Cramer Looks Back: A Final Blow From an Old Friend, the S&Ls

A seemingly safe bet blows up in the trader's face as his five-part series draws to a close.
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Editor's Note: James J. Cramer, co-founder of, is getting some rest and relaxation with his family this week. But in order to give you your daily Cramer fix, we've got a special five-part series from the trader. In this final part, Cramer outlines how one of his best long-term strategies evaporated.


For a dozen years I used a principle first articulated in

Peter Lynch's


One Up on Wall Street

: Buy quality savings and loans around book value and you will make money.

In 1998, that simple principle cost me millions. And led to a change in style that I had to implement at my fund, or risk the possibility of continued massive underperformance against the averages.

To simplify Lynch's argument, the logic behind S&L investments is that these companies either perform well on an earnings basis and move up or stagnate and get bought by other companies that want to grow. You win either way. Sometimes you win dramatically.

But in 1998 two concerns overrode that luscious dichotomy. First the yield curve, the shape of interest rates over time, turned extremely negative for these S&Ls. They were basically lending out at no profit. Further, long-term rates had dropped so low that massive numbers of borrowers refinanced, wiping out prospective earnings streams that these companies had counted on to make their estimates.

Second, Y2K integration worries simply halted the mergers-and-acquisition game. Savings and loans that had enough problems worrying about their own compliance were certainly not going to take on the Y2K problems of another S&L, along with the hassle of integration. It didn't help that the big banks had basically bought everybody they needed and all fill-in acquisitions in areas around the country might lead to saturation. More deals would just invite regulatory scrutiny over antitrust.

So with earnings kiboshed and with M&A dead, I saw no reason to own these stocks any more.

That was the problem. Nobody else did either. These are stocks you have to sit with over time. You can't trade them. You can't move in and out. That's not possible without inflicting severe damage to your performance.

No matter. The writing was on the wall. And there is nothing worse than a manager who knows he has an asset that is going to go down in value but takes no action. So, one by one, I bade goodbye to each of my tiny savings and loans, many of which I owned as much as 8% to 9% of the shares outstanding.

As these stocks are all traded by the same people and they all knew I was bailing, obviously I could not get the best prices. By the time I was finished I was taking big losses on much of the merchandise. In some cases I had to stop selling to let the stocks lift. But in most cases there was no lift.

Ultimately, I got out of all but one, one that I felt understood the game and was doing too well to boot. In every case, after I was done selling the S&Ls, they fell dramatically.

The price performance of the group after my exit was vindication, but it was hardly sweet. A strategy that had made me so much money was now dead. A group of stocks that I know well (or better than most) can no longer make money. My years of skillful picking of winning S&Ls are now over.

What is the epilogue? The world changes. The key to long-term investing outperformance is to make sure that you are never so devoutly attached to a strategy that your true belief becomes a lonely and money-losing proposition. The big lesson: Even time-tested strategies eventually come undone. Don't get religion, but remain religiously steadfast in search of the inflection points that mark these changes.

James J. Cramer is manager of a hedge fund and co-founder of 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 by sending an email to