven story.”

4. Buy best-of-breed companies.

This chimes with Jesse Livermore again, who advised us to go with the strongest player in any given sector. We do this with things like cars, Jim Cramer reckons, so why not in the stock market? It often pays to spend a little more to get ‘better’.

Cramer says:

“There are very few bargains out there in the world of secondary and tertiary players. I believe that when it comes to price-to-earnings multiple, investing in the more expensive stock is invariably worth it because you get peace of mind.”

5. Don’t own too many names.

Cramer advocates diversification, but the temptation is often to buy too many firms in the same sector, maybe because we just can’t decide.  So, he advises keeping a portfolio as small as possible whilst maintaining diversity. If he buys a share, he sells one to make room for it and that discipline keeps numbers down and enhances his performance.

Jim says:

“When I lost the most money as a hedge fund manager, my position sheets were as thick as a brick. When I made the most money, my sheets were, well, one sheet of paper, double-spaced. And I ran hundreds of millions of dollars.”

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Is Warren Buffett losing his touch?

Our writer's noticed that Warren Buffett’s investment vehicle has underperformed the S&P 500 during three of the past four years.…

Read more »

Investing Articles

Non-energy minerals are the top performers in 2025. These small-cap FTSE shares are leading the charge

Mark Hartley examines which sectors are doing well in 2025 and the FTSE shares that investors should consider to benefit…

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

Buying 10,000 Vodafone shares generates a passive income of…

Vodafone shares have had a rough ride, with dividends slashed in half. But with its turnaround making steady progress, is…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Buying 1,000 Aviva shares generates an income of…

Aviva shares could be primed to thrive in the long run if its takeover of Direct Line is a success,…

Read more »

Investing Articles

At today’s price, buying 1,000 British American Tobacco shares generates a second income of…

Tobacco companies may not be popular, but the British American Tobacco share price is on the rise, along with its…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

The cheapest UK stock in my ISA is…

This UK stock currently trades at a massive discount to the market. Edward Sheldon believes it's mispriced and that there's…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

Buying 750 Phoenix shares generates a passive income of…

Phoenix shares offer one of the largest yields in the FTSE 100, but could dividends grow even larger by 2029?…

Read more »

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Investing Articles

Why buy UK shares when I can get 4.5% a year in cash?

Why take the risk of investing in UK shares when I can earn over 4.5% a year sitting in cash?…

Read more »