Skip to main content

People loved this piece, so I am more than happy to rewrite it. I was proud, given where the market finished the week, that I penned it and I hope you were able to use it. Normally this piece would have appeared Saturday, but a motherboard glitch prevented it until today, when it holds even more true, fortunately.

OK, you just discovered the stock market in the last year or two. You have been buying stocks, trying to take control of your finances, trying to make some money in a market that has been on fire. You have beaten your mutual fund or your broker. You are thrilled with it all. You love the excitement.

(So many new people have come into this market in the years since the Net took off, and many of those people have had positive experiences doing so. Many of you write me every day and say that you truly enjoy the market, and others are getting the hang of it. You are the people I really write for. I tend not to like email from someone thinking about starting a hedge fund. And I tend to love email from people not in the business who are doing well by beating the business. By this point, everybody knows that I get excited about the market and I want others to be similarly excited. This week certainly gave us plenty of excitement and a great opportunity to get in, which I think this piece steered you toward.)

Join the discussion on


Message Boards. And then you run into Tuesday's buzz saw, and all of a sudden, you are thinking, "What the heck? Hey, am I over my head here? Should I buy more? I mean, I have my 401(k) contribution to make. I have some cash on the sidelines. Do I raise more cash, as I am still up big from last year? Is this selloff the beginning or the end? Is it an opportunity? Or is it the big comeuppance that I always hear those old guys talk about on TV?"

(Every single selloff is accompanied by the same set of interviews and the same doom and gloom rap.

Bill Griffeth

dusts off

Jim Grant


Ron Insana

notches up the bearishness.

Merrill Lynch

stays negative, even as this week would have been the perfect week to switch direction. Only

Joe Battipaglia

Scroll to Continue

TheStreet Recommends

stays forceful, and what a delight he is! (I consider it an honor to sit next to the guy on the same panel on our show. The cards are so stacked against the notion of buying that you begin to believe that the most difficult thing you can do is buy. Hmmm, that's right. That's what gets rewarded.)

You've come to the right place. This article's for you. I don't have any merchandise to sell you. I don't want your commissions. I just want to help level the playing field, and after a day like yesterday, the playing field feels awfully lumpy and unfair.

(Here is our mantra. A word about what (TSCM) is trying to accomplish: When we started, we had aspirations of being a magazine. But after last year, a bunch of us realized that we were much more than a magazine. We could be a force, a mass force to try to make it so individuals did better either as a client or an investor with their money. (As I never get tired of saying, is the

Home Depot

(HD) - Get Home Depot Inc. (The) Report

of the New Millennium for the individual investor making decisions about money. Unlike all of the other entities currently helping people make money, we don't want your assets. We don't want to make money for ourselves whether you make money or not. We simply want to make you smarter about your money. To me, it a noble thing to do. I think it is right. I have spent most of my life making rich people richer. This column is about helping everybody else, and fortunately I have enough energy to do both.)

First, forget about whatever you have heard on TV or read in the papers. When we have these selloffs, nobody really knows when they are going to end. What the heck, as my wife said to me midday, "Didja really expect that after a plus-85% year on the


that it would just keep going up?"

(Let's face it, we had an unbelievable year. Many times last year, I would urge you to savor the good feelings, stock them up for when the doom-and-gloomers and the attackers of progress came out of their dens to scare you. You needed some of that strength this week.)

We were due for a correction. What does due mean? It means the same as when

Joe DiMaggio

went 0-for-whatever after 56 straight games. Didn't make DiMaggio a bum. But it sure was a letdown. Did the Yankee Clipper then hit in another 56 straight games? Nope. Still didn't make him a bum.

(Turns out, of course, that DiMaggio hit in 20 straight games right after that miss. Seems like a pretty good parallel to this market.)

I pick sports because, unlike most of the talking heads I have huddled with over the years, it correctly infects your thinking with elements of chance. It correctly sets the odds. In other words, if I were saying right now, "Buy because it is done going down," and it stopped, and I claimed that there was a skill behind that call, I would be bluffing. I would have gotten lucky.

(Cardinal sin of the investment business violated here: I admitted that chance plays a role in getting it right. That flies in the face of guru-dom. But I ain't no guru. I am someone who has traded and invested a lot and loves the game. I am a student of the game. But I get things wrong. And I get things right. Heck,

Ted Williams

didn't bat .500.)

So, if we don't know when it is going to stop going down -- if ever -- why buy anything? Why not sell? A perfectly good question. For these moments, I always fall back on the tenet that has served me well in my stock-picking career: There are bulls, there are bears, and there are pigs -- and only pigs get slaughtered. Simple homily, not as precise as "I always sell based on MPEG," or "I take it off the table when the P/E equals 3 times the growth rate minus the book value squared by the return on equity." But it is commonsensical. And it always applies.

