Listen up if youre going to manage your own money, you have to recognize the value of maybe one of the most important issues out there, the value of humility, so, please, repeat after me, sometimes, im going to be wrong. Come on, say it. Sometimes, im going to be surprised, and one more. Sometimes my stock picks just wont work out. Look, i of all people understand that humility doesnt come naturally to everyone, but staying humble is important. Why . Other than greed nothing has cost more people more money than arrogance. If you own stocks, you have to accept the fact that youre going to be wrong perhaps even often. As the past three years have taught you painfully the house of pain. Your portfolio will get hit with things you never saw coming, things you never imagined, things you never thought were possible. Or put another way the one thing you can be sure of when putting a portfolio together is that at some point something is going to go wrong, and it will hit you totally out of left field. Or even worse, something bad will happen that could easily have been anticipated and unless you took the appropriate precautions youll end up being run over by a train that you actually saw coming. All aboard. Think about how often have we been clobbered by the mess in europe. Every time things start to look less horrible across the atlantic, every time we begin to wonder it maybe, just maybe, the worst is finally past, theres some hideous headline out of greece or portugal or spain or italy that the comes back with a vengeance and the s p gets bashed down by a torrent of selling. Thats why its so important to prepare yourself and your stocks for the next catastrophe around the corner. Expected or unexpected, so that you can make money in any market, or at least lose less and not just when things are going smoothly. You have to build this stuff into what i call your world view. You have to assume that somewhere, sometime, something will go wrong. Im not saying you should be a super skeptic permabear, not at all. Over the course of my 31plus years in this business ive seen the averages climb way too way, watched the market make people way too much money to ever be that cynical and closeminded. Being negative all the time has not historically been a lucrative strategy, and i dont see any reason why that should change now. There are a handful of incredibly smart, professional short sellers, hats off, able to turn pessimism into profits but i dont recommend trying to follow in their footsteps at home. I never recommend short selling on this show because its inherently more risky than being long, which is authentic wall street gibberish for owning stocks. Just a basic question of arithmetic. Lets go through it. When you short a stock or bet against it, at best that stock goes to zero and you have a 100 gain. Double at worst, it could never stop going higher. And you could lose 200, 300, 1,000 , theoretically lose an infinite amount of money. When you own a stock the situation is reversed. The most you can lose is 100 of your money. You can rack up much larger gains. Weve seen ten baggers around here. Ask anyone who bought apple near the generational bottom back in 2009. When it pulled back to less than 100 bucks, if they held on for the next three years, they snagged a 580 return. Hallelujah im not telling you to be so afraid of what could go wrong that youll pass up on that kind of massive gain. Even if youre incredibly bullish, it would be silly to not make sure your portfolio is prepared for the next marketcrushing disaster. Come on. How many times has europe given and taken away . We know these things happen. We shouldnt let them stop from trying to make money but we should certainly do what we did can to protect our investments in advance. How do you do that and get ready for a calamity when you dont even know what its going to look like . How do you expect the unexpected as an investor . One word, one magic word. Diversification. Look, diversification, as boring as it might seem, jim, i cant make thousands of percent with diversification. The single most important concept in investing, key to avoiding enormous losses and making sure you can stay in the game, our ultimate goal. Why i diversify every wednesday and talk about this concept ad nauseam and call it the only free lunch in the jim cramer gospel. Why i push it so hard as essential to protecting your portfolio in getting back even. If your portfolio is properly diversified you can handle any setback. You can come back from any financial disaster, i mean that. Now, normally when i talk about diversification i mean making sure all your stock eggs arent in one sector basket like in 2001 and 2002 when so many people left the building because of technology stocks. I go over this again because i can never say it too many times. Means that no one sector, one segment of the economy should ever account for more than 20 of your portfolio. If you own five stocks, only one of them can be a tech stock, one a health care stock, one a financial, only one can be an Energy Company and one an industrial and only one a food and beveragemaker. What if youre not sure . Always err on the side of caution. If two stocks trade together, Underlying Companies succeed or fail based on the same factors, youre not diversified, oil driller and oil producer, people think they are different, both part of the same sector, software and hardware, look, both techs whether we like it or not, not doing this to be arbitrary or capricious or make it more difficult to pick stocks. When you get too concentrated in one area the moment something bad happens to one of the two big stocks in that area you want to throw yourself off the bridge because the loss will be enormous. Imagine if you owned too many industrials when the economy started to slow due to the blow up in europe and fastgrowing markets like china slammed on the brakes with higher Interest Rates, you got obliterated. How about if