Mad Money w/ Jim Cramer 3/3/25

Summary

Mad Money w/ Jim Cramer – Episode Summary (March 3, 2025)

Release Date: March 4, 2025

Introduction

In the March 3, 2025, episode of Mad Money with Jim Cramer, Jim delves deep into the tumultuous world of stock market crashes and sell-offs. Drawing from his extensive four-decade experience, Cramer aims to equip investors with the knowledge and strategies needed to navigate through both historical and contemporary market downturns. The episode not only revisits significant market crashes but also offers practical advice on identifying and capitalizing on opportunities amidst chaos.

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1. Understanding Market Sell-Offs: Historical Perspectives

a. The 1987 Black Monday Crash

Jim Cramer begins by recounting the infamous Black Monday of October 19, 1987, when the Dow Jones Industrial Average plummeted by over 22% in a single day. Reflecting on his personal experience, he states:

"On October 19, 1987, also known as Black Monday, the Dow Jones Industrial Average fell 508 points or more than 22% in a single session. [04:17]"

Cramer discusses the rapid decline caused by the then-novel S&P 500 futures market, which overwhelmed traditional stock trading mechanisms. He highlights the lack of preparedness among traders for the sudden surge in futures trading, leading to a market malfunction.

b. The 2007-2009 Financial Crisis

Contrasting Black Monday, Jim explores the financial crisis of 2007-2009, emphasizing its prolonged nature and deep economic roots. He notes:

"The bear market that began in October of 2007 was a totally different animal. Dow fell from 14,001 to 6,470 by March 2009. [05:15]"

Cramer underscores the systemic risks involved, differentiating it from mechanical sell-offs like Black Monday. The prolonged downturn saw significant economic indicators deteriorate, leading to a severe and extended bear market.

c. The COVID-19 Crash

Briefly touching on the COVID-19 crash, Cramer points out its relative brevity compared to previous crashes:

"The COVID crash wasn’t as bad as these two, especially when you remember that the market started rebounding almost immediately. [07:10]"

He attributes the swift recovery to decisive government and Federal Reserve interventions, which stabilized the market faster than in past crises.

d. Flash Crashes of 2010 and 2015

Jim revisits the flash crashes of 2010 and 2015, drawing parallels to Black Monday in terms of mechanical failures within the market infrastructure:

"Black Monday was similar to the flash crash of 2010 and its doppelganger in 2015. [15:45]"

He explains how overwhelming futures trading and automated sell orders led to rapid declines, emphasizing that these events were more about market mechanics than economic fundamentals.

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2. Distinguishing Between Types of Sell-Offs

Cramer differentiates between sell-offs driven by economic fundamentals and those caused by mechanical glitches:

• Economic-Driven Sell-Offs: Linked to systemic risks such as financial crises, where the downturn is rooted in economic deterioration.

• Mechanical Sell-Offs: Triggered by factors like over-reliance on futures trading, margin calls, or automated trading errors, independent of the underlying economic health.

He advises investors to assess the nature of the sell-off to determine appropriate strategies.

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3. Strategies for Navigating Market Downturns

a. Recognizing Opportunities Amidst Crashes

Jim emphasizes the importance of identifying when a sell-off is mechanical, presenting potential buying opportunities:

"If you can figure out when a sell off is caused by the mechanics of the market breaking down, then you might have an incredible buying opportunity. [20:30]"

b. Accidental High Yielders

Cramer introduces the concept of "Accidental High Yielders" — stocks whose dividends appear unusually high due to significant price drops rather than improved financial performance. He advises focusing on companies with solid balance sheets that temporarily offer high yields due to market anomalies.

c. Utilizing Limit Orders

During flash crashes, Jim recommends using limit orders instead of market orders to avoid unfavorable pricing:

"Don't use market orders because you might end up getting terrible prices. Frankly, you should never use market orders because they're especially stupid during a crash. [29:00]"

This strategy helps investors acquire stocks at more favorable prices during volatile periods.

d. Avoiