Cramer's 'Mad Money' Recap: Rally Rules
NEW YORK (TheStreet) -- There's nothing worse than watching the averages roar higher while your portfolio just sits there, Jim Cramer told "Mad Money" viewers as he devoted his entire show to teaching investors how to best take advantage of short-term rallies.
Cramer said the most important lesson in dealing with big market moves is preparing for the future and not letting great opportunities to sell pass you by. He said just as investors can't give in to despair when the market plunges, they also can't get blinded by euphoria when things are going well. "You don't actually have a profit until you sell something," Cramer reminded viewers. You aren't making money until you "ring the register." That's why selling into strength is always the best policy.
There's nothing wrong with feeling good about a rally, as long as it doesn't lead to complacency -- the enemy of every investor. You can be thrilled about your portfolio's performance, said Cramer, but don't forget that you've also been given a chance to sell at great prices. Remember the goal of investing: buy low and sell high.
Take a Hard Look
Cramer's next rule for investors was to always scrutinize your portfolio hard during big market rallies. The only time investors need to be tougher on their portfolios is during brutal market declines.
Cramer said it's only natural to fall in love with a stock that's making you a lot of money. But in the end, you can love your spouse, you can love your kids, you can love your dog and maybe even your job, but you should never love a piece of paper, especially if its value is heading higher. When a stock is making you money, you tend to love it more, but actually you should be liking it less. The more expensive it gets, the riskier it gets and the more likely it is to fall.
That's why investors should re-rank all of the stocks in their portfolios during big rallies, taking into account the risk/reward they now offer. Stocks you bought low and still represent great value? They should be ranked highest. Those with big gains should be ranked progressively lower. Emotionally, this may seem counter-intuitive, said Cramer, but in a rally where everyone is buying like crazy, the smart money should be ringing the register on their biggest gains.