Cramer's 'Mad Money' Recap: Invest Like a Pro
Editor's note: This show was last broadcast on Dec. 27, 2011.
NEW YORK (TheStreet) -- "You can make more money investing for yourself than you would investing in bonds or index funds," Jim Cramer told "Mad Money" viewers Tuesday, as he devoted the entire show to helping home gamers become better investors.
Cramer said ordinary people can become great investors, even if the pundits and market "experts" say otherwise.
Cramer's first lesson for investors is that the market isn't always rational and it doesn't always make sense. He said sometimes we try to find logic and reason where there is none. "The market does some crazy things," he explained, "and when that happens, you want to take advantage of it."
On days when the markets get pummeled, Cramer said there will be tons of stocks that go down for bad reasons. He said hedge funds, for example, sometimes need to sell their positions to raise cash to meet margin requirements or redemptions. When this happens, stocks move not on their individual fundamentals, but on the fundamentals of the money management business.
Cramer said the worst thing an investor can do is assume that because a stock trades at a certain level, it deserves to be there. "Was it right for oil to trade at $147 a barrel in 2008?" Of course not, he replied. With so many hedge funds gravitating toward the futures markets, "hedge funds gone wild" are having a greater and great impact on how the overall markets react.
The next time everything goes down all at once, Cramer told viewers, don't try and cook up reasons to justify it, just ask yourself if you might be seeing out-of-control hedge funds taking charge.
Buying 'Broken' Stocks
"Buy broken stocks, not broken companies," was Cramer's second lesson to investors. He said that in a serious correction, everything will go down, including a lot of stocks that don't deserve to. But how can investors tell the difference?
Cramer said that every correction has a cause. In 2008, it was mortgage-backed bonds, while in 2011 it was the debate over the debt ceiling and the resulting U.S. debt downgrade. Cramer said investors can look for the companies responsible for the corrections and assume they're probably broken companies.