The most useless thing you can do as an investor is follow what everyone else is doing, Jim Cramer cautioned his Mad Money viewers Monday. When everyone expects something to happen, it's likely already priced into the stock market, Cramer told viewers, as he dedicated the entire show to some basic economic and investing lessons that every investor needs to know.
Cramer's first lesson was that of efficient markets, the theory that stocks always reflect all relevant information. Index funds have been marketed largely on the premise that it's pointless to pick stocks because individuals will never have the edge over the markets overall.
But in reality, the stock market is not perfectly efficient, Cramer said, and it takes time for news to travel. When the Federal Reserve changed its mind on raising interest rates earlier this month, it took a full two weeks for money managers to reposition themselves for the new reality and for stocks to find a new equilibrium.
When everyone says something is going to happen however, then in a way, it already has happened. That's why it doesn't make sense to fret about what everyone else is fretting about. Instead, prepare for what investors are not caring about.
Cramer's next lesson for investors was about timing. As with many things in this world, timing is everything. That's not to say you can't make money from something obvious, even if you're late to the party. It just means you'll have to work harder for less reward.
That's why Cramer said it's perfectly OK for investors to put their money into index funds if they don't have the time or inclination to invest in individual stocks. He continued to advocate "buy and do your homework" over "buy and hold," which is why you need to have the time to do some research, understand what you own and why you own it.
Remember that great is always the enemy of good, which is why you should never wait and try to pick the perfect times to buy and sell. Instead, buy in stages on the way down and sell in stages as your stocks go higher. In the end, all that matters is that you bought low and sold for more than you paid. If you wait for the perfect timing, you'll never get in or out in time.
Why Stocks Rise and Fall
Every day, thousands of stocks head higher while thousands of others trend lower. But not all individual stock moves are equal, Cramer said. Some represent a signal, while others are just noise.
Sometimes, a good stock gets ahead of itself and becomes overbought. Other times, stocks sell off too hard and become oversold. Even high quality stocks can find themselves in either condition.
Cramer said it is important to understand that when a stock has a big swing, that swing might be rooted in its fundamentals and represent a signal, while other times it may just be noise that signals nothing. Sometimes a stock's technical indicators reach a certain level, while other times a stock will be tied to the exchange-traded funds, or ETFs, it finds itself apart of.
That's why Cramer said investors shouldn't take their cues from day-to-day gyrations, and they should instead focus on the the longer-term fundamentals and the secular trends in the markets.
Supply and Demand
Cramer's next economics lesson to viewers was the classic law of supply and demand. In particular, how the IPO cycle affects the broader market.
The stock market obeys supply and demand like any other market. For fund managers to buy the next red-hot IPO, they must first sell something else in order to raise cash. If there are too many IPOs all at once, there won't be enough demand and prices will fall across the board.
This pattern played out in early 2014, Cramer recalled, as a flood of profitless cloud and biotech stocks hit the market. The market simply couldn't handle the supply and prices tumbled. Now is 2019, after Uber (UBER) - Get Report , Lyft (LYFT) - Get Report , Pinterest (PINS) - Get Report , Slack (WORK) - Get Report and countess other red-hot names, we are rapidly headed for another tipping point.
Good Planning and Good Luck
Cramer's last lesson for investors was to always understand why a stock is going up or down, because it might not be for the reasons you think.
When you do your homework and buy a stock, you'll have a list of reasons why you like it and why you think it will be heading higher. So it's easy to think that when the stock does go higher, it's because of the reasons you've chosen. But sometimes you might just be in the right place at the right time.
Depending on where we are in the economic cycle, investors will be rotating in and out of different sectors. If it looks like a recession, look for the consumer packaged goods and the healthcare stocks to rally. If the bulls are running wild, expect to the see rallies in technology. In all of these cases, Cramer said it's better to be lucky than good. If you're in the right place at the right time, great, but if not, try and look for the signals you missed and don't get caught unprepared again.
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At the time of publication, Cramer's Action Alerts PLUS had no position in the stocks mentioned.