Cramer's 'Mad Money' Recap: Stock Picking Requires Detective Work

Cramer says investors need to do sift through information to get the facts they need to make intelligent choices.
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Editor's note: This recap was last published on March 31, 2010.

NEW YORK (

TheStreet

) -- "One of the most important parts of investing it finding the truth," Jim Cramer told the viewers of his "Mad Money" TV show Friday, as he dedicated the entire show to teaching investors how to put on their Sherlock Holmes cap and find the best stocks.

Cramer said he's always been a fundamentalist, believing that the best way to analyze a stock is by looking at the underlying company and its prospects.

The "homework" that Cramer preaches nightly refers to looking at companies' earnings releases, checking EC filings and most importantly, listening to the quarterly conference calls. Cramer said this work may seem boring, but it's vital to understanding the stocks you own.

But fundamentals don't always tell the whole story, said Cramer. Looking at the charts, or technical analysis, is a good gauge to tell what the big money guys are doing with their shares, he said, adding it's becoming increasingly important as more investors come to rely on patterns they see in the charts.

Cramer said investors need a complete picture of a stock based on the best information out there. He said that in the long run, the fundamentals, such as the growth and strength of the underlying company, will always win out. But in the short term, he said, the buying and selling of institutional money managers matters more, and that's where technical analysis does its best work.

Cramer cautioned, however, that investors should never buy a stock based solely on technical analysis. He said if the stock fails to go up as expected, investors will have absolutely no reason to own it. But if they like the fundamentals as well, then they won't mind holding on for the stock to recover.

Wary of Academic Talk

"Just because someone has a Ph.D or Nobel Price doesn't mean they have a clue about investing," Cramer told viewers. He said while it's always worth taking advantage of other people's ideas, there's a real danger in listening to the academics on TV or in the newspaper.

Cramer said its tempting to listen to the talking heads on TV, because they're some of the most convincing and influential people out there. He said they're intelligent, articulate, well credentialed, and sadly, almost always dead wrong.

Cramer said that most academics simply don't have any skin in the game and don't understand how investing really works. He said unless they invest in stocks themselves and have plenty of experience as investors, everything they say should be taken with a grain of salt.

Case in point, professor Nouriel Roubini and Nobel winner Paul Krugman, two of the loudest proponents of nationalizing our banking system during the height of our financial crisis. According to these academics, the banks were insolvent and should all be taken over by the government. Yet in retrospect, many of our nation's banks were just fine and were able to recover with just some loans from the government.

Cramer said the collateral damage that would have been caused by a mass nationalization of our nations' banks would have been huge. He said the economy wouldn't have recovered, and there certainly wouldn't have been a stock rally in 2009.

Cramer said never give much credence to academics unless they have real- world investing experience.

Dangerous Comparisons

Cramer's third lesson for investors: "You can't make smart decisions if you're taken by fear." He reiterated his mantra that "no one ever made a dime panicking" and said that investors should never buy into hysterical historical analogies such as "the U.S. is just like Japan during its lost decade," or "the U.S. is on the verge of becoming Weimar Germany with hyper inflation."

Cramer said ever since the financial crisis first got started, analogies were drawn to Japan's "lost decade" during the 1990's where the country experienced no growth. He said while there are similarities, such as a brutal downturn in real estate followed by a financial panic, the U.S. is very different from Japan.

Cramer said U.S. businesses made the tough calls, cutting back hard and slashing inventories, while Japan's didn't. He said the consumer spending rebounded in the U.S., while it languished in Japan. And most importantly, the U.S. didn't follow Japan's lead in propping up all of the banks, even the ridiculously insolvent ones.

Cramer said there are also stark differences between the U.S. and Japan. He noted that Japan's population is stagnant, growing just 9% from 1980 to 2008. By contrast, the U.S. population was up 34% during the same period. Then there's also the average age in Japan, 44.2 years, compared to just 36.7 years in the U.S.

As for Germany's hyper-inflation comparison, Cramer said that too is just bogus. He said that you can't draw a line from inflated commodity prices based largely on phony demand, to hyper inflation, no matter how hard you try.

Cramer said his bottom line is that there will always be fear mongers out there, but investors should only sell when the fundamentals are faltering, and not because the bears are trying to freak you out.

Turnaround Signs

How can investors tell when a company, or whole industry, is about to turn a corner? Cramer said look at their inventory levels.

Few things are more important that inventory, Cramer told viewers, recounting the lessons his father taught him about how business really works. Cramer explained that inventory has to be financed, and that businesses need to have credit to keep inventory on hand. That means that no business has enough cash on hand to pay for excess inventory.

What's that mean for stocks? Cramer said whether you're talking about retail or housing, technology or auto makers, inventory levels will always tell the story of how a company, or industry, is doing. If companies have large inventories, that means they're selling at a discount, cutting into margins to eliminate the excess. But if inventories are lean, then companies can charge full price and keep moving forward.

Cramer said that too much inventory is always trouble, especially during times when credit it tight, and companies can't get the loans they need to finance it.

Listing Myth

Cramer's final tip for investors was to dispel the myth that just because a stock is listed on an exchange, it must be viable. "Nope," Cramer exclaimed!

Cramer used the term "zombie stocks" to characterize shares of companies that would have been cancelled in any other country in the world. He said these shares do nothing more than make the exchanges and brokers money, which is why no one has the guts to cancel them.

Case in point, shares of the former General Motors, which were allowed to trade for months, even though everyone knew that after bankruptcy, those shares would be worthless.

Cramer also gave the zombie moniker to shares of

AIG

(AIG) - Get Report

,

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, three companies where government involvement makes it impossible to know if these shares have any value at all.

Cramer said the regulators have made it clear that they don't care about you, the investor, and they don't care if you get taken advantage of. He called it a travesty that the Securities and Exchange Commission doesn't crack down and delist shares that rightfully need delisting.

-- Written by Scott Rutt in Washington D.C.

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.

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