The only thing we have to fear is dumb money itself. When

Jeff Berkowitz

and I strategize, which we do about 3,974,986 times a day, we never think about what is the objective,

Fox Mulder

-like, truth. We think about the truth as it is perceived by the marginal, panicked dollar.

Let's take a situation last week that I think will prove very topical this week:

Hewlett-Packard

(HWP)

. First, let's start with some suppositions. People think HWP is a once-great company. People don't think that its current leadership stacks up against the competition, whether it be the guys running

Sun Micro

(SUNW) - Get Report

,

Dell

(DELL) - Get Report

,

Compaq

(CPQ)

or

IBM

(IBM) - Get Report

. If you disagree with that, you are not in touch with what the stock firmament is telling you. (How does the stock market talk? Through price-to-earnings multiples. HWP is much cheaper than any of the other companies on both forward and trailing earnings.)

Two weeks ago

SCI

(SCI) - Get Report

, a well-respected company, gave a very negative outlook for the second quarter, citing one particular customer. It didn't take long to figure out that it was Hewlett -- analysts all knew. That sent HWP into a tailspin.

Jeff and I knew that HWP deliberately cut back orders to SCI. We knew that HWP is finally starting to walk away from low-margined business, including the SCI business, and that this was GOOD news, not bad. So what did we do? Heck, we sold HWP along with everyone else. In fact, we sold it ahead of everyone else. And we bought it back seven points lower. Why? Because the marginal dollar is not run by the smartest guys in the world. In fact, the marginal dollar is run by the money that is clueless about reality but that tends to panic because of a lack of knowledge.

Jeff was on vacation when the SCI news came out. But he was ready and emailing me that night that we should expect the worst from HWP. He figured if it opened down two, that would be a gift, and we should blow out of our position and then rebuild it lower.

Initially, I disagreed, saying that once people call HWP analysts they will know what we know. Jeff fired back that people will shoot first and ask questions later, and we had to shoot before them (there's that Quick Draw McGraw school of investing again).

Jeff was dead right. We sold a massive amount of HWP when everyone else did, and then as second and third and fourth waves of selling came over the stock.

Only after

Merrill Lynch

and

Goldman Sachs

squawked what we knew did we then pounce. We got back in at 73 and change and we sold some stock into the

SoundView

hoopla on Friday. But we maintain a fair-sized position ahead of the quarter.

The important lesson here: The psychology of the market, not the empirical decision-making behind HWP and SCI, meant the most. If you can ignore that psychology and don't think there is any difference between HWP at 79 and HWP at 72, that's great. You may be a fine investor.

But you are a crummy trader.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time of publication, the fund was long Hewlett-Packard, Sun Microsystems and Dell, although positions can 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 by sending an email to letters@thestreet.com.