Sneak Preview: Follow the Street's Lead

Learn the first lesson of success in this special excerpt from Jim Cramer's upcoming book.
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Editor's note: This is a special excerpt from Jim Cramer's book,

Jim Cramer's Mad Money: Watch TV, Get Rich

. To order your copy and read all the rules, click here.

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When I make a good call on Mad Money, I don't just rest on my laurels -- I try to learn. I've developed 10 ... rules from carefully examining the stocks I got right.

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How did I get these stocks right? Six of my rules come out of stocks I told you to buy that went up; the other four are products of my best sell calls. It's just as important to know when to sell as it is to know what to buy. Knowing when to bail out and give up on a stock entirely is much harder and requires more discipline than knowing what to buy. I say this because that is what I've learned from systematically analyzing my best calls on the show over the past year. My very best calls have been the ones that prevented you from losing money; that's why it's important to learn the rules behind what made them good calls.

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1. Follow the Street's lead: most of the time it works.

When you trade based on momentum, buying a stock that's gone up in the expectation that the momentum will take it higher, or when you buy a stock that belongs to a group that's been favored or "anointed" by the big institutional investors, you're trying to make money by following the Street's lead. Unless you believe that these hedge funds and mutual funds are dead wrong about a stock, you can get rich just by looking at their past behavior and anticipating what they'll do in the future. If the big funds have started buying bank stocks hand over fist, it's not a bad bet that the banks will go higher.

How can you tell that the big funds are buying? When a stock goes up significantly and there hasn't been a takeover bid, you can be pretty sure it's going up because big institutions are buying it. The same is true when a stock goes down significantly. Of course, you can't rely on the Street to make your decisions for you, and you're never allowed to buy a stock just because it's going up.

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I've already told you not to fight the business cycle because then you'll be fighting the funds, and when you do that you lose. That's similar to this rule, but this rule is broader. You may know that the oil and gas sector is surging, but you'll make even more money if you also know that

ConocoPhillips

(COP) - Get Report

is the best performing of the major integrated oil companies. That means it's the integrated oil that's been "anointed" by the Street. It's the one that the funds think of first when they decide they want more oil exposure, and thus it's the one they buy more of. If you pay attention to the stocks the big institutional investors have anointed, you can anticipate the moves of those big buyers and make yourself a lot of money.

The best example on Mad Money of an investment that came out of going with the flow on Wall Street was

Allegheny Technologies

(ATI) - Get Report

. I made this company my stock of the year for 2006 on February 3 when the stock was at $36.05. A month later, on March 3, my stock of the year closed at $50.98, up 41 percent from where I picked it. Four months later, the stock was up 72 percent, at $62.02. On May 3, five months later, it closed at $71.47, up 98 percent. Between May 3 and the peak on May 11, the stock went as high as $84.53. Even after the peak, as I write this in August, it has never gone below $55, and it mostly hovered around $60. I was telling people to clear out of this stock shortly before the peak, to take at least a little, but preferably a lot, off the table. After you catch a double in a stock, discipline tells you to take those gains to the bank. Even if you didn't listen to me when I said sell, you still made a lot of money in this stock. How did I help you do it?

I did it by following the lead of the big money managers. Sure, Allegheny had great fundamentals. It is a company that manufactures titanium and stainless steel, and the market for both of those products, especially titanium, was incredibly strong at the time. The titanium market was being strengthened by a strong aerospace cycle. Because titanium is strong but much lighter than steel, it makes for more fuel--efficient airplanes. These were all great fundamental reasons to buy the stock. But they're not what brought it to my attention, and they're not why it worked so well.

The big reasons I talked about Allegheny on the show, the reason I made it my stock of the year, was that

Titanium Metals

(TIE)

had been the best--performing stock of 2005. As you can imagine, Titanium Metals makes titanium. From this I knew that the big funds wanted titanium exposure. I knew that they felt good about buying titanium stocks because they'd made a lot of money in Titanium Metals. I assumed they would try to expand their titanium exposure, and they'd do it by swapping out of Titanium Metals, where the easy money had already been made, and swapping into Allegheny Tech, a company that wasn't pure titanium, but that was expanding its titanium business.

I looked at what the Street had liked in 2005, and then I picked out a stock that looked similar to it for 2006. Sure enough, the big institutions did what they always do: they look at what's been working for them and they buy more of it. Allegheny Technologies was a great pick because it both followed and anticipated the behavior of the big institutional players. They're the ones who drove the stock higher. Yes, the stock had great fundamentals and the money managers absolutely paid attention to them, but there were stocks with better fundamentals that didn't double over a five-month period. Allegheny worked both because it had great fundamentals and because the Street was eyeing the stock hungrily.

If you watch what's been working and what hasn't, you can come up with great investment ideas. The big money managers who set prices are creatures of habit: if a stock or a type of stock has been earning profits, they'll throw even more capital into similar stocks. When you anticipate this behavior, you can make serious money.

Added note:

Mark your calendar -- I've lined up two book-signing events for

Jim Cramer's Mad Money: Watch TV, Get Rich

and I want to see you there! On Monday, Dec. 4, come to the

Barnes & Noble

in Clifton, N.J. (395 Route 3 East) at 7:30 p.m. EST for some one-on-one with me. If you can't make that, I'll be in Borders Books and Music (290 Commons Way) of Bridgewater, N.J., just two nights later, Wednesday, Dec. 6, at 7 p.m. EST.

Editor's note: This is one of Jim Cramer's 10 Lessons From Success: Some Buy and Sell Rules, a special excerpt from his newest book,

Jim Cramer's Mad Money: Watch TV, Get Rich

, due in stores Dec. 5. Learn how to hold your own Lightning Round, Part 1 and Part 2. Check back tomorrow for a new lesson. To preorder your copy on Amazon, click here. Can't wait? Attend the special book signing, 7:30 p.m. Monday, Dec. 4, at the Barnes & Noble in Clifton, N.J. (395 Route 3 East). Or get your copy signed at Borders Books and Music (290 Commons Way) of Bridgewater, N.J., on Wednesday, Dec. 6, at 7 p.m.

At the time of publication, Cramer had no positions in any of the stocks mentioned in this column.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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