Cramer's Worst Moves in '96 - TheStreet

As a fund manager paid once a year, the end of my pay period is always bittersweet. If you've had a decent year, one where you kept pace or beat the averages, you are loath to set the earnings clock back to zero and lose that beautiful return that greets you on your margin run each morning.

But it's nice to get paid.

At Cramer & Company this year's conclusion is particularly conflicted. I spent much of this year not only behind the averages but also behind almost everybody. But like the old Montana-led 49ers, I rallied in the fourth for what felt like a classic come-from-behind victory.

I could spend this column telling you how I got hot in the final period, how I finally saw the holes, and hit the open man, you know, really belabor the football analogy. But I don't think that is nearly as important as learning what I did wrong in the first three quarters. In fact, I am spending all my time scrutinizing the bad trades of early 1996 so that I won't repeat my horrid start again.

Put it this way: It's great to spot the opponent 14 or even 21 percentage points of performance and then work like the dickens to close the gap all fourth quarter. But it is a lot more fun to go to the movies during the day in the fourth quarter, as I did in 1995, when I wanted to sit on my lead.

Anyway, this column's name is Wrong! not Right.

My first error, made right out of the chute, was the belief that if I was up 60% in 1995, it was because I was so smart, not because I got lucky. That arrogance caused me to make a few big bets at the beginning of the year without doing any homework. For example, I loaded the boat up on Cascade Communications calls and common stock knowing that the high-tech flyer was coming to town as part of a January high tech conference. I figured it would be incredibly bullish because, well, Cascade is always bullish.

But then a snowstorm that hit New York canceled Cascade's appearance. As I knew little about Cascade other than it was a hot stock with a good chart involved with the Internet I had to blow Cascade out. Everybody else had the same idea and I took a drastic hit. Cascade came to town a month later and made up all it lost, but the damage had been done.

My second big mistake was thinking I could walk on water overseas. I had this vision that Mexico was no longer going to go down--a vision that was largely right. However, coaxed by a new guy I had hired, I bottom-fished and bought the lowest-rated, most-leveraged Mexican stocks.

Every one of the companies then disappointed in earnings, as I should have guessed, and everyone dropped substantially. I got drubbed and had to fire the guy who recommended these ideas.

Third, I believed that the new issue and secondary markets would remain strong long after they started to roll over. So I got caught investing in some dicey secondaries at the absolute top and gave back all of the money I had made playing new issues. I forgot a cardinal rule: What brokers give in new issues they will take away, if you are greedy.

Fourth, I let a camera crew in for some documentary, which caused me to take my eye off the ball. I was so busy trying to entertain the film crew that I failed to realize that the market had stopped going down. I kept shorting it and shorting it. That day was July 23, the fateful market bottom. And I had to scramble up 200 points to bring in all my shorts. But I looked great on camera!

Fifth, I got sucked into the joker stocks of the summer almost at the top when I subscribed to the

Cabot Market Letter

, after hearing about all of the money Carlton Lutts was making for his clients. I even started calling his hotline for tips. Cost me a bundle as all of Lutts' stocks fell apart when it was revealed that the SEC was investigating the letter. Shame on me.

Sixth, I felt pressured to make trends, to do something, anything, once I had fallen behind the averages. In my flailings I jumped on to whatever seemed hot, flirting with Ascend, ANET, Citrix Systems, all right before they rolled over. I frantically bought calls and puts on the market itself and on various indices, even though my forte is individual stock picking. Got crushed.

Seventh, I started listening to technicians. As I got increasingly frustrated I found myself doing what people told me to do on television. My nadir came when I started doing what the technicians said to do. People in my business have different views of technicians. Here's mine: they are charlatans who will lose you money hand over fist. Stocks trade off of fundamentals (unless someone is deliberately manipulating them up or down, a short-term effect). I learned my lesson a decade ago when I shorted Genentech because it was a perfect head and shoulders pattern --and got hit by a takeover bid the next day.

Nevertheless, when I get insecure I grasp at anything. Including technicians. Lost a bundle.

Eighth, out of frustration I started shorting good companies that I thought would go down (BankAmerica, most obviously) and bet with companies I didn't even like (Iomega, Nycomed) or didn't know well because I felt I needed the exposure. You don't need exposure, you just need good stocks.

Ninth, I tried to call the bottom repeatedly. Bottoms are beautiful things, but they get formed by sellers capitulating, not buyers stopping a decline. All too often I would think that the worst was over and start buying when another wave of sellers would come in. Finally, on the big July 23rd bottom, I was selling, not buying, because I couldn't take the pain. I established some 1996 lows myself that day. I should have been more disciplined and been prepared to buy anything I bought lower.

Finally, I pressed instead of taking time off. When things went from bad to worse around here, in August, I found myself coming in earlier and earlier and staying later and later. All that did was make me more tired and less able to see what was going on. I should have walked away.

In fact, that's what happened that changed the year for me. I walked away. I got away from the market. I got away from the papers. I got away from all my machines and all of the broker phone calls. I got to the beach and I chilled out. I took time off. Played with my girls; they didn't care that I had fallen behind the Dow. I relied on others at work to help me through the difficult period. And I came back rested and ready and relaxed.

The rest was history. And I'm plenty glad for that.

James Cramer is a hedge fund manager and co-chairman of The Street. While he cannot provide individual investment advice or recommendations, he welcomes your comments, emailed to