How do you best handle a falling knife? To me the issue is not knife avoidance. That's impossible. Unlike with real knives, you can't see what is going to get that stock market knife to stop going down. As much as technical analysis can help -- and it does -- you often have to be in there buying during the descent, hoping that you are at or near the bottom.
Of course, you could wait for the knife to land and then get it. But that's almost impossible in this market. That split-second between when the knife is done falling and when it shoots back to stab the bear in the fuzzy nape is too fleeting to call.
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So how about sticking your hand in and out, letting a little chunk be taken at worse, but maybe catching that knife by the handle? That's how we play it. That negates the "hope" from the equation, for, as I have written many times in this column, hope can't play a role if you are going to be a successful trader.
. We like this stock. After that run, what's not to like? We sold some after its huge leap, and in yesterday's ugliness we wanted to get back in and rebuild the position on weakness. We could stand there at one level and feel that knife slice right through our hands, buying a ton of stock where we think the bottom might be. Or we could put our hands out for a few seconds and take in some knife without risking too big a blood loss.
The first way, buying a huge chunk of VerticalNet at one time, is gutsy and macho and really stupid. The second way, buying a small amount and betting it goes lower, is wimpy and timid and really smart.
So we did the latter. Let's say we wanted to buy 5,000 shares of VerticalNet on the way down. What we do is take a blood oath to buy 1,000 shares every 10 points. If we think the velocity of the knife's decline has slowed, we can increase the amount to be bought to 1,500 shares or tighten the increments to every 8 points or 5 points. (We would never be tighter with a $200 stock.)
We don't cluster at one level, and we presume our own fallibility. If VerticalNet goes right back up, we have something "in" on the sheets and we can hold it or blow it out for a quick trade. If it keeps falling, we don't become the VerticalNet fund, which is how, by the way, you can wipe yourself out. And we never find ourselves, after a vicious selloff like yesterday, buried too deep in VerticalNet even if it keeps falling today. Or tomorrow.
Why do we take a blood oath to buy? Because when that knife is falling, it takes tremendous discipline to go in and buy. You never want to buy when you know you could be down a buck or two by the time you got the report of your purchase. But if you agree beforehand that you will buy it in that strict fashion, you can stomach it beyond your wildest view of personal endurance.
Or, of course you can always wait for the bull to grab the knife and ram it back up before you jump on it. We've been gaffed too many times. We can't do it that way. You just don't make enough money.
Today, if VerticalNet doesn't turn around, if it continues to decline, we are ready and able. We have built in the contingency. And if it turns?
We will have done well.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long VerticalNet. 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