Cramer Rewrites 'Know How to Sell'

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(This is one of those pieces on how institutions work. Most money managers who have come of age during this bountiful period have never been faced with the need to take losses unless a stock blew up on them and they had to. The idea of "moving a block" of stock is pretty alien to them. They have no knowledge of how it's done. I only know because I worked at a large brokerage house and saw the right way and the wrong way and my wife, who traded all her professional life for hedge funds, repeatedly showed me how it works.)

Here's something they are going to have to start teaching mutual-fund managers: how to sell. (How to sell blocks of illiquid stock is more like it. Anybody can sell 25,000 Compaq (CPQ:NYSE - news - boards).)

As long as things were rosy, knowing how to sell was for morons. You sold only because you didn't know any better about what you bought! But the end of mutual-fund fiscal years showed me that a tutorial in how to get out of the dregs is much needed. (Remember, mutual funds took losses last week in order to offset gains they may have taken earlier in the year. That helps keep the tax bill down.)

First, let me tell you how to sell when you have a stinker: You go to the head trader at Remarc Brothers. (Made up brokerage house that trades iVillage (IVIL:Nasdaq - news - boards), which is the standard I use for these distressed pieces of business.) You get him on the line with your salesperson from Remarc and you say, "I need to move 700,000 iVillage. The stock is at $6. What will you pay me? You cannot shop this." ("Move" equals sell. "You pay me," means that Remarc, the firm, is being asked to commit capital, its own capital, to take the iVillage off of your hands. "You cannot shop this" means we don't want you to go tell anybody that you're working this piece of merchandise because we don't want other guys, bad guys, to run ahead and knock the stock down and short it at our expense. Believe me, they will if they know a big trade like this is coming.)

If you're a good account and you're not a liar, the Remarc people will come back with a reasonable bid at a discount. (What is there to lie about? Plenty. First, Remarc might not trust you and think that something horrible is about to come out about iVillage. That will leave them holding the bag. Second, maybe you're not opening up and telling them your full position. If you have 2 million shares of iVillage -- oh Lordy! -- you would get Remarc long 700,000 and then kill them by moving the rest away from them. That would be devastating.)

"With the last sale for $6, I'll pay you $5 for the whole thing." If you are a regular in this game, you know that the $700,000 hit to your bottom line that the trade will incur is nothing, a gift, part of what happens when you make a mistake. You say, "Thanks. Let me know when I'm done." And you move on, grateful to get out down $1. (That's a nice size discount. But remember, Remarc has to take on a lot of risk. They take down 700,000 and hope to place it without too much of a loss. They aren't trying to make money off you, believe me. They are simply masters at figuring out supply and demand and usually they can find buyers -- their real job -- of most stocks down 15%. Even this stock. That's a decent bid. You could counter and say $5.5, but, believe me, that's not worth it. That would be a mistake. They are pricing it not to haggle with you. They are pricing it where they can move it.)

But if you're a neophyte, you don't even know how to have that dialogue. Instead, what you do is you sell little bits every day to different brokers. You sell 10,000 here and 20,000 there. Soon every market maker is full up with your iVillage. Now, instead of one seller out there selling a big slug, you have 10 sellers out there selling chunks of iVillage. (This is how many of these stocks traded during the final days of October. The same pieces just kept getting barfed right back up because the sellers never knew how to trade big pieces or they were embarrassed or were not skilled at cutting losses because they never had to.

The selling would be exacerbated because in horrible down moves like this one, we all know who is selling and who is caught. We can bet that someone big is coming out of a position and we can short it, betting that you will panic and sell it even lower. People "shoot against" you when they see you sell a stock out piecemeal. If someone catches a whiff of a large shareholder bolting from iVillage at $6, that's a license to short the stock betting there'll be more selling. That's why, when the selling is done, the stock pops so convincingly, because not only is the supply then eaten up, but the shorts have to scramble and cover.)

By the time you're done, the stock is at $1. Instead of losing $700,000 in one fell swoop, you lose millions. You do a disservice to your fiduciaries. And you want to kill yourself. I saw this pattern happen time after time in the last few weeks as moronic sloppy sellers carpet-bombed their own stocks on the way out! (People who are inexperienced in the institutional ways can hurt you badly, and there are so many new managers that I'd put a premium on experience in this market.)

It killed a lot of these funds. They should be ashamed. There are rules of professional selling. There is a right and a wrong way. These folks just never learned the rules. Now their shareholders have to pay for their rookies' selling mistakes. And the funds will probably never recover. (Again, go with experienced managers in this market. Otherwise it's too hard if things go wrong.)

Random musings: Don't forget to read up on the dot-com world in the excellent package TSC has put together! (Great package, I love this stuff.)

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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to send comments on his column to James J. Cramer.