Sneak Preview: Wall Street's Often Wrong

Jim Cramer dishes an ugly secret in this special excerpt from his 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.

3. The Street is never bullish enough on good stocks, and it's never bearish enough on bad stocks.

When the analysts who cover stocks in a given sector are bullish, and you agree with them, then you should get behind that sector and buy more of your favorite stock in it. If the Street is bearish about a sector and you agree, you should stay out of the whole thing.

In general, the analysts who cover stocks will never be bullish enough when they're positive, and they'll never be bearish enough when they're negative. That means you have an opportunity. If the analysts like a stock that you like, you should like it more than the analysts. You should believe it's going higher than what the analysts believe. By the same token, if you see that all the analysts are bearish on a sector, but still recommending some stocks in it, don't buy those stocks.

The analysts never got behind oil and natural gas in 2004 and 2005 the way that they should have. They may have been mildly bullish, but they missed one of the greatest bull markets in recent history by not being bullish enough.

The analysts thought the increase in oil prices was caused by high demand, but they were wrong. It was a combination of short supply and high demand. I was behind oil and natural gas, pretty much anything in the oil patch, from the very beginning of the show, and I rode that sector all the way up because I understood that even though the Street was bullish, it should have been a lot more bullish.

The Street had to get behind these stocks in the end because they set a price for the commodity, and when the price was breached and breached and breached again, they were dragged kicking and screaming into recommending the stocks because both their estimates and their price targets were too low. But remember, they did nothing but follow the stocks up; they never led them. That's your way to win as an individual investor anticipating the estimate bumps upward.

Then when you look at bad stocks like

Boston Scientific

(BSX) - Get Report

,

Amazon.com

(AMZN) - Get Report

,

eBay

(EBAY) - Get Report

or

Lucent

(LU)

, stocks that I went negative on before their precipitous declines, you'll also see that the analysts were never bearish enough. Sure, they didn't like these stocks, but they never hated them with a passion, which is what those stocks deserved.

***

The same thing happened with

Vonage

(VG) - Get Report

-- the dog, the worst IPO of the first half of 2006 -- and with all the radio stocks. I said Vonage was terrible before it came public, and all it did was go straight down after the initial public offering. The analysts would have been more negative, but they worked for the investment banks that were making a lot of money taking the company public.

I know that Eliot Spitzer is supposed to have cleaned up Wall Street, but I don't believe there's an impenetrable wall at the investment banks between the analysts and everyone else. The analysts, if they are smart and want big raises, will recommend the stocks that do business with the banks they work for. They had to get behind VG. They helped price it at $17, so they had to like it at $15, $12, $10, and so on.

***

You can rule out whole sectors -- that's what I do on Mad Money. And when you find a good sector, you can run with it, even if the analysts are already bullish, because you know that they're not bullish enough. Sometimes people feel like they're chasing a sector, like they've missed the boat, especially if all the analysts are already positive. There are times when that's true, when you've hit a top, but most of the time, when the analysts are bullish, you'll win by being even more bullish.

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, and read Lesson 1 and Lesson 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.

From Jim Cramer's Mad Money by Jim Cramer. Copyright 2006 by Jim Cramer. Reprinted by permission of Simon & Schuster, Inc.

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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