Editor's note: Jim Cramer's new book,
Real Money: Sane Investing in an Insane World
, is available in selected bookstores now. As a special bonus to
readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it,
. Today, we present Cramer's seventh rule of investing. To read about his first rule,
; for his second,
; for his third,
; for his fourth,
; for his fifth,
; for his sixth,
You see it over and over again. A stock gets hammered. People flee after the hammering. The market gets crushed on a huge down day. People leave at the end of the day. A sector gets annihilated. Quickly. People can't take the pain; they bolt after the annihilation.
Panic is the operating instinct in all of these cases. There's something basic and instinctive about panic, about the desire to flee. It might work when it comes to individuals and things that might threaten us physically. But it can't make you a dime. That's why I say:
No one ever made a dime panicking.
There will always be a better time to go, a better time to leave the table than the one brought on by panic.
Let's take the latest panic, the run out of
(BIIB - Get Report)
. As soon as I saw the panic in that stock, I wanted to run the other direction; I wanted to buy. If you bought the heart of that panic, the $36 price, you could have made a quick 5 points already. If you flipped it then, you could have gotten back in and already would be up a couple for the investible side of the ledger. I think that stock ultimately will go back to the $40s and maybe even the $50s, making a mockery of those who fled.
We get mini-panics all the time in the market. We had a mini-panic in
(SBUX - Get Report)
off a weak monthly comp number. We had a mini-panics in
(PNRA - Get Report)
off a couple of not-so-great months. These down-5 and down-10 situations don't need to be chased or participated in. A better time to sell will come.
I want you to do something for me next time there is a panic. I want you to take the opposite side of the trade. When you see one of those high-speed routs of a sector or a stock, buy a little. Get a feel for it. See what I mean. The most rewarding trades you can make are those where the decks have been cleared out by panicky folks using market orders who just don't get that the exit doors aren't as big as they think they are.
Mind you, I am not saying that all merchandise that gets panicked out of is worth buying for the long term. I am saying that it's a rare day when a stock or market that is socked that there won't be some sort of bounce that allows you to get out at a better price than you would have if you just joined the fleeing masses.