Editor's Note: This column originally ran as part of the Jan. 30 edition of TheStreet.com Internet Review. It's being republished as a bonus for TheStreet.com readers.

The Internet stock that was most in the news last week was

Rediff.com

(REDF)

, an

Internet Forever stock that notched a 33% gain during the week, thanks to Jim Cramer's mention of the company on

Mad Money

on Tuesday.

I was giving a talk in Phoenix later that evening and happened to be in my hotel room watching the show before I was scheduled to speak. I remember when he mentioned REDF and how the ticker started going across the screen: first at $15.90, then $16.40, then $16.80, and finally, I couldn't believe my eyes, $17.90!

The next day, when the stock went as high as $21.40, there was much discussion, from

Jim and

Doug Kass and others, about the "

Mad Money

effect" and Jim's effect on the stocks he mentions.

Today, I want to share my own

Mad Money

anecdote and my thoughts on this phenomenon, and give my two cents on how readers can effectively manage their positions in Internet stocks that get captured by the

Mad Money

effect.

It was around last February when Jim was doing dress rehearsals for his show, and I went on as a guest (the show was not aired). On the show we argued some of my picks vs. some of his. I liked Terra Lycos and Ask Jeeves at the time, and he hated them for being third- and fourth-rate search engines, an assessment I agreed with. However, both had great balance sheets (hundreds of millions in cash for each of them with no debt at all), and both were trading at single-digit P/E ratios. Additionally, their cash flows were very steady, making them, in my view of things, excellent buyout candidates. In fact, within two to three months, both stocks were bought out at 20%-30% premiums.

Meanwhile, Jim liked

Google

(GOOG) - Get Report

, a stock I had no real opinion on. The stock dipped about 10% in the month after the rehearsal, but Jim's call proved to be the right one, as the stock moved up about 120% in the 11 months since the show.

I sort of feel the same way now about Rediff that I did about Google then. It could definitely make the huge move over the next year, but it doesn't fit my usual criteria. It trades at a high multiple of sales, but trailing sales are never going to be the metric for a company like this. However, there are a billion-plus potential customers in India, and one company will win there. Right now, the leading company is Rediff. Could this $509 million stock achieve a $1 billion or $2 billion market cap within five years? Absolutely.

As I outlined in

TheStreet.com Internet Review

last week, it doesn't fit my criteria at the moment for the Internet Review portfolio, but I liked it enough for the Internet Forever portfolio to select it there, since I believe in the long run it has every chance of being a winner.

So on the basis of my experience and observations, here's what I believe made Cramer like Rediff.

First off, I believe Jim picked Rediff because it's a leader in a growing sector. A very successful strategy among fairly high-frequency traders is a top-down-then-bottom-up strategy of picking leading sectors and then finding the fastest-growing companies in that sector. As a completely removed observer (I've never spoken to Jim about this), I would generalize Jim's style as coming in three stages:

    1) Top-down: Find a leading sector within the market. In this case, the Internet is hot, and India is growing. So what's the stock to pick to capitalize on India and the Internet?
    2) Bottom up: Finding a leading stock in a leading sector is not as easy as finding the biggest market-cap company; you have to find the fastest-growing companies. Jim loads up on the sector leaders, figuring that if the sector continues to run, they will get the customers, the continued earnings advances, the favorable newspaper articles, and finally, the investors. If Internet and India are sectors that are clamoring for leadership, then it's natural that Jim would look for the few stocks (and there's really only one that stands out) to pick for his run, and that's Rediff, particularly since it had been very beaten down recently.
    3) Do no evil: This third leg of his approach can perhaps be summed up as, "If I get the sector right and if I get the stock right, I sure as hell don't want any headline risk about numbers, accounting, corruption, etc., to throw me off further."

A recent example of his "do no evil" approach is

SulphCo

(SUF)

. This is a company in the alternative energy space that has announced several good deals lately, and the stock ran from $4 to $19 until

Barron's

had a very negative story implying fraud, and the stock tumbled. Furthering the troubles, about a year ago the company dealt with a

Securities and Exchange Commission

investigation. Despite falling from $19 to $7 last week, Cramer said, "Sell sell sell." I don't blame him at all. Why take the risk when there are good companies without the hair on it?

So this brings us to the most important question: Should traders have bought Rediff the day after Jim mentioned it? The stock closed on Tuesday at $15.09 and then opened Wednesday at $19.46. It reached a high of $21.40 before closing at $19.22. It closed Friday at $19.78, a gain of almost 2% for those who bought at the open on Wednesday.

But people who were buying right when Jim was speaking (anywhere between $15.90 and $18) had a potentially enormous one-day trade. Note that just two weeks earlier, the stock had been above $20. I have a couple of thoughts on this.

One, it would be interesting to see the effect Jim's comments have on stocks that have fallen 20% or more in the prior week. Perhaps his comments trigger not only a bounce but a short squeeze.

I happen to think that buying a stock while Jim is talking is a worthwhile endeavor if you are a fast trader and not betting the farm. Some might say it's irresponsible for me to say this, but it does look like you are good for at least a huge one-day trade if you do that. So that's the trader approach.

Of course, in a perfect world, people should wait a week or so with these picks, do their own analysis (which, hopefully, takes a week or more anyway), and then buy the stock if they like it, regardless of how it has performed since the show. In fact, Jim advocates that this is a starting point, not the endgame.

I also think that if I were a holder of a stock Jim mentions, I would not be a seller the next day. Again, maybe there's a short-term bounce that fades, but maybe not, as people continue to do their research after Jim's show brings attention to the stock. It would be worthwhile to study the

Mad Money

effect not just for what happens if you buy at the open the next day, but if you buy one week later and hold for the duration.

At the time of publication, Altucher and/or his fund was long SUF, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, TheStreet.com Internet Review. For more information,

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