Market Realities (Final)
By Scott Rutt
TheStreet.com Staff Reporter
8/31/2009 6:20 PM EDT
NEW YORK (TheStreet) -- "You can never afford to stop learning," Jim Cramer told the viewers of his "Mad Money" TV show Monday.
He said that even Wall Street veterans don't know everything, and unless investors keep learning, the markets will run circles around them. That's why he unveiled new rules for investing in turbulent markets.
Rule No 1: A bear market rally is still a rally. Cramer said this rule should be obvious, but conventional market wisdom still seems to think that a bear market rally is not worth profiting from.
Is it really so dangerous, he asked, to buy into a rally that's part of bear market? Cramer said the real danger lies in keeping your money on the sidelines, and missing out on the few opportunities bear markets give investors to make money.
Cramer dismissed the notion that stocks are "out of season" in a bear market. He reminded viewers that their goal as investors is to make money, no matter what the markets may be doing. Banks do not turn away money that's made in bear markets, he said. Since the market lows in March, the Dow has rallied some 36%, he said. "Aren't those points worth harvesting?"
Cramer conceded that it is sometimes harder to make money in a bear market, but noted that he's never seen a rally that caused people to lose money. "Don't be scared away," he said.
The China Card
Rule No. 2: America no longer rules the roost. For the better part of a century, America was the pre-eminent global economic superpower, said Cramer. "But all that's changed," he continued.
He said that the United States has now been replaced by communist China. "China is now more important," said Cramer, "it's simply a fact of life now and we have to get used to it."
Cramer said until investors come to terms with this fact, the markets will make them crazy. "Just look at the facts," he said. "While the U.S. issues trillions of dollars in debt every year, who is the only country big enough to buy them? China," he said. "While U.S. banks teetered on the precipice, Chinese banks weren't even flinching."
It was Chinese demand for resources, said Cramer, that powered much of the bull market that peaked in 2007. And it's the Chinese recovery that's helping to stabilize things now, he continued. Whether it's materials or oil, machinery or technology, all roads lead to China, he said.
"It's time to fact the facts, The People's Republic Of China is the most important Capitalist country," said Cramer.
Herd Strategy
Rule No. 3: Following The Herd Can Make You Money. There is no tried and true way to make money piggybacking off of the most successful investors out there, said Cramer, but there are easy gains to be made by following the herd if you do it right.
Cramer said some patterns are easy to spot. As the market rises, investors pour money into mutual funds, and those funds, in turn, keep on buying, sending stocks even higher. And as one fund starts beating the markets, you can bet investors will notice and continue pouring new money into it, said Cramer. Since no large fund can buy a meaningful amount of stock without moving the price, anticipating these large fund moves is a solid strategy, he said.
How does the strategy work? Find a successful fund, one that's been buying recently and see what they're buying and what they're core holding are. If you also like the fundamentals of the company, buy some. Fund managers like to buy more of the stocks they already own, said Cramer, especially if those stocks are working.
Cramer said this method of investor is battle tested and always comes up with aces. He said as long as investors are monitoring their funds quarterly, they will profit. Watch for turning tides however, said Cramer, if the fund begins losing money, their new investments will dry up and so will your profits.
Key Indicators
Rule No. 4: Be ready for change. If the market collapse of 2008 and 2009 and its meteoric rise since March of 2009 has taught us anything, said Cramer, it's that the indicators that matter can change in an instant.
Investors use indicators such as interest rates, unemployment rates, oil prices, and volatility indices to gauge where the markets are headed, he said. The key however, is to know which indicators matter.
Cramer said that gold historically has been a great indicator for investor fear. In times of instability, gold trends higher, or at least it used to. Today, he said, gold prices are more determined more by developing nations buying gold for jewelry than they are by U.S. economic worries. As a result, gold is no long a good indicator and will likely confuse investors who rely on it, he explained.
What's an indicator that works? Cramer said the Baltic Dry Index, a measure of imports into China. Others indicators, such as volatility and advance/decline lines, fluctuate in their relative importance, said Cramer.
Cramer said the bottom line is not to follow indicators blindly, but rather to thoroughly understand what they measure, and how important they are to the markets. "This is the best way to protect yourself from harmful sidetracks," he said.
Listening
Rule No. 5: Listen to everyone, not just the experts. "Listen to everyone, especially people who know more about consumer behavior that's different from yours," was Cramer's final word of wisdom.
Cramer said sometimes the people who are supposed to know, don't. On his show, he said there have been several CEOs and executives who have touted "things are great," right before the business cycle ended and the bottom fell out. He said others were shocked that "better-than-expected" results didn't move their stocks.
Other times, however, those who shouldn't know, do. Cramer cited analysts who discounted a restaurant's potential, despite the fact they had never eaten there, or a retailer's earnings potential because they'd never shopped there. In both these cases, hesaid others, maybe even you, would have better insights than Wall Street.
Such was the case with restauranteur Danny Meyer, whose notion that companies that provide great service and hospitality will be rewarded by the markets. Cramer said he originally dismissed Meyer's notion, but it turns out, he was right.
Cramer said investors need to listen to everyone and take advantage of every insight they can find.
-- Written by Scott Rutt in Washington
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