Trash Cramer? Don't mind if I do

I almost feel bad criticizing Jim Cramer, the host of Mad Money. However, I'm not going to talk about how his picks are awful, even though they have underperformed the market. I'm also not going to talk about his lackluster industry analysis, such as, "Ignore financials, they're terrible."

What I am going to talk about is his recent 5 part series, 'Playing Defense.' This set of 25 investment tips to "keep you from losing your money" range from the obvious to the downright stupid. I thought that I would pick out three of the downright stupid ones and talk about why they're wrong.

Tip #1: Diversify. Cramer says: always be diversified, and never keep more than 20% of your money in a stock or sector.
I say: It depends. Value investor Joel Greenblatt's The Little Book that Beats the Market describes, essentially, that if you have a portfolio of great companies, there's no need to diversify. I prefer to think in terms of valuation. If a stock or industry has an incredibly cheap valuation, there is nothing wrong in being overweight in it.

Tip #16: Don't sell call or put options. Cramer says: selling calls gives up your upside, and selling puts has unlimited downside.
I say: This is exactly what I thought when a friend of mine first told me about selling calls. Why would I want to sell my upside to someone? Then, after actually doing some research on options, I realized that options, like stocks, come in expensive and cheap varieties. Since then, I've focused on selling the expensive ones and buying the cheap ones. Call options are amazing. Sure, if a stock goes above the strike, you're not making that profit. Nevertheless, you're not losing anything, either, and you still get to keep the options premium. Moreover, selling calls decreases your cost basis and acts as a hedge against downside risk. Cramer's advice is just foolish.

Tip #17: Never use margin. Cramer says: if the price of a stock drops, you will get a margin call and it will be painful.
I say: This is basic financial accounting. If your return on equity (the return of your portfolio) is greater than the rate that you pay to borrow money from your broker (the margin rate), margin yourself up and watch your portfolio grow. That being said, don't ever margin yourself to a point where you could receive a margin call that you won't be able to meet.