Game Plans Revisited

Cramer stresses the importance of changing your investment model.
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What is it about the stock market that gives people such bogus surety?

Is it the brokers? Is it the media? Is it the need to have a construct, a vision that it all makes sense?

Yesterday, the theoreticians and the historians were all out pounding the drums about what has to happen after a second

Fed

rate hike. Many of our readers were out in full force, lambasting me for being bullish about something that "the books" say is bearish. The blind nature of the bearish reaction shows all of the classic signs of a false need to believe in something that has to happen, when, quite frankly, it won't.

Here's why.

For the longest time, I thought that if you just sat there and did nothing but game every stock in every matrix with every piece of data it would produce results that would be superior to the market. I was convinced that if you charted the next one, two or five days after a particular type of event, with a particular type of bias, you would have to hit it out of the park because patterns were bound to repeat themselves.

Wrong!

I discovered the hardest way imaginable. (Forgive me, early subscribers, as I know you may have read this tale before, but considering we had about 1,500 people reading us when I last wrote it, instead of the 150,000 we have now, I think it's worth repeating.)

Five years ago, my wife and I were about to have our second child. I was determined not to have the market interrupt this most important of all things on earth. As I have always felt that you could game anything, I set out, knowing that the Fed was going to meet around the day when our baby was due, to develop the definitive matrix about what must happen immediately after a Fed tightening. I was going to leave nothing to chance.

I studied how

Alcoa

(AA) - Get Report

always reacted after the last 10 rate changes. I studied the moves in

Phelps Dodge

(PD) - Get Report

and

Bristol-Myers

(BMY) - Get Report

and

American Express

(AXP) - Get Report

. I put down hourly prices for the banks, for the retailers and for the energy stocks, and I grouped them according to the size of the rate increase, the kind of statement issued and the kind of increase (discount, fed funds). I examined hundreds of stocks. Understand, this was during a period where I would have hundreds of charts and graphs spread everywhere around my apartment and would relentlessly try to back-test and determine what could and would happen after a very specific event -- here, Fed action.

I know this is hubris, but nobody had done more work on this Fed meeting than I had. Nobody. I was ready and determined to be able to handle this move unemotionally, with a series of instructions by remote control, because I did not want to be bothered with the market during these particular days.

Our baby was born on 2:16 p.m. on May 17, 1994. The Fed hiked rates less than a minute later. Less than two minutes later,

Cramer Berkowitz

had begun to put in our game plan, the one devised in the calm of my Brooklyn Heights living room, in the event of a Fed rate increase.

Wamma jamma.

Within six minutes, the cell phone rang in the delivery room. I don't think the umbilical cord had been cut yet.

We had already dropped a million bucks on the game plan. I told them I couldn't be bothered. I told them my wife would never forgive me, that I could not live with myself and to stick by the game plan and not bother me.

Ten minutes later, the phone rang again. We had dropped another million or two on the shorts and longs we had put on. Everything was doing the opposite of what it was supposed to. I was sweating profusely, torn between happiness and the guilt that comes with doing a poor job for my partners and my company.

I shut my phone off.

We continued to lose money at an amazing pace. By the end of the day, we had cut dramatically into our gains for the year.

But we stuck with the game plan. And the game plan buried us. The game plan had not survived one minute's worth of contact with the enemy. The game plan that was scientifically designed by someone who had spent months planning for it had wrecked our year. (We recovered and beat the market nicely, so don't worry. And, yes, my youngest is as great as my eldest.)

Already some of you are preparing to email me, saying that of course it was my own faulty research or execution. I had not backdated or back-tested enough. Blah, blah, blah. Give me a break. I was taught how to do this stuff by the best people in the business and am more exacting and demanding than anybody I know about this stuff.

It failed because there is no surety short term in the stock market. There are great hunches and terrific judgments that can be made. There is intuition and psychology that can be measured and gained from. But those who would demand that the market dance this way or that because of a statement by a group of fallible professionals are doomed to the failure I experienced five years ago.

Game plans are great in football and battle and the stock market. You have to have them. But they must be adjusted and can't be blindly adhered to without risking slaughter. When the game plan goes up against a force that has other ideas in its head, whether it's a running defense against a team that suddenly decides to pass or an amphibious landing against an opponent that the night before mined the harbors, you have to call an audible. You have to adapt or you risk losing everything.

So stop telling me that these last 72 times one variable went this way you had to do something in response. You don't know what you are talking about. Sure, if the Fed were to tighten 10 straight times in 10 months, I know what the market would do that year. And if the Fed eased six times in four weeks, I could figure out where things might go.

But when the Fed does what it did yesterday, you have to readjust and recalibrate and accept that there is no science. Someone in the futures pits first wanted stocks to go lower. Then someone wanted them to go higher. Then someone wanted them to go lower still. Then a buy program at the bell brought everything higher.

A game plan that doesn't take into account those possibilities is a game plan that's best left on the living-room floor. It will never survive its contact with a constantly changing, sometimes intelligent, always mercurial enemy.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long American Express. 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

jjcletters@thestreet.com.