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Cramer Rewrites 'Little Room for Error'

The market has become a vicious beast that allows for very few mistakes.
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This was everybody's favorite story for the week, so let me spend some time going over it. I can tell, by the way, that we have a ton of people who want to know more elementary stuff about how the investment process works because, even though these pieces go up on Saturdays, they're the most read pieces I write. Sometimes I think that if the whole business journalism establishment, save Fortune, weren't out to try to put us out of business, someone would mention that I was doing this stuff, because it's unique that a hedge fund manager stops to put every word into plain English. But that's just the way it is.

Every day, I have to rethink my role as a columnist writing about the market. Every day. Because the market has become a vicious beast that allows for very few mistakes.

(The real peril of my column is the way it can make me look stupid so fast. On that subject, by the way, my favorite was my Yahoo! (YHOO) Badlands piece -- the original -- I was writing in real time about buying Yahoo! and getting clobbered as I was doing it.)

Let me give you the perfect for-instance.

I get hard copies of papers delivered to me from around the world to look at different business sections. (I scan the online editions, but I find that a lot of stuff doesn't make it into the online editions.)

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Yesterday I got a Boston Globe from Friday. In it was a glowing article about



written by two very respectable business columnists. The article talked about how well Sapient had weathered the new dot-com world.

(Sapient is in the Viantundefined/Scientundefined/Siebelundefined cohort. That means it helps construct Web strategies for those that don't have them.)

If you had gotten this article, you probably would have bought the stock immediately, even though that was not the


of the authors.

(Business writing tends to be pretty pedestrian, but I like the writing in The Boston Globe because it's written for fund managers. These two writers used to do stuff for us, too. It seemed a little warmed over to me, but the stuff in the Globe is as fresh as a daisy. This article was quite compelling.)

The same day, Sapient reported a bad number. The exact same day. The stock went down 40 points.

(How ironic!)

We can conclude:

    The writers got fooled and are idiots. (The writers are the two best financial writers on a nonfinancial daily paper outside of New York City and Los Angeles. They're top-notch. They're not idiots. They were no more fooled than all of the buyers of the stock who paid in the hundreds for it. )The Sapient guys got fooled and in turn fooled the writers. (Wow, your worst nightmare. Management didn't have a handle on its business? If this is the case, the company is in serious trouble. I don't think it is, or I would not have bought stock in it on Friday.)This market is nuts because Sapient just wasn't that bad. (I liked this one.)The business market is so dynamic that you can't take a snapshot of it anymore and have it be more than just a true picture for that second in time. (The proper way to have put this would have been to say that the "expectations" are so dynamic. That's what keeps ratcheting up while the company does its thing.)

I am going with C and D. I am not long or short Sapient, but it is pretty frightening to be "wrong" for 40 points before the ink is dry on the paper. The market just gets it wrong so often these days because the conditions are changing on a dime.

(What could have changed here? Some unbooked business? Some sense that the company thought Wall Street had gotten too bullish and was afraid of disappointment? Some sloppiness in execution? We still aren't sure. When we find out we might have a reason to take a big swing in this stock because it's in the most robust sector of the U.S. economy.)

That's where we are right now in the stock market. The margin for error is too great, and the need to equivocate is growing, not shrinking. You can't be right for more than 10 minutes!

(Sometimes I will write something for and, before I can finish it -- and I'm an unbelievably fast writer -- something monumental has happened. This morning when the employment numbers were reported, the bonds skyrocketed. It was a huge move up involving trillions of dollars of debt being repriced. A few minutes later, and one minute after I sent the piece, the bonds nose-dived. These moves would have taken months in another time, even when I was in the business. Now they take seconds! How can anybody write about them and not be wrong quite often? Hmmmm, maybe that's why I call my column Wrong!)

Take our TV show last Friday night. Given that



had just reported, I didn't think it was possible that they could have material market information about deals with China that they would not mention on the conference call. That made me not want to own the stock. But this weekend, they revealed an important marketing initiative that turned the stock around.

(Some people say this was clear on the call. The only thing clear on the call was that the Qualcomm people thought expectations, like Sapient, had gotten ahead of themselves. That's why this stock went down so badly.)

Again, I ask, was I fooled, management fooled, the market fooled, or do things just change so fast now that nothing holds up for more than a few days or even hours? I think it is the latter.

(I still don't know the answer. But I sure didn't like what happened.)

You want to talk about ephemeral? Let's look at this

America Online


decision to merge with

Time Warner


. If AOL is to survive and prosper long term in a world where television is still king of the home -- and it is, by the way, and those of us who get their news online, while growing, are still in the vast minority -- it needs to have a broadcast and a broadband strategy.

(This continues to be a lead balloon and I continue to own it. Sometimes you have to play it that way. I believe this combination cements AOL's place, along with Microsoft (MSFT) and General Electric (GE) , as one of the dominant companies of the future.)

Yet by doing the logical thing it needed to do to survive, it, short term, killed its own stock. Anyone who championed this deal, including yours truly, is now judged to have made a foolish mistake.

(This harks back to the mistake I made in taking AOL when the deal was announced. I wrote about it as I did it, which took away the deniability that other managers have in this business. I was right there in living color buying a stock too high!)

And in the world that I helped create, a world where you are at last held accountable for your financial mistakes, that's how it should be. The smart/right thing to have done with AOL was to short the *(&^% out of the stock the moment this deal was announced.

(I want our world to be like the sports world, where there are heroes and bums and mistakes in execution and successes in execution.)

Nevertheless, everyone I know in the dot-com world nods silently that this deal is the killer for everybody else involved in the space. It is pretty much game over for everybody else involved because it boxes everybody out. It may have made the owners of AOL look foolish, but it makes the owners of everything else even more foolish. Indeed, the sector still hasn't recovered from this merger.

(Here is the little secret that I know from my work at This is a transforming deal that makes it so you may never be able to beat AOL. You have to understand the massive scale this deal brings and the ability these two companies have to cross-promote and set the agenda. They could be unstoppable.)

What I am adapting to, both in this column and in my stock picking, is a reality where the penalty for being wrong is unbelievably high.

(It was so much easier when stocks moved in small increments. You could always fudge things by saying you were buying them for the long term. Now when stocks go up 50, 60 points a day, who gives a hoot about the long term?)

But the need to make fast judgments is so great that you have to risk being wrong if you are going to make big money.

(Every day I have to make decisions on the fly that could come back and bite me. And I tell you about them!)

The answer, again for the moment, may be in trying to find the stocks where the risk/reward is not 40 points up or down, as is the case with Sapient or AOL, and is instead 10 points up and 3 points down. That way, instead of being a fool, you can be smart and yet have made a foolish mistake.

That's a big difference.

(So I look for good stocks that are momentarily down or damaged. I don't look for damaged companies with stocks that are down. In this environment a damaged company may not be able to recover in time. The economy moves too fast for that now.)

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online, Microsoft, Sapient and Yahoo!. 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 comment on his column at