(Wow, a bunch of people emailed me on this asking whether this formula was a good one. One guy told me he used it! Oh please, this is simply a bunch of mumbo-jumbo. I feel terribly for the people who can't admit that things have changed, the ones who are still swearing by certain parameters before they buy or sell a stock. I feel sorry for them because they can't compete with those who are willing to be flexible. I feel sorry for them because they are now wrong for so long that it would be embarrassing if they ever switch and they could not live with themselves if the market nose-dived after they finally turned bullish. I feel sorry for them because they might never make as much as many of you made last year by simply going with great companies and not worrying about valuation. And you could cash out tomorrow and they would never catch up to you.)

Then, you might say, why not panic and get rid of everything? You've made more money than you could have ever believed. Can't it all be taken away?

To which I am asking you to rely on my laboratory. I have traded with all my heart and with all the dough I had since 1979, and I have never ever seen panic pay off. In fact, the great moments to invest during the '80s and '90s were not the "dips" per se, but the ones that felt like routs or panics because somebody, some guru screamed, "Get out now." Even if you can't take the volatility -- and, believe me, there is no crime to that; I know many professionals who vomited yesterday -- I would go for a staged reduction. In other words, don't order the helicopters to the Saigon embassy; there is a better way out of Vietnam.

(This is the crux of this piece, the notion of not panicking. You know why I get so mad at the

Barton Biggses

and the


at times? Not because they aren't rigorous. Heck, in their own way, they are 10 times more rigorous than I will ever be. But because several times -- no, make that many times -- they have advocated strategies that I considered to be the equivalent of yelling "Fire" in a crowded theater and then spraying some lighter fluid when the fire didn't erupt fast enough to cause a stampede. It's not ethics; it is simply the wrong way to do it, even if you are bearish. You can scare people beyond reason when it comes to stocks.)

What does my experience with turbulent markets tell me? First, I like to dig deeply into the reasons why we are having a selloff, even as I know we were due. I want to know if anything has changed. Is there something in the firmament that is so different that this time it would be stupid, heretical or anti-common sense to put some money to work?

(People ask me would I ever be bearish. I always point out that there have been whole years where I leaned to the short side, that when I worked with my wife, she would only play the short side for whole quarters that some of my biggest bets are against companies. But I don't like to be bearish when I think the fundamental backdrop is positive. And I think it still is.)

Interest rates sure have taken a big jump here. They are getting more competitive as an alternative, but I don't think they are there yet. I know that if I were to make a 401(k) contribution today to bonds, it would not be to make a big profit; it would be because it was somehow "safer" than stocks. Sure, if rates went up to 7%, they would be more attractive, and at 8% it might be sayonara market for now, because you just can't beat 8% compounding after you have just socked in some big gains in risky stocks.

(That's the real threshold where people who have a lot of money pull their money out of the stock market. You can just make too much money without thinking about it at those levels. And we are not near those levels now. We are still at levels where the stock market, on several days, makes more than you would make owning bonds over many years. They are not competitive yet.)

Oh yeah, by the way, you may have discovered Tuesday that they are risky. One of the more embarrassing moments yesterday was watching "great first day pop"



get halted and lose


(GM) - Get General Motors Company Report

on the very same day that one of the least risky strategies for making money in this bull market was playing out: initiation day. Yep, 30 days out of the IPO chute, the bankers get to start promoting, but this glitch -- did it or didn't it lose GM and did we really discover it from some radio interview last month but just learn about it today? -- sure did kibosh the strong buys of the world. That FreeMarkets trading was amateur hour for everybody involved.

(This was terrible! Let's refresh how this game is played. After an IPO, the merchants who brought the deal can't comment on it for 30 days. Once 30 days is up, they are out there really whooping it up. For much of last year, if you bought the stock on the 29th day anticipating the recommendation on the 30th, you made great money. Not this time. This GM news, which should not have been unexpected, given that GM has a stake in

Commerce One


, broke a week before. But somehow nobody discovered it until initiation day. It sure did blunt the buy recommendations. I still am scared of it. (And I don't mind playing highfliers. We assume risk when we buy stocks. We just haven't had much of the downside of late. Maybe it is going to be stored up. You can't believe the hate mail I got this week from old-timers (who, of course, were younger than I am) telling me, "Just you wait until you smell the foul breath of the bear." To which I say, "Man oh man, he better show up soon, because I am making honey by the carload.")

How about that for something that has changed? The risk/reward. Does it make sense that stocks that have gone up hundreds and hundreds of percentage points have more risk in them than stocks that have done nothing?

Believe it or not, this one is a bit of stumper. The carnage in this selloff has extended to areas that looked like they were pretty immune from further selling. The real drubbings here have been in the drugs and the bank stocks. The only "can you believe where that stock has gone to?" conversations I had with

Jeff Berkowitz

around the office yesterday revolved around






, not



and Commerce One.

(Oh man, what a wacky week this was. Schering-Plough made 8 straight points after this observation. Instead of talking about it, I should have been buying it. I felt like a dunce when I reread this, but the market humbles you daily.)

No, the only thing I saw that was truly different yesterday was that stocks that hitherto had not traded as a commodity, notably the


, did so yesterday.

(When I speak of the NDX, I am speaking of the Nasdaq 100, which became the preferred benchmark for stocks last year. When I now speak of "the market" I am really speaking of the NDX, not the


. Amazing, but true.)

