You have to understand that when you hear a rumor -- that so and so is going to buy some company -- you are invariably hearing it because someone is in trouble and wants to unload a position.

For example, let's take the

Hewlett-Packard

(HWP)

for

Compaq

(CPQ)

story that keeps coming around. This one was the brainchild of some rumor site and it won't go away. I'm long them both, so what the heck do I know? But the point is that someone is under water in Compaq and wants the stock higher so he can sell it.

Join the discussion on

TSC

Message Boards.

First, let's get this straight. Takeovers are pretty controlled in this country. If you find out about one and you trade off of it, I'm pretty confident you'll get nailed. They nailed the woman who traded off that ex-

Keefe Bruyette

guy's tip on a couple of hundred shares of

Barnett Bank

. They'll catch you.

If you're passing on that there are merger talks to someone and you're a fiduciary, you will be implicated. That's James McDermott himself. (Although he's pleading not guilty.)

If you don't know anything and you are fomenting takeover talk for the sake of moving a stock up, that's a violation of the nonfomenting clause of the

Securities and Exchange Commission's

1934 Act.

Sure, periodically someone can put two and two together. Could ABC Food Company merge with XYZ Beverage Company? Well, why the heck not? Guess that makes all of the other rumors OK if the deal comes out. Makes me a real seer!

But almost all of the tipping and rumor-mongering I hear is about a stock that has been killing someone's profit and loss statement, that won't move up without the help of some desperate journalist who needs something to say at the top of the hour.

Take

Clorox

(CLX) - Get Report

right now. I'm neither long nor short it. But this has been a godawful position for people. Why not start a

Procter & Gamble

(PG) - Get Report

for Clorox rumor?

Now, I know this couldn't happen. The German stakeholder in Clorox would block it. The

Justice Department

has already said it doesn't want a concentration in the bleach industry. It's totally phony. Bogus. Stupid. Untrue. Designed to foment activity in Clorox so a losing position comes off the sheets. Never underestimate what a bad actor can and will do to move a crummy stock and never underestimate the demands on "journalists" to come up with stories to fill time. (The former is illegal, but the latter has First Amendment protection unless the journalist took money from the source.)

It's a fact. It's life. You can buy things off of rumors if you want, but understand that you are the mark. You are the stooge who makes it work. You are the bozo in the equation.

I was taught not to be a stooge when I was growing up. I'm sticking with the program. If you need me to set a similar program up for you I will. It goes like this: If you trade the rumor you will lose more than you will win, so don't do it.

There.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Compaq and Hewlett-Packard. 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.