Jim Cramer: Methods to my investing madness

Individual investors can not only invest like the pros, they can beat them, too, Jim Cramer said, detailing the methods to his investing madness.

Cramer said it doesn't take a lot of effort to invest one's own money, just a few hours a week for research -- the "homework," as he so often calls it. But the results from that research will bear far more fruit than blindly dumping money into an index fund or, worse, a bond fund in a time of historically low interest rates.

Where can investors find their research? Fortunately, it's practically everywhere, said Cramer, on financial sites and others, as well as on the websites of every publicly traded company.

When starting out, Cramer recommended using the 52-week high list. The new-highs list shows stocks with true momentum, said Cramer, especially in a bad market. But that does not mean investors should just blindly chase every stock on that list. Instead, research will still need to be done to separate the truly great stocks from the ones that are just lucky.

After researching the new high list and picking out the true winners, Cramer said the next step is determining when to buy them. He said a pullback of at least 5% is usually a good entry point, especially when that pullback is caused by general market weakness. You should only buy stocks that have pulled back from the new high list if you're confident they'll make a comeback, he continued.

Cramer's next tip for investors: Learn how to trade. He said learning how to trade stocks on a shorter-term basis will make home gamers better investors overall, as it will teach them many valuable lessons, especially in markets with large, volatile swings in every direction.

Then comes the critical question of when to sell a hot stock. He said there's certainly a lot of money to be made by owning a hot momentum stock, but investors have to know when it's time to leave the table or risk losing it all.

So how can investors tell when a momentum stock has peaked? Cramer said one thing they can look for is the analyst coverage. For smaller, more speculative stocks, Cramer said the rule of thumb is that when a stock has half-a-dozen or so analysts covering it, the stock will begin to peter out because it's become too well known.

Source: Bloomberg Pro Terminal

Trader-G.Bozhidarov

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