Jim Cramer's Mad Money In-Depth, 1/29/08: Rules of the Game

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Tuesday January 29. Click on a stock ticker for more analysis:

Note: The following Mad Money Recap is a rebroadcast of a show that originally aired December 26, 2006

New Rule #1 : "There's a market for everything; pay attention to how it works," Archer Daniels Midland (ADM), Andersons (ANDE) and VeraSun (VSE)

Cramer reiterated his recommendation that investors read his first book: Jim Cramer's Real Money: Sane Investing in an Insane World, in addition to his newest publication, Jim Cramer's Mad Money: Watch TV Get Rich, which contains 20 brand new investment rules, 5 of which he described on Tuesday's show. His first new rule requires that investors be aware of how stocks trade and that there are many sub-markets within the market. When faced with a trendy stock, it is more important to pay attention to supply and demand than media hype. For instance, late in 2005 when demand for ethanol stocks was high and supply was low, it was possible to make "truckloads of money" with ADM and ANDE. However, when VeraSun went public in June 2006, Cramer declared that the ethanol story was over, since the supply of ethanol exceeded demand. "If you'd just been paying attention to the fundamentals, or to the hype about ethanol in the media, you would've been caught totally off-guard by the downturn in ethanol," Cramer said.

New Rule #2: "Make sure your stocks actually fit the bill," Microsoft (MSFT) and Cisco (CSCO)

In addition to doing homework, Cramer warned, "Don't be bamboozled by what sector your stock belongs to. Instead, know precisely what you own and why you own it." Cramer cautions viewers not to confuse a rally in an entire sector with a rally within the sector. Broad sector rallies are not too difficult to spot or predict. For instance, when the Fed cuts interest rates, rallies are prevalent among cyclicals, and when the economy is perceived as being weak, consumer staples rally. However, "most rallies don't work that way," Cramer said. For instance, when there were stories about a tech rally in June 2005, Cramer chose MSFT and CSCO as names that "represented" tech, when the upsurge was actually a gadget rally, and did not affect these stocks. Cramer suggests looking at industries within sectors.

New Rule #3: "Latin America is Always a Trade," BanColombia (CIB)

Cramer envisions that one day this rule may be revoked, but not in the near future, because every time there is an "amazing, long-term growth story" in Latin America, it will wind up being a trade. This has nothing to do with the fundamentals of the companies, but is the result of huge market-moving investment firms which have the conviction that Latin America is always a trade, and the stocks get hammered as soon as they move on. Cramer admitted that he made this mistake by thinking that CIB was an investment when it was actually a trade.

New Rule #4: "Be a Lemming."

Although he confessed that, at first, this rule may sound "stupid" and "terrible," it actually makes sense to go with the big institutions and the movement of the market if the investor has done sufficient homework. This doesn't mean to ride momentum blindly, but it is true that stocks which hit a 52-week high often keep increasing. "This isn't about being a unique and individual snowflake. It's about trying to make money," Cramer said.

New Rule #5: "Don't be afraid to say something is too hard."

Some things are just too difficult to game, even after doing lot of homework. Cramer confesses that his rough spot is predicting restaurant same-store sales growth; "There are too many better, easier ways to make money in the market," he said. "Restaurant CEOs have a hard time predicting their own same-store sales, and the weirdest, most unexpected factors can cause worse-than-expected results." Since there is always a bull market somewhere, Cramer doesn't see the point in knocking one's head against the wall with something that is too hard.

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