One day Pop announced that he was going to take that money and buy the stock of National Video because his brother heard from a guy named Jack that it was the next big thing. At first the stock went up dramatically, and Pop was so happy he kept buying more.
In fact, that was all Pop knew about the stock. He did not follow it intraday and had not researched the company. Eventually the stock started to plummet, and Pop lost everything on the investment.
“All I can say is that I’m glad for two things: one is that Pop never borrowed money to buy National Video, and two that stocks blessedly stop at zero on the way down,” Cramer said.
Cramer learned a very valuable lesson from watching his father go through this experience. He learned that investors will want to own individual stocks to augment their paycheck, but they must know how to invest in an individual stock if they are going to do so.
That is why he created the following four rules for owning stocks:
No. 1 Tips are for waiters.
No. 2 You must do the homework if you are going to own an individual stock.
No. 3 If you can’t do the homework, then own an index fund.
No. 4 If you fear losing money, don’t own stocks at all because they will go down as well as up.
Cramer’s father went wrong by not researching the company and relying on someone else for information on how it was doing. Therefore, he was at the mercy of the movement of the stock and he only knew how to buy, not cut his losses.