you owned too many banks right before the financial crisis hit . I know a lot of people who did, by the way, they had such good yields going into the dotcom bust, where the ruination occurred, something then soured an entire generation of people on investing. Spread your money across stocks in related sectors so when something happens and makes one of them go down hard the rest remain relatively unscathed. Sometimes you can go higher. Your basic diversification is mandatory in cramerica. If youre prepared for anything, not enough to make sure your stocks dont overlap, you need a portfolio that works in all kinds of markets, so tonight i want to explain and refine what i like to call the new diversification, how to protect your wealth and ensure you own something that works in increasingly chaotic, difficult, unforgiving, nauseating miserable market where diversified by sector alone can not be enough. The new diversification is all about owning the rights kinds of stocks. There are five different areas you need covered for maximum protection and upside. You need gold, dividendpaying stock with a high yield, growth stock and something speculative, yes, i believe in that, and something from a healthy geography. Cover all five bases and youll have a portfolio that can win in any market which, is why im going to explain what makes all five areas so essential, teach you how to analyze stocks by yourself, and each one, so you can fill every position with the best possible names. Heres the bottom line. A good investor knows to always expect the unexpected, meaning keeping your portfolio diversified with 20 of your holdings in any one sector and following the new diversification for maximum protection, gold, high yield, growth, speculative stock, geographically safe stock and stick with cramer and ill show you how to pick the best plays. Lets go to loretta to start the questions. Loretta. Caller thanks so much for taking my call. Regarding your suggestion of not investing more than 20 of your portfolio in any one sector, does this only apply to portfolios with individual stocks, or do you calculate in the stocks which are within your mutual fund as well . Okay. Thats a great question. We dont talk much about mutual funds on the show. Look, if your mutual fund is diversified in itself then basically you can say, well, why do i even need to pick individual stocks . Thats why we have the show called mad money. A lot of people like to pick individual stocks. Im not necessarily encouraging or discouraging, heres how you do it if you want to. Keep the mutual funds aside. Were talking individual stocks. Its great to have a bedrock mutual fund. I have it in my 401 k , not allowed to own individual stocks, you cant relate the two. Putting that off in a separate quadrant. Tom in california, please, tom. Caller hi, jim. From sunny warm san diego, americas finest city. I like the dads. Caller im a Financial Adviser and longtime viewer who appreciates what you do to educate and motivate investors. Thank you. Caller im wondering if you would share your objective criteria are for investors to use in determining best of breed. Thank you. Well, ive got to tell you, best of breed, start with record dividends and then i go to how a company has done and consistently in good and bad times, and, yes, for best of breed i actually look at the product itself. Is the product something i want to use, a bank i want to go to . Is it, to use the danny meyer phrase, a great restauranteur, is it the one thats most hospitable to shareholders . Anyway, new diversification. Its important. Its what were preaching tonight. Make sure your portfolio is home to some gold, a high yielder, okay. You need a growth stock. You know what, a spec, and then you need geographically safe area for one of them. Ill teach you how to pick the best ones. I want you to be comfortable with your own portfolio. Mad money will be right back. Dont miss a second mad money. Follow jimcramer on twitter. Have a question, tweet cramer, madtweets. Send jim an email or give us a call at 1800743cnbc. Miss something . Head to madmoney. Cnbc. Com. Sfx sounds of african drum and flute look whos back. Again . Its embarrassing its embarrassing we can see you carl. We can totally see you. Come on youre better than this. All that prowling around. Yeah, youre the king of the jungle. Have you thought about going vegan carl . Hahaha you know folks who save hundreds of dollars by switching to geico sure are happy. How happy are they jimmy . Happier than antelope with nightvision goggles. Nice get happy. Get geico. Fifteen minutes could save you fifteen percent or more. I have a cold, and i took nyquil, but im still stubbed up. [ male announcer ] truth is, nyquil doesnt unstuff your nose. What . [ male announcer ] it doesnt have a decongestant. No way. [ male announcer ] sorry. Alkaseltzer plus fights your worst cold symptoms plus has a fast acting decongestant to relieve your stuffy nose. [ sighs ] thanks [ male announcer ] youre welcome. Thats the cold truth [ male announcer ] alkaseltzer plus. Oh what a relief it is [ male announcer ] to learn more about the cold truth and save 1 visit alkaseltzer on facebook. [ male announcer ] to learn more about the cold truth i played a round of golf. Id in the last five hours . Then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. Finally, i became a ping pong master while recording my debut album. How you ask . With 5hour energy. I get hours of energy now no crash later. Wait to see the next five hours. Never in history has there tonight im teaching you a novel way to fill those five slots in your portfolio, the five types of stocks that represent the new diversification, not just by sector but also by style and strategy, so that if executed correctly, youll always own something that works and holds your interest. Keeping you in the game, even when it feels so excruciating that you dont want to continue playing. Stop looking at your statement