Editor's Note: James J. Cramer was the keynote speaker at The Miami Herald's Making Money Conference, held Saturday. We're running the full text of that speech here, and this is the second of four installments. Read the first part here.
But first some caveats. Here are some things I won't do today. I won't talk about penny stocks. If you are buying them or trading them, you should be ashamed of yourself. You will lose everything. You deserve to lose everything, and I have no respect whatsoever for your views. Owning penny stocks is like driving 50 miles over the speed limit without a seatbelt or an airbag in your car. It's your own fault when the accident happens. Never in history has there been more fervor in penny stocks. Six months from now, never will so many have lost so much money on low-priced stocks.
Second, I will never ask you to buy and hold anything. I believe that in a market as superheated as this, if you're not taking profits, taking some cash off the table as your winnings grow, then you should just go to Vegas, play blackjack and keep hitting on 18. I guarantee you, you will lose more than you win. Taking profits is the common-sense thing to do, regardless of your tax situation, and good investing is all about common sense. As my wife, the recently recuperating
, always says, bulls make money, bears make money and
pigs get slaughtered!
Third, I will not try to scare you into Old Economy stocks. The
Procter & Gamble
this week, a hideous decline that started in the 80s and ended in the 50s, tells a most enlightening story. If it turns out that the Old Economy stocks can't go up as much as the new ones but fall much harder, you tell me what it makes sense to be in.
Finally, and most importantly, I will not talk down to you or theorize to you or academize to you. This speech is not about trying to be more informed about the way the economy works, nor is it an attempt to pass judgment on why the stock market works the way it does.
Earlier this week, Robert Samuelson, a well-respected economist/journalist who writes for
The Washington Post
, took me to task for helping to promulgate a market that loves profitless companies and forsakes profitable ones. He talked about how I liked
speech I gave recently about winners and losers in the dot-com world. He mentioned that it was absurd that anybody would like profitless Ariba, a supply-chain-management Net stock, quintessential New Economy, when highly profitable
goes begging. He sounded logical, compelling even. But what has happened in the week since he first interviewed me about his piece? Ariba's stock rallied in a week by almost the full price of a General Motors as
took a huge equity investment in the company.
General Motors, of course, did nothing.
So what are we trying to accomplish? What am I preaching about? A couple of simple ideas that I think will help you make money.
First, let's understand, if we're going to game the stock market, that the divergence between the companies and the stocks that represent them is the greatest it has ever been, and growing, not shrinking.
To go back to that General Motors example, we are not investing in the stocks of companies that are extremely profitable now; we are investing in the stocks of companies that we hope will be extremely profitable in the future.
In other words, we are not looking for profitable companies; we are looking for profitable stocks. Those are two very different pursuits. How so few people understand this difference is amazing to me!
Second, we at
are acknowledging this differential and we are supporting it and embracing it because the old way doesn't make you any money. How much money would Robert Samuelson make you with that GM call? How much money will traditional price-to-earnings multiple analysis, or price-to-book analysis or old-fashioned
analysis make you in this environment?
Third, we are accepting that this environment, rather than going away, is actually becoming more and more entrenched. It's doing so because growth investing, after battling value investing for years, has spent the last 10 years winning, a streak that is now long enough that we may have to think that the two leagues have diverged permanently. And they are leagues. If the best National League team can't beat the worst American League team, then there is no parity. There is just dominance, and growth is dominant. This dominance is not spoken of out loud in our profession because it is too embarrassing to too many of our colleagues. And because there is no Joe Namath of Value out there who can turn the Super Bowl of investing into a rout for value.
Fourth, this growth methodology works because, empirically, it can be demonstrated that had you just bought a basket of the highest growth stocks in the '80s -- the software stocks -- or the highest growth stocks in the '90s -- the networkers -- and all of them went down except the winner, the winner would have more than covered the losers and you would have gotten very rich.
more than made up for
more than made up for
Be sure to check back later today for the third and fourth installments of this column.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Ariba, Microsoft and Cisco. 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