At the risk of forcing you to scroll down some more, let's go into the velocity of this selloff so we can understand why something may be a little more dangerous than I thought, but not so dangerous as to make it unpalatable to you at home.

(I often speak of the velocity of a move because the time compression distorts the decision-making. If you had a chance to buy a stock that was falling slowly, you might take it. But a fast fall is scary, if not too scary, to act on. We had a fast fall this week, and the speed of it reminded me of being at the Daytona 500.)

Ever since the advent of stock index futures, stocks have been lockstep linked with bonds. When bond futures sold off in Chicago, stock futures then sold off, which led to the selling of the underlying stocks. We don't have time to go into how that works in this piece, but you should check my archives, I have gone there many times. (Again, why I love the Net. You can just click on

Best of Cramer, and I have some stuff in there about this.) For the purposes of this piece, let's accept that interlocking nature of the markets. When rates go up, it has been historically difficult to make money in stocks. When rates go down, it has historically been good for stocks. Bonds are like the backdrop. A rate rise is like rain; it just isn't that much fun playing in stocks in the rain, especially a vicious rain like we had in bonds last year.

(Bonds are like the weather. When it is gloomy out, they shine! But really it is worth going into this for a few minutes. We are supposed to be in a very interrelated world where bonds and stocks are at war with each other for capital. When bond yields are high, you are supposed to sell stocks and buy them. When stocks offer massive potential, you are supposed to sell bonds. But what if you have money and you don't know this? Can you ignore it? Last year I said yes. I don't know how because the textbooks said it wouldn't. But the textbooks were wrong. If this were cards and we were playing blackjack, you would be saying to hit on 18 because you always get a 3 because it happened 52 times in a row. Or maybe there are just a ton of 3s in the deck -- more than any other card?)

However, most of the stocks individuals buy themselves are over-the-counter tech stocks, many of which are too new or too "unseasoned" to trade in sync with bonds. First, many are not part of any index. Don't forget



just got added. That meant these stocks don't trade with the same established patterns that older stocks groove to. (Yahoo! was whipsawed huge by an


sell program in the last half-hour yesterday, by the way.)

When bonds go down (rates go up) they haven't impacted these newer stocks the way the older stocks get impacted. (It is precisely because of this linkage that the S&P 500 vastly underperformed the unhinged NDX last year.) Instead, what has controlled these stocks' movements is a rare combination of individual enthusiasm, some mutual fund embracing and some excellent fundamentals.

Yesterday, however, wasn't like that. Institutions were selling index futures for all sorts of different indices, and they knocked down both old and new stocks. They had not been able to do that before. The individuals could not stem the decline with their purchases. In fact, individuals who were on margin contributed to the selling to beat the margin calls that will occur if the stock market keeps going down.

(Once the market turned, that pressure totally left the market. It is a terrible bet to worry that more margin calls will occur. There are too many variables.)

You could read that as meaning "the party is over" because once these stocks are connected to other assets, they will lose their magic quality.

Part of me says that is true, and that it would be a better idea going forward to lessen exposure to the so-called

Red Hot stocks. In fact, there is an excellent article in today's


about how managers are fed up with the high prices of some tech and are looking elsewhere for exposure. I know I want to look for bargains among the drug and bank rubble, but I still am more drawn to the tech stocks that have gotten clobbered. That's where I am most confident of the fundamentals even as the valuations have been stretched severely.

(If they were fed up, they sure didn't show it this Monday. They are all going back and buying the same old names like nothing happened last week.)

Which gets us back to the basic question: What do you do if you have money on the sidelines or you are already in somewhat and scared? If I had taken nothing off the table at all and am running around fully margined, I would take advantage of any lull and trim back. You can't afford to be margined up here. You could lose it all. Sorry, but I am calling that strategy by the name that comes to mind: "stupid." If I had something in and have cash, I would now add to some of the stocks that have gone down the sharpest, even though they were up huge last year. Indeed, that was my game plan yesterday and will again be today because I do have cash coming in and cash on the sidelines and I had been hoping for a pullback to put money to work. Now that it is happening, I can't shun it in fear. It never feels good to buy during the best times to buy.

(This turned out to be dead right on all counts. The margined players got cashiered Thursday, but the guys with cash who put it to work made huge amounts of money. That is how it is supposed to work, and it did.)

And if I were making a contribution to my 401(k), I would take advantage of the decline and put the money to work. To sum up, we amateurs and professionals don't know when the selling is going to stop. But equities remain the preferred competitive investment to bonds, stocks, gold, cash or real estate here. That hasn't changed.

(Still hasn't. Bonds must go to a very different level before they are competitive.)

Could I be wrong? Sure, happens all of the time. Have the methodology and thought processes outlined here worked for me for the past 20 years?


(This is the purpose of my column. It is a diary of what I do right and what I do wrong. I make the mistakes for you. I learn for you. It is an incredibly cheap way to get tutored, even at the new prices that come out in April when RealMoney starts.)

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Yahoo!, and Ariba, and Cramer was long Cramer's fund also may be long or short certain stocks in his B2B rotisserie league or Red Hot index. 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