and that kind of thing. At the same time, making sure you have some positions which can go much higher when times are good. Whats the most important category . Theres no question, people, its yield. You need to own a stock, at least one, possibly more, with a big highyielding dividend, but unlike when we diversify by sector, owning multiple highyielders can actually be a good thing. I wouldnt own five dividend stocks because you might be extremely vulnerable if competition ever spiked in a big way or if the tax rate on dividends went up dramatically and your whole portfolio could get hurt. If you own one stock with a really large yield and one or two of the other names also sport decent dividends once they get raised, thats not a bad thing. I know dividendpaying stocks may not be what most people consider sexy, but you know what . Dividends make you money, and to me thats the definition of sex appeal. Ive got a pretty warped social life. My perspective here might be a little skewed but the fact remains buying high yielders and reinvesting your dividends back into the stocks, one of the greatest and most reliable ways to make money out there, plain and simple. It allows your investment to compound over time. In other words, over time the money from your past dividends pays dividends. Giving you what we call compounding returns. Now theres a huge misconception out there about dividends. People think that highyielders are only about safety or generating income in your retirement, but if you go back to january of 1926, 40 of the return, 40 from the s p 500 has come from reinvested dividends, and if you look at the last decade, the percentage is even higher. Thats how essential dividends are to capital appreciation. Of course, they are an income street and thats wall street gibberish for growing your money. Dividend stocks arent merely a place to hide when the market gets rough though they represent a fabulous safe haven and not only for retirees who care about capital preservation. Investing in high yielders is one of the smartest strategies for making money period and one of the safest since dividend stocks have a cushion which we call yield support that helps them hang in there when Everything Else is getting annihilated. As the share price falls, yield increases and it gets too attractive for most investors to ignore. That cushion is the reason why i like accidental high yielders, i even call them ahys, whenever you can find them. These are stocks that yield north of 4 , not because of dividend boost, but because their share price is falling so far, so fast, causing the yield to skyrocket. Time and again weve seen stocks bottom at this crucial 4 level or at least slow down their selling. Happened during the financial crisis providing the company could pay the dividend and weve seen it happen in Big Industrial stocks that have been hammered by european woes. Once the yield hits 4 , as long as dividend is safe, meaning its backed up by the cash flow, these stocks tend to stop going down or slow. They are often fabulous bargains longer term. I also like the Stocks Companies that have recently raised their dividend. As a dividend hike its a clear signal management can send about the strength of their business. Remember, a company that can raise the dividend is one thats a steady reliable growth. Equally important its a company that you can be pretty darn sure wont be cutting the dividend any time soon. Even better are the outfits put through dividend increases for 20, 30, even 40 or more consecutive years. Thats stability, and thats part of the best of breed. Other than accidental high yields and dividend boosts, how do you analyze a highyielding dividend stock . Like learning to drive, think safety first. High yields are attractive but never reach for yield. A very high yield can be a signal that the dividend is unsustainable, hey, and it will have to be cut, which is why we have to put the stocks through a rigorous safety inspection. Yeah, im throwing the red flag on too high dividends. The dividend is sound, maybe the company can raise it, but it seems endangered, you know what youve got to do. Sell, sell, sell. Stay away. Consider the Cautionary Tales of two real household names, radioshack and supervalue. The first half of 2012 stocks had been pounded so hard that their yields were in the stratosphere, but there was nothing accidental about these highyielders, and in each case the yield was a huge red flag like the one i threw and almost broke the camera, sending a signal the payout would be cut. Radioshack and supervalue eliminated their dividends and the stocks down massively almost fell through the floor. The ceo told me a year before he cut it that the dividend was safe. What do you look for to tell if a dividend is secure . First, above and beyond Everything Else we look at the earnings per share. My rule of thumb, if a company has earnings greater than twice the dividend payout, we know it can sustain the dividend even when earnings shrink and in that case youre almost home free, cant ever be certain but the dividend seems secure. If not, go to step two. Look at the cash flow, especially important when dealing with those companies that have a lot of machinery or other heavy capital investments, Cable Companies, which cause them to report high depreciation and amortization costs. High yielding telcos, verizon and at t, as communications networks, they dont come cheaply. The depreciation and amortization costs dont come out of a companys actual cash but they do skew the earnings lower, which is why the cash flow can often give you a better idea about the health of the dividend. A lot of callers call say, listen, jim, why do you like at t, doesnt cover the dividend . Its the cash flow, okay . Finally you have to look at the Balance Sheet to make sure there isnt a lot of debt coming due in the near future that can often necessitate a dividend cut if the company doesnt have cash on hand. Last