3 Investing Rules That CNBC's Jim Cramer Swears By

Jim Cramer has been broadcasting his stock picks over the airwaves of CNBC since the late 1990s. In 2005, he launched his flagship show, Mad Money, where he regularly makes stock calls. Cramer also anchors a daily CNBC show called Squawk on the Street.

Through the decades, he's become one of the most well-known stock pickers in financial media. During this time, through all his calls, both good and bad, he's developed fundamental investing strategies that he shares with his audience and swears by.

Here are three.

Image source: Getty Images.

1. Never buy all at once

Cramer recommends that investors never buy an entire position at once.

"When you buy all at once, you're basically declaring that the stock absolutely won't go any lower," he said. "I mean, come on, that's crazy. Nobody has that kind of insight all the time. Buying gradually, in stages, is all about recognizing that our judgment is fallible."

I think this recommendation makes a lot of sense. Unless investing is your full-time job, you likely won't have time to do all the research you want to before you invest in a company.

So start small. Buying a few shares keeps you interested, so you will consistently follow the company. Then you can get a couple of quarters' worth of data under your belt and see how the company performs, what management says on the earnings calls, and what key performance indicators the market reacts to.

Not only is this experience vital to truly understanding a stock, but it's also similar to dollar-cost averaging, in which you invest a set amount each month, helping smooth out your cost basis over time. This is a better, more defined practice for long-term investing.

2. Buy damaged stocks, not damaged companies

Another rule that Cramer swears by is focusing on stocks that are down for reasons unrelated to the company's fundamentals or operating business.

Investors may be tempted to buy the dip whenever they see a stock getting crushed, thinking it is an opportunity to buy at a discount. But there is often a reason a stock is down. This is when investors need to determine whether a stock is a value play or a value trap.

Is it a fundamental issue with the company, or are external factors beyond its control influencing the stock? For instance, a stock may be down due to an issue in the broader economy or due to a mechanical issue that negatively impacts trading conditions.

But Cramer also acknowledges that determining whether a stock is selling off for legitimate or misguided reasons is never easy.

Investors need to do significant research on this front. If you can determine that an external factor is affecting a stock's price negatively and it has nothing to do with the underlying business model or long-term prospects, you might have a solid buying opportunity.

3. "Bulls make money, bears make money, pigs get slaughtered"

Cramer himself did not coin this phrase -- it's an old Wall Street saying. However, it's one of Cramer's top rules in investing. Very simply, it means don't get greedy if your stock makes big short-term gains.

Cramer said he first learned this lesson while working at a hedge fund owned by Michael Steinhardt, who essentially told him not to get too big a head after he made a big gain on a stock. "I had no idea what he was talking about," Cramer said, according to CNBC. "Of course, not that long after, we got a vicious sell-off and I gave back everything I made and then some."

This has likely informed one of Cramer's other rules, in which he recommends trimming 5% to 10% of a position when a stock rises 20% above your purchase price. And do it again if the stock rises another 20%.

Now, this goes against some of what we preach at Motley Fool, where we would argue that long-term investors should generally let their winners run, which is arguably the best way to build wealth in the stock market.

For example, Nvidia has had a legendary run over the past few decades, turning a $10,000 investment 10 years ago into more than $1.3 million today. But that run included a nauseating plunge of some 60% during the 2022 bear market. Not all institutional investors could let that decline sit on their books while they waited for the stock to recover. But ordinary investors with patience and fortitude could -- and did.

That said, I do think Cramer's advice is worth listening to if you're holding a stock that's suddenly surged and now trades at a pricey valuation, leaving very little room for error. In this scenario, trimming a little off the top may not be a bad idea.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.