Cramer's 'Mad Money' Recap: Invest Like a Pro

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Editor's note: This recap last aired March 30, 2010.

NEW YORK ( TheStreet) -- "The market doesn't always make sense," Jim Cramer told the viewers of his "Mad Money" TV show Tuesday.

He said that if viewers want to become better investors, they need to understand how the market works, which is why Cramer devoted his entire show to teaching his most important lessons.

Cramer said that there's a pernicious myth that the markets are always rational, that it always makes sense, but that simply isn't true. He said whenever the markets get hit with a huge pullback, there will be a lot of stocks going down for the wrong reasons, or even for no reason at all.

So how can investors make sense of these sell-offs? Cramer said they need to understand how the markets work. He explained that unlike the old days, the markets are now trading baskets of stocks, like index funds and ETFs, along with futures and options and a whole host of other instruments. These index funds link stocks that wouldn't otherwise be linked.

So when oil and gold are both down in the same day, said Cramer, does that mean there's something wrong in both groups? Probably not.

Cramer said the other fairly recent market phenomenon are large hedge funds pooling massive amounts of money together and trading these ETFs and index funds as an easy way to get in and out of different sectors.

Cramer called hedge fund thinking "hedge funds gone wild," as the largest of these funds often trade in tandem, causing big swings in seemingly unrelated stocks. He said that when everything seems to be going down all at once, investors shouldn't try to dream up reasons why, they should instead just accept that it's probably part of the new investing world we live in.

Tips on Secondary Offerings

Cramer's second lesson for investors was how to tell the difference between an opportunity, and a red flag, when it comes to secondary offerings. He said there are still opportunities to make money, even mad money, as long as you know what to look for.

Cramer explained that a secondary offering is when a listed company issues more shares to stock. He said that while secondaries generally are dilutive to existing shareholders, there is one case where issuing more stock can be extremely beneficial to shareholders, and that's when the company is heavy in debt.

Cramer said the companies in this situation often use secondaries to reduce debt and firm up their balance sheets, something that's been seen over and over since the financial crisis ended. This new strengthened balance sheet is welcome news for shareholders, which often causes the stock to profit big.

That's how companies like U.S. Steel ( X) was able to price a secondary at $22.50 a share, and see its stock rise 44% to $36.82 over the next month, said Cramer. It's also why others, like Ford ( F) and Vulcan Materials ( VMC) saw gains on their recent secondaries.

Cramer said investors just need to watch out for these debt-laden companies and when they announce their secondaries so that they can take advantage of the fabulous opportunity of a better balance sheet from the offering.

Cramer explained in detail what he looks for in a successful offering. He said investors need to find offerings that either provide sizable gains for stocks they don't necessarily care for, or opportunities to buy stocks they do care for at a nice discount.

Cramer said that investors can't just assume that all secondary offerings will work. It takes homework, he emphasized. Sometimes the price at which the stock is being offered is more important than the company doing the offering.

So how should investors evaluate an offering? Cramer said they need to first keep an eye on the news so that they can be on top of the announcements, when they first come out.

Then, he said, investors must evaluate the company and its prospects. Cramer said he'd never buy the stock of a company he didn't trust, even at a discount.

Finally, Cramer said he'd contact a full service broker to learn how "tight," or well subscribed an offering is. If there are large institutional investors who plan on holding the stock, that's good news, he said.

But even if a deal looks good, Cramer said he'd still play it safe and not buy all at once. If investors plan on buying 200 shares, for example, Cramer said he'd buy 100 shares at the offering price, then buy the rest after the offer breaks the print price.

Cramer said a good full service broker can help investors gauge the demand for a secondary offering, as well as help them get in on these deals.

Buyback Caveat

Cramer's next lesson for investors was that stock buyback programs, by themselves, are not a reason to own a stock. He explained that investors can no longer trust buybacks to propel stocks higher, or even protect them from losses.

Cramer said he used to believe in stock buybacks, as they were almost always worthwhile. But in recent years, buybacks haven't provided the the value they once did, as companies have squandered billions of dollars buying back shares at inflated prices, leaving shareholders with nothing to show for it.

Cramer said some of the wort offenders have been HMOs, like Wellpoint ( WLP) and UnitedHealth Group ( UNH). He said these companies' buybacks did nothing for their share prices, and the companies would have been better off offering a dividend, which would have made their stocks far more attractive to investors during the crash.

So what's the problem with these buybacks? Cramer said that too often executives use them for generate cheap earnings per share growth. He said the buybacks can be too small or ill-timed to provide any long term benefits.

Then there's the notion that buybacks provide a cushion against short sellers. Cramer said this once-tried-and-true rule was obliterated during the financial panic, thanks in part to the removal of the uptick rule, which helped safeguard stocks from short sellers. Cramer said during the height of the panic, short sellers would overwhelm a stock, sending it sharply lower, rendering buybacks useless.

For all of these reasons, Cramer said buybacks just can't be trusted any longer. He said investors never want to own a stock where the company is wasting money that it needs to survive to repurchase its shares.

Market Fuel

"In order for stocks to rally higher, they need to have fuel," Cramer told viewers, and that fuel is cash. He said that as long as more dough is flowing into the market, it's easy to find groups that can go higher.

Cramer explained that the fuel the market needs often comes from retail investors who are taking their money off the sidelines and putting it to work. He said if investors are reluctant to invest, however, then it becomes a zero-sum game, with some stocks going higher at the expense of others.

Cramer said that investors should always worry when they see defensive names, like consumer staple stocks, roaring higher. He said that trend often means people feel the economy is getting worse, which stops the flow of new money entering the market cold.

Keep an eye out for rallies in stocks like Coca-Cola ( KO) or Kellogg's ( K) or Heinz ( HNZ), he said, and be less aggressive.

-- Written by Scott Rutt in Washington D.C.

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Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for, Inc., and CNBC, and a director and co-founder of All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or is related to the specific opinions expressed by him on "Mad Money."

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