but not least, you need to know how to collect, how to actually collect the dividend. Forget all the jargon like declaration date, x date, the record date. No, on mad money we care about only one date with dividends. Thats the mustown date. Thats the last day you have to buy a stock in order to claim its next dividend payout. The mustown date is always the day before the x date and thats all you need to know. Bottom line, want to embrace the new diversification on top of the old sector kind, be prepared for every kind of market out there, absolutely must own at least one highyielder. Dividends protect your stocks and theyre also a terrific way to make money. Whats not to like . Lets go to mary in missouri, please. Mary. Caller mr. Cramer, i read in the wall street journal a very small article on the dividend bubble. Id like to know what that is and how it might affect my utilitys dividend income. So glad youve asked me this question because for two years most of the cognoscenti have been saying bidding up the dividend stocks is a mistake. Its all thats going to crash and all thats happened is the Interest Rates have gone lower, lower, lower and dividend rates more attractive. The dividend bubble isnt something that really exists. Not that much interest in the stock market and versus the tenyear or 30year i think youre fine. Thats all we have to look at, a competitive situation. Ron in texas. Ron . Caller yes, sir. Whats up . Caller so, how do you know when to get out of a stock . Lets say youre doing well, its got a dividend, but youre way up. How do you know . How do you know to get out . Look, one of the things that we like to do, have to stay in touch with the fundamentals. We dont do buy and hold here. We do buy and homework. If you suddenly see a decline in cash flow, suddenly see a company has a change like if a cfo leaves, that matters, but in general we dont like to be greedy because bulls make money and bears make money and hogs get slaughtered. If you can take out enough money to be able to play with the houses money, thats when youre golden. Your portfolio should be able to dividend, not to buy, but dividend and conquer. Make sure you have at least one highyielder. That helps when it comes to diversification. After the break well try to make you even more money. Keep up with cramer all day long. Follow jimcramer on twitter and tweet your questions, madtweets. [ male announcer ] everyone deserves the gift of all day pain relief. This season, discover aleve. All day pain relief with just two pills. [ woman 2 ] its the real deal [ man 1 ] turn it around turn it around [ woman 1 ] over here over here [ woman 2 ] turn around turn around [ woman 1 ] i love you i cant believe its not butter neither can i. Turn the tub around show us the back [ man 1 ] turn the tub around [ female announcer ] with zero grams of trans fat per serving, i cant believe its not butter is a superstar turn the tub around, and become a believer. Tonight im putting on my negative nancy hat, going the glass half empty mode, focusing on the fact that in the immortal words of joey brown in some like it hot, nobodys perfect, at least not when it comes to investing. Why . Not because im some kind of misanthrope, stock sadist who delights in spreading despair and making people miserable and not trying to make you hate stocks even more than you do in the wake of the flash crash, facebook ipo, so many examples of Insider Trading its hard to count. Im trying to help you cope with your own fallibility as investor to make sure youre as prepared as possible to avoid losses caused by the slings and arrows of an outrageous market or whips and scorns of a european politician. While also putting yourself in a position to maximize your profits when things are going well. Yes, and you know weve got to do that because bulls make money and bears make money and hogs gets slaughtered. A diversified portfolio trumps conviction. Used to have it on my pc. By never having all your stock eggs in one sector basket youll never have to suffer through the agony of watching everything you own getting crushed when that basket gets run over by a truck or an oncoming train. What if you want to put an extra layer of protection against a market thats become increasingly volatile and difficult to fathom in recent years . Thats where the new diversification comes in, diversification by strategy. Just like being diversified by sector immunizes your portfolio against massive acrosstheboard losses, being diversified by strategy helps no matter what market were in youll own something thats working. Reserve one space in your portfolio for a highyielding dividend stock. Now a good oldfashioned growth name, especially a secular growth stock. On wall street secular has nothing to do with public versus parochial schools or establishment clause and first amendment, which you know i question. No, on wall street when a company has secular growth, it means that unlike cyclical smokestack growers you arent hostage to the economy and when you get your hands on a strong secular grower, that stock can keep lifting higher and higher. A la jackie wilson, going on the new high, after new high for as long as growth lasts. Think about apple or whole foods or amazon. Some of the major biotech companies, amgen, gilead, celgene, growing like the Big Companies of old, back when big pharma was synonymous with growth and not high dividend. When we buy a stock were paying for a companys expected future earnings per share. Ill repeat that, really important. Expected future earnings, not past. A lot of people call me with the past and say that looks cheap, future earnings. Its the basic valuation algebra, share price, p, price, equals the earnings per share, e, times whats known as the multiple, m. Pricetoearnings multiple. E times m equals p, tells you what investors are willing to fork over for a companys future earnings. This blew me away when i got to goldman sachs. Were solving for