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Listening to Rumors Can Prove Pricey

The trader warns investors to evaluate carefully those whispers of a bid.
Author:

Pssst ... buy Great Atlantic & Pacific (GAP) -- the Germans are going to buy the rest they don't own. Pssst ... buy Clorox (CLX) - Get Report -- the Germans are going to buy the rest they don't own.

How many millions of dollars have been lost in common and call options on the back of these two bogus whispers? How many people have bit on this kind of fantasy because some German companies bought stakes in these companies years ago?

When someone tells you to buy something because it is about to get a bid, you should ask yourself two questions:

    If the guy knows something, why is he talking, given that he will be caught, go to jail and lose everything? If he doesn't know anything, why is he talking, other than to get you to take him out of his position?

OK, but you say, "Hey, I know nothing, but doesn't it make sense that a deal could occur? Isn't that reason enough?"

No, if the fundamentals aren't any good. If the fundamentals stink, as they do with A&P, or if the fundamentals are uncertain, as they are in Clorox, you are just buying a house of pain.

Eleven years ago, I predicted to my wife that A&P would get a bid that summer from the Tengelmann family, which owns a giant stake in the food-store chain. Why? Because there had been so many other buyers of food-store chains that it

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just made sense

.

She asked me, "How is it doing?"

I said, "Lousy."

She said something like, "Well, I guess we will have to live with that bid when it happens because we aren't buying it with crummy fundamentals."

The stock was in the 60s at the time.

Closed yesterday at 18.

Good call. Good miss.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. 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.