Sneak Preview: Commodities Are Special Cases

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.

---

6. Not all companies that produce commodities are as interchangeable as their products. When you look over a group of oil producers, or copper producers, or nickel producers, or rock producers, you should have a natural tendency to think that all of the stocks are pretty much the same. They all do the same thing, and the product they produce is totally undifferentiated. After all, what's the difference between a ton of iron ore from one company and a ton of iron ore from another company?

This kind of thinking is wrong. It's gotten me hurt in the past, and it could get you hurt in the future. Companies aren't just boxes that turn inputs into outputs and generate profits. Even commodity companies don't work that way. There are just too many ways for an oil company or a mineral company to screw up what should be an easy, profitable process.

That's why you can't treat commodity companies like the commodities they produce, as interchangeable products. You have to differentiate between the good, the bad, and the ugly, even in business where you'd expect all companies to look pretty much the same. If you make the assumption that all oil and gas companies or all mineral companies are essentially the same, then you'll end up holding the worst ones and losing money hand over fist.