Sneak Preview: How to Be Contrarian

Editor's note: This is a special excerpt from Jim Cramer's book, Jim Cramer's Mad Money: Watch TV, Get Rich. To order your copy and read all the rules, click here.

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2. How to be a contrarian and still make money. I just told you to go with the flow, but there are times where you make a lot of money by going against the conventional wisdom and buying a stock that's totally out of favor.

That said, you have to know what you're doing. Not every hated stock becomes a winner. Most of them keep being hated and keep going down. If you're going to buy a stock that you think the big institutions are wrong about, you have to do more than just your regular homework. You still must understand the fundamentals of the company; you need to know how the market treats the sector; you have to know that the stock you're buying is good.

But you must add one more thing if it's a stock that's seemingly out of favor: you must understand why the big institutional money managers and/or the analysts will change their minds about the stock. If they don't change their minds then no matter how good the company is, no matter how great the fundamentals, you know that stock is not going higher.

The way to make good, contrarian calls is by understanding what will make a stock move from the out-of-favor column into the in-favor column. You need to know how the money managers think, and for that, you should watch me think out loud on Mad Money. There are some easy ways to tell what the institutional investors are thinking about a stock. If the earnings estimates for a stock are all low, and you think that the company is going to blow those earnings away, then you have a good thesis.

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Two of my best contrarian calls were Amylin Pharmaceuticals(AMLN Quote) and Google(GOOG Quote) at the very beginning of the show. People might not think of Google as an out-of-favor stock at this point, but from its IPO in August 2004 until about a year later, this stock was unloved. It was being valued at a huge discount to competitors like Yahoo!(YHOO Quote).