m and the most important determining and vital ingredient that has the greatest effect on the size of the valuation, the companys growth rate, thats why we pay so much attention. The growth rate is what matters more than anything else in cramerica after the Balance Sheet and diversification. Well pay a bigger multiple for businesses with faster growth because the earnings will get larger and larger in the years ahead. As a general rule of thumb, when it comes to high octane secular growers, the stock can trade up to a multiple as high as two times, twice the longterm growth rate before it gets too expensive for the vast majority of growthoriented Money Managers. Earnings growing at a 20 clip, the stock could fly as high as 40 times earnings, 40 multiple and typically a growth stock wont trade down to a multiple of one times its growth rate unless theres s as a general rule of thumb, when it comes to high octane secular growers, the stock can trade up to a multiple as high as two times, twice the longterm growth rate before it gets too expensive for the vast majority of growthoriented Money Managers. Earnings growing at a 20 clip, the stock could fly as high as 40 times earnings, 40 multiple and typically a growth stock wont trade down to a multiple of one times itsrowth rate unless theres something seriously wrong with the fundamentals or were in a nasty market soured on growth. Possibly higher Interest Rates coming, inflation, making the multiples of Growth Stocks shrink as the future becomes less attractive to the yields that people can get from cash or treasuries or just plain hard cash because of inflation. Lower rates make Growth Stocks more attractive and cause their multiples to expand. Even more important when you want a highgrowth stock you need to be especially sensitive to which direction the earnings estimates are going and whether those estimates are increasing at a faster or slower pace. These stocks can soar to new high after new high but remain cheap as long as analysts who cover them are raising the earnings per share estimates quickly enough. When the estimates have momentum, thats right, when you see a raising number, raise the rates, a stock like apple can double over the course of 12 months and the multiple is lower than where it started because the earnings estimates increased even faster than the share price this kind of earnings momentum allows the stock to resist even the downward gravitational pull of an economy, secular growth, not cyclical. Be very, very careful here because when youre playing momentum, youre playing with fire. For the truly high octane Growth Stocks out there, if the time comes when the estimates have to come down or it looks like the growth is decelerating, splat. Its like driving a fast car right into a retaining wall or a human, you got it. When one of these companies stumbles the stock can fall faster than you can imagine. Geez, where does chipotle, dropping more than 100 points, losing a quarter of its value in a matter of days, when in july of 2012 it reported a disappointing quarter that suggested the Company Might be more vulnerable to economic weakness than we previously thought. We thought it was a secular grower. Suddenly there was the question did it have cyclical weakness . Chipotle had been riding up for years, Massive Gains still, but after a growth name loses its mojo, got to be cautious because the pain can last for years as the stock goes through a painful process of george costanzalike multiple shrinkage. Yeah, years, as momentumseeking investors gradually play less and less for progressively slower Earnings Growth, and so they all the growth managers get shaken out and the multiple sinks to levels where the valueoriented investors become interested, think maybe theres a takeover. When you see multiple compression dont hang on for the full ride down. Just sell. You can catch it later, believe me. Bottom line, to build a portfolio that can work in every kind of market, you need a fast grower, preferably a secular growth stock with room to run and, remember, dealing with growth, its worth it to pay up for a company that is still accelerating because once the momentum stock starts to slow down the multiple can shrink for ages before it bottoms. Logan in texas, logan. Caller hey, jim, want to give you a Big University of tulsa, oklahoma booyah. Im loving that booyah. Whats on your mind . Caller a couple weeks ago i was watching a similar show when you told us investors about a p. E. G. Ratio and how to determine if a stock is expensive or not, and i was wondering what does it mean when a stock has a negative p. E. G. Ratio . Does that mean its a company you want to avoid and what are other indicators to see if a stock has room to grow . You always have to worry. I like to switch to this is a complicated concept. I cover it in getting back to even. Times to go to cash flow, if it looks like theres no earnings, you say, well, what kind of Earnings Growth do i have if theres no earnings but if theres cash flow growth like the Cable Companies and telcos, its not as valuable. I like the p. E. G. Ratio for traditional earnings, not for ones that dont have earnings. Frank in pennsylvania, please, frank. Caller jim, first and foremost, booyah. Booyah right back. Caller a three part question for you, what does the term risk on, risk off mean, why is it so common and are these terms a signal to stay away from a stock . All right. Ive been at it more than 30 years. This risk on, risk off is offensive to me, okay. Its offensive to me because i think it obfuscates what i need to be able to teach you. Its some hedge fund gibberish gobbledygook. Who knows whats a risky stock, who knows what is not a risky stock . I know stocks, okay . Heres what you need to know. Its not risk on, risk off. Its do i have cash or am i borrowing money to buy stocks . Do i have cash, or am i buying highGrowth Stocks or value stocks . Risk on, risk off, youll never hear it