This was my most important piece by far because it gave you some insight into what the party's ending might look like after everybody is in the pool. Believe me, we are very far from that happening, as this piece shows. Very far. But it's scary nonetheless, as we shall see.
Let's revisit that moment on Wednesday when it looked like it was curtains for tech.
(When the market opened, it held together for about seven minutes, then the
tanked viciously. This piece is about that tanking.)
Let's treat it as if it were a fire drill and critique what could and could not be done.
(Good traders anticipate. Bad traders react. This is a piece about reacting.)
First, understand that there was confusion everywhere because declines happen with a level of swiftness that advances can only dream about.
(Here is probably the most important point about declines that you need to know. Sellers sell mostly out of fear, that they'll get a lower price. Buyers, once they've done their homework, are willing to stand up to the onslaught of sellers. But if they haven't done their homework, they're too scared to react, or at least act fast enough to match the velocity of the sellers. That's how you get steep momentary declines that chill you to the bone.)
As soon as word spread that
may not have had such a hot quarter -- and I say "may" not just because I'm long it, but because this stock had been trashed by negative publicity before and I'm not succumbing to it this time -- people figured, hey,
, Lucent ... in other words, let's stay away.
(Boy, was this right. Lucent came back to 78, where I let it go. I've had enough of Lucent for the moment, but wasn't going to sell it at 74 off some
Securities and Exchange Commission
document about backlogs. 3Com was disappointing. These guys are beginning to bother me again credibility-wise after they'd made strides to get it together. In the end, they're still competing against some pretty great companies and they don't seem to get enough wins.)
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The difficulty is that by the time that decision is made, we are strictly in group-think mode. In other words, when the consensus was reached that maybe we were due for a round of profit-taking, you can bet that your screen was already wrong.
(Declining prices are great galvanizers. We see them, we think, Lucent and 3Com, could Cisco (CSCO) - Get Report be next? And we sell Cisco. Or Lucent and 3Com. Is there a slowdown in telco spending? Let's sell Nortel (NT) . Or Lucent and 3Com are going down hard, so we better lock in some other winners before they take those away, too. These are the collective thoughts of the market and they dig into the cortex faster than the speed of light. You have to realize that when you have these thoughts you are not the only one having them, that you are probably being joined simultaneously by pros and amateurs alike, now that everyone who plays the market has the Net or a TV. In other words, there's no way to act successfully on a notion if everyone has the same notion at the same time. )
Let's talk about my worst trade of the day, when I sold some
down about a half-dozen points.
(Let's say I talked about my best trade of the day: What would be gained? You would think I was lucky. I would be bragging. We would lose so much in the baggage of that kind of action that it's better just to focus on what can be improved. After 20 years of trading, I have plenty left to improve. But you can't improve unless you investigate the mistakes you've already made. They are painful. This diary, however, has made the pain so routine that I am a bit anesthetized.)
When I went in to sell it, the stock was unchanged, after having declined a couple from the opening. (For the record, as I have now looked at the time and sales run, the stock was looking 126 when I went in.) Goofus (that's me) right then says, "Hey, get the last price on that sale." Gallant knows better; he knows that the stock will be so low by the time you finish selling your 5,000 shares that it's better not to do the trade.
(I trade these kinds of stocks in maximum increments of 5,000 because you can't get any more of them done if you use more than that. Done means executed. You can't get anything near the current stock price -- buy or sell -- with a larger order. I use the Goofus and Gallant stuff because I find myself reading Highlights to my kids just the way my Mom and Dad did with me. Goofus and Gallant stuck with me all those years. Can't believe it.)
Goofus forces the trade and knocks Veritas down big. Gallant anticipates that forced buy and is ready to pounce the moment he sees it down 5. In other words, it was the time to buy, not sell.
(I actually knocked it down 3 from the bid side and 5 from the offered side. The distance between is known as the spread and you'd better believe that the spread in these kinds of stocks when the market is nose-diving is much larger than it looks normally. The whole point of this piece is that, in times of stress, it will be very difficult to do anything -- buy or sell -- in these markets. To buy you would have had to pay up big, which is what ultimately happened here. And to sell you would have had to take a severe discount to the price you saw last.)
But in the heat of battle, people make mistakes. The stock is up big from where I bought it. How do I know where it will stop? What's the problem with taking a profit? It was a good trade to begin with. The whole litany of rationalizations.
(Many of you told me you do the same thing, which is pretty funny. We find ways to reconcile the dumbest things!)
Ultimately, great traders know where the market is heading even when not-so-great traders are reacting to what they are seeing. In a "fast market," one that is moving so rapidly that the machines can't really update in time, you have to think ahead about where a dumb seller might knock down a stock you like. You have to be ready to pounce because you have to understand that, at the bottom, others want to buy with you. But most important, you have to like what you are going to buy because it may not be the lowest price of the day, or of the days.
(My discount brought out a ton of buyers. In order to complete all of the buyers the stock not only had to move up beyond where I started selling, but had to go up another 10 points besides!)
In this great tape, however, it is. If you bought my Veritas, you made about 15 points in 10 minutes.
(I lost; buyers won.)
Now that's good trading.
During this incredible time of plenty in the stock market, we all have to remember that not everyone has it easy. I know this is a journal dedicated to helping you make money, and I don't want to turn it into my soapbox. But I am also not going to pass up the opportunity to remind you to dig in and help out the other guy. If you've got a big profit in something, take something off or give some of it away. Charity is an intensely private matter with me, and it is none of my business what you support or what you do with your money that you have worked so hard (or been lucky enough) to earn.
But if there were ever a year a reader of my column should be able to do the right thing, it is this one. So let's all do it together.
(The other reason I wanted to rewrite this piece. I wanted to hammer this stuff home again.)
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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time this column was originally published, his fund was long Lucent. At the time this rewrite was published, the fund was long Cisco and Nortel. 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