Editor's note: As a special bonus to TheStreet.com readers, we will be running an updated version of Jim Cramer's "Twenty-Five Rules of Investing," from his latest book, Real Money: Sane Investing in an Insane World. Here's Rule 15.
"Where are the bonds?" That's how I used to begin every phone conversation when I was on the road, away from my desk, back when I ran my hedge fund.
Yet people forget the bond market all the time. They forgot it in 2000, even though it told them the economy was softening. They forgot it in 2001, when it was clear that the cash rates were too competitive to stocks and would cause a massive selloff.
That's why I say:
Don't forget bonds.
I was trained to focus on bonds because bonds are the competition to stocks, the competition I most fear. When short-term rates go sky-high, you have to expect companies that had been bought for good yields, stocks like
Bank of America
(BAC) - Get Report
or
BP
(BP) - Get Report
, will sell off.
When long-term rates fall to 4%, you have to believe that the economy may be too soft to own deep cyclicals or that stocks that have high yields, like utilities -- I like to watch
Duke Energy
(DUK) - Get Report
-- will be on the move.
You need to watch more than the stocks. If this were basketball, I would be saying that if you just watch the man with the ball, let's call him
Citigroup
(C) - Get Report
, and you don't watch what the others are doing on defense -- the bonds -- there's no way you are getting to the basket. The men without the ball -- the bond market -- can determine the action.
Many people who got in this game in the last decade still don't even know what bonds are. They are troubled when you say bonds went up today. They think that means interest rates are going up rather than what it really means, which is that interest rates are going down. If you don't understand how bonds work, I think you will not be able to make nearly as much money as if you do.
By the way, a lot of younger managers think they only need to think about bonds if they own
Washington Mutual
(WM) - Get Report
,
American International Group
(AIG) - Get Report
or
Fannie Mae
(FNM)
.
They don't think bonds matter with a portfolio of
Research In Motion
(RIMM)
,
eBay
(EBAY) - Get Report
or
Qualcomm
(QCOM) - Get Report
.
Wrong! When interest rates move significantly higher, no one's going to pay a lot for the future earnings growth stocks provide.
So keep your eye on the ball, and on the men without it.
At the time of publication, Cramer was long Qualcomm.
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
Action Alerts PLUS. Listen to Cramer's RealMoney Radio show on your computer; just click
here. Watch Cramer on "Mad Money" at 6 p.m. ET weeknights on CNBC. Click
here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click
here to get his second book, "You Got Screwed!" and click
here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by
clicking here.
TheStreet.com has a revenue-sharing relationship with Traders' Library under which it receives a portion of the revenue from Traders' Library purchases by customers directed there from TheStreet.com.
