Cramer's 'Mad Money' Recap: Next Week's Game Plan
Cramer explained that it's all too easy to assume a company and its stock are synonymous. After all, much of "Mad Money" is spent analyzing companies with good growth prospects and hefty dividends in the hopes they will reward shareholders for years to come. But in today's complicated markets, stocks, and markets, can move for many reasons, most of which have nothing to do with the underlying fundamentals.
A company's performance and its stock price don't move in a straight line, said Cramer. For example, many investors now use exchange-traded funds, or ETFs, which trade sectors or even the entire market as a single commodity. This allows good companies to trade in lock-step with the bad ones. There are also macro-economic factors, such as the financial crisis in Europe, which weigh heavily on the day-to-day action of the markets.
Cramer said there are also the hedge funds and institutional investors. He said if too many hedge funds are trading around a single thesis and if that thesis doesn't come true, margin calls and redemptions often force funds to sell when they'd rather not.Short-sellers are another contingent to consider, said Cramer, as large groups of investors betting against a stock can also cause unexpected volatility.
Finally, there is the company itself. Cramer said when times get tough for a company, things can get much tougher for its stock, which gets slammed much harder than it deserves. The key is to recognize that's happening with your stocks, and think like a trader to use those short-term swings in prices to your advantage.
Doing Homework"All investors are looking for an edge in the markets," Cramer said, which is why doing the homework and studying a company's fundamentals are so important. He said the notion of homework may seem trivial, given everything else that moves stocks up and down on a day-to-day basis, but in reality, homework builds conviction and can give investors a leg up on everyone else.
Cramer explained that lots of people are just lazy and many money managers are often technicians analyzing charts for patterns. That means investors who do the research, who truly understand a company, will often know more than even the professionals.