used on this show ever because all it does is confuse you and tries to make me sound smart, but it tells you actually that im pretty darn stupid. Risk on, risk off, not in cramerica. Growing pains, not around here. You need to have a fast grower as part of your new diversified pattern. This is the way were doing it. New diversification. Its worth it to pay up for a company that is still accelerating. If it decelerates, just go. Stay with cramerica. Taking control of your financial destiny is smart, but why would you go it alone . Let me explain this to you. Something that has a much larger bearing on you and the stock market as a whole. Let cramer be your guide, your sounding board. Im having a hard time with my favorite stock. I know you can beat these professionals. And your coach on the road to financial independence, mad money, weeknights on cnbc. Tonight im focusing on different kinds of stocks showing you how to put together a portfolio thats diversified by strategy. A toolbox with something that can work in any and every market no matter how tough or difficult so far ive talked about dividends and growth. What else is essential for a truly balanced portfolio . How about something to keep you interested in focusing and opening your statement at the end of the month . In my view, you always want to own something, i know, going to sound heretical, something speculative. Even if speculation has to be the dirtiest word in the business. Except, of course, here in cramerica, where its part of investing orthodoxy. Not only is it okay for you to own these tempting risky brokenseeming stocks that trade in the single digits, i actually regard it as a necessity, as long as you follow my rules and speculate wisely. I dont fear criticism talking about this because its made my investors a lot of money in my old hedge fund. I realize this is the exact opposite of everything youve ever been told by the usual purveyors of investing wisdom, gray beards telling you to focus on stocks and the big indices like the Dow Jones Industrial average. Blue chip didnt help you with the gm or the citigroup when they were annihilated or nearly annihilated during the financial crisis. Theres a place for the dow stocks, many of which are high yielders, but theres also a place for speculation and index funds which is another thing the gray beards tell you to do. Im not against those but i want you to pick some stocks, too, and i know youre going to do it so lets do it right. These socalled experts say stick with the index fund because the professionals who give you this advice presume that regular individual home gamers like you are brain dead, and that youre incapable of analyzing the prospects of publicly traded companies on your own. Thats right. Thats what they think of you. They dont think you can pick your own stocks. Im not sure if they think you can pick your own nose. They assume youll do less damage to your health if you stay away from tiny speculative stocks and sometimes they even tell you its okay to own etfs as if they are not crazy enough sometimes. That is the smug conventional wisdom on wall street, and among the intelligentsia. Look, im a grizzled veteran and i have been at the stock game for 30, geez, 32 years. Im telling you its totally bogus. These pros who dismiss speculation are completely ignoring what i call the human element, the emotional component of investing. The fact is a lot of people end up investing poorly because they arent engaged. They find the whole process boring, and they dont stay on top of what they own. It is true if you neglect your own stocks, if you dont have the motivation to do the homework, then i dont want you in them either, and you wont do too well either because buying stocks without homework is no better than gambling, or you think frankly that you can roll the dice and, you know, somehow get lucky and thats not the way its played. And thats where speculation comes in. You need something speculative in your portfolio as a tonic against boredom. High risk, high reward spec stocks are interesting an undeniable mystique to owning something that trades in the single digits. I cant fight it. They allow you to stay engaged and make it easier to keep your head in the game. Always hear that speculation is the height of irresponsibility but i say a portfolio without speculation, without a long shot, so to speak, is a portfolio that wont capture your fancy, one that has you bored with your money and actually surrender it to people taking care of your fees. Speculation doesnt just keep you interested. If you do it wisely with the right rules and discipline, i actually think you can generate enormous gains. Truly massive returns almost unheard of in the stocks of larger more wellknown and wellliked companies that are deemed safe. Some of the biggest wins in my investing career came from speculation, but when done wrong swimming in under 10 waters can also lead to truly gutwrenching losses, so im not saying this isnt dangerous. Im saying i know you want to speculate so lets speculate wisely. How do you identify the winners and avoid the losers . Two kinds of stocks that trade in single digit territory, hated broken stocks left for dead by the big institutional Money Managers and the relatively unknown stocks of undiscovered companies. In both cases you can get an enormous edge, the kind thats virtually impossible to have in the stocks of household names simply because so many of the big boys wont touch anything under five bucks. Youre benefiting from what i call classic mispricing created by overpessimistic Money Managers, large institutions, big safe mutual funds, they dont want to own singledigit stocks, thinking they are too dangerous. They are afraid they will be questioned by their clients about why they own this junk. These Money Managers fear the downside of stocks that look broken, so when the fundamentals of one of these companies starts to turn, you can buy their stocks at terrific prices. Since so many of the big boys wont go near them until they climb to higher levels. They want to sell low and buy high. I dont want you to do that. Thats foolishness. Thats what happened to ford. When ford was pushed to 4 and change, sally mae, speculative stock in 2009, got behind it at 6 and in two years it was at 16. More recently you cut one in sprint, traded down to nearly 2 bucks on fears the company was headed to bankruptcy even though the wireless business is lucrative and they were turning the corner. If you took a look at how sprints bonds were trading and, well, if you hadnt looked at the common, just looked at the preferred, you might have gone into the common which doubled from its lows after spiking 20 on a single day on a much better than expected quarter. These stocks were supposed to be trash, dumpster juice, but if you went dumpster diving you caught doubles or triples. More often we speculate in stocks with Tiny Companies that most people never heard of. Were looking for sectors that seem like they can capture the imagination of the crowd. The next hot fad that will sweep through the wall street fashion show. Sometimes, but not always, the fad will be backed up by genuine earnings power which is what we saw with all the little companies that make smartphone components in 2009, the first half of 2010. These speculative fads have the life cycle of a mayfly, so the trick is always first to remember to lock in your profits when you have them so you dont get burned when interest wanes and second, cut your losses before they come too large. When you speculate, youre not trying to find a stock that can buy and hold, right, were not looking for buy and hold forever, not when you speculate. We want something that shoots higher and as long as youre disciplined and ring the register, it doesnt matter if that stock comes back down later. Dont take that as a license to own the stock of a company with bad or deteriorating fundamentals. Thats the essence of stupid speculation. You need to own something speculative. Something that will help you stave off boredom and allow you to rack up huge gains, something to capture your fancy. A lot of fantastic stocks start as speculation. It could be a triple waiting to happen. Stick with cramer. Does the market have you stumped . No fear. Cramers here. Just email him. Madmoney cnbc. Com. [ sniffs ] i took dayquil but my nose is still runny. [ male announcer ] truth is, dayquil doesnt treat that. Really . [ male announcer ] alkaseltzer plus fights your worst cold symptoms, plus it relieves your runny nose. [ breathes deeply ] awesome. [ male announcer ] yes, it is. Thats the cold truth but first youve got to get him to say, hello. New crest 3d white arctic fresh toothpaste. Use it with these 3d white products, and whiten your teeth in just 2 days. New crest 3d white toothpaste. Life opens up when you do. Announcer get caught buzzed driving, and you could do some hard time. Woman craig. Knock it off sorry, mom. Announcer it could cost you around 10,000 in fines, legal fees, and increased insurance rates, and that could set you back a few years. Buzzed, busted, and broke because buzzed driving is drunk driving. All night ive been preaching and teaching, trying to show you how to build a portfolio of stocks that can work in virtually any and every type of market. From a nasty picnic, from the marauding bears. To euphoric pamplonastyle running of the bulls. You always own something right for the moment by following what i call the new diversification. Just like the old school diversification by sector that i push endlessly, this ensures your stocks wont all key off the same bad news and get beaten to bits at the same time. The new diversification by strategy, not sector, means that whatever the market is doing youll always have at least one approach to investing thats paying off big time. Now remember what weve gone over so far just in case youve missed it. You need a dividendpaying stock with a high yield, a growth stock and you need something speculative. What else . When i originally came up with the idea of new diversification, i said you should always have foreign exposure to portfolio, but given how the mess in europe crushed portfolios, what you really need is a stock thats in a safe geography. At times, when the United States is growing more slowly than the rest of the world, you need Something International and not just a lot business overseas. Talking about a company thats based in a foreign country and at other times when the rest of the world is falling apart and the u. S. Looks pretty darn good by comparison, you need a stock that gives you domestic security, something thats entirely confined within our borders. Because if those moments being exposed to the rest of the world is downright dangerous. What do i mean by domestic security . Anything thats usa all the way. You can own a phone company like at t or verizon. Pick a regional to National Restaurant chain like Dunkin Brands or a dollar store like dollar general. How about a Real Estate Investment trust, federal realty or tanger factory outlets, youve seen those companies over and over. Why . Because they have been winners or just own the iyr. Dont like etfs. But the point is in terms of International Turmoil this slot shutting tipped by something all domestic and when the world is in much better shape, which is where we were after the financial crisis, then maybe youll want to own a Foreign Company. Bottom line. Always own a stock thats from a safe geography. Sometimes that means a Foreign Company. Sometimes just got to always Pay Attention to the facts, Pay Attention. It means the domestic security is all american, and believe me. I think youre going to want to go domestic for the foreseeable future. Mad money is back after the break. Its a brutal, fullcontact sport. From the time the whistle blows. Traders bracing for what could turn out to be a wild session. To the last play of the game. Markets absolutely getting hammered today. I know its not easy, but i promise to keep fighting for you. Jim cramer, leveling the Playing Field for all. The road is a tough one, but the payoff can be your greatest win of all. Join mad moneys training camp, weeknights. I think your friends will understand. Oh no, its actually my geico app. See . I just uh paid my bill. Did you really . From the plane . Yeah, i can manage my policy, get roadside assistance, pretty much access geico 24 7. Sounds a little too good to be true sir. Ill believe that when pigs fly. Ok, did she seriously just say that . Geico. Just click away with our free mobile app. Anyone have occasional constipation, diarrhea, gas, bloating . Yeah. One Phillips Colon Health probiotic cap each day helps defend against these digestive issues with three strains of good bacteria. Approved [ Phillips Lady ] live the regular life. Phillips. [ Phillips Lady ] live the regular life. I played a round of golf. Id in the last five hours . Then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. Finally, i became a ping pong master while recording my debut album. How you ask . With 5hour energy. I get hours of energy now no crash later. Wait to see the next five hours. House to reflect the suns rays back into space to try to reduce climate change. But there are easier ways to go green. Like turning off the lights when you leave a room. You could save the tin foil for leftovers the more you know. All night ive been talking to you about the new diversification, a way to diversify by strategy, not just sectors, so you can thrive in any market. Look, we still believe in the old kind of diversification by group, but weve also got a new prism going here. Remember, you need a highyielder in your portfolio, a big dividendpaying stock for Downside Protection and the massive multiyear gains that come from reinvesting those dividends, and you must reinvest. Second, you need a way to profit a whole lot when the market is in good shape. Sometimes it is, and still potentially keep delivering gains if things get worse which is why you must have exposure to growth, preferably a high quality secular growth stock, where the earnings estimate is a powerful momentum. Then a speculative stock, something that trades for less than 10, a company left for dead by big Money Managers on wall street or one theyve never heard of. Speculation keeps you doing the homework and keeps you from not opening your statement. I hate that, people put the statement in the drawer. Fourth, you need something from a safe geography, either a Foreign Company if the United States is weak or a domestic security play if the rest of the world is stinking up the joint. And last but absolutely not least you need some gold, because gold has a special property, one that makes this metal precious to any diversified portfolio. Gold tends to go up when Everything Else goes down. Consider it your insurance against economic or geopolitical chaos. Consider it insurance against uncertainty and inflation. All things that cause most stocks to decline, but also cause the price of gold to rise. I like to think of the gold position as a kind of stock insurance. Would you own a home without Homeowners Insurance . Would you buy a car without Car Insurance first . You shouldnt invest without some gold exposure because gold pays off when Everything Else fails and also has been the best performing asset year after year for the last decade, racking up gains consistently over a period where at some point every other asset class has truly disappointed you. Owning gold is not on the upside but can be minimal, about limiting the risk to the downside. At any moment theres a whole host of sectors that outperform gold but none look like the insurance policy like gold does. How should you own gold . The easiest and less risky way is through the etf or spider called gold shares but youve heard of it as symbol gld, right, which owns the metal and does a terrific job of tracking its price. You can also potentially call your broker and buy bouillon, the physical bars of gold as opposed to the cubes i like in my soup. This is for investors with a lot of money and can afford to buy gold in bulk. And pay to store it in a bank. Got to tell you though, i like it, if you can do it. What about the gold miners . Pick the right company, one with low cost thats growing production, they can outperform the commodity for a period of time, but remember its not going to trade in lockstep with the commodity, and the same thing that makes gold valuable here, its scarcity, its hard to get out of ground cheaply and there arent a lot of cheap new mines also makes the gold miners perilous. Gold miners can screw things up, debt, management teams, geography. Virtually every time ive gotten behind a gold stock recent years ive been burned, shutdowns at their mines, higher than expected cash costs and delays and every time something goes wrong the stocks get hammered, so i gave up on the entire group and decided to stick with the gld or the physical commodity. Heres the bottom line. If you want exposure to gold and not only want it, you need it, its your portfolio insurance policy and everybody should have some. Then you should just do the easy thing and own gold through the gld. Not some gold miner thats only loosely connected to the underlying price of the commodity. Thats too dangerous. This is gld. Stay with cramer. Ed a round of. Then i read a book while teaching myself how to play guitar; ran ten miles while knitting myself a sweater; jumped out of a plane. Finally, i became a ping pong master while recording my debut album. How you ask . With 5hour energy. I get hours of energy now no crash later. Wait to see the next five hours. With olay, heres how. New regenerist eye and lash duo the cream smooths the look of lids. Softens the look of lines. The serum instantly thickens the look of lashes. See wow . Eyes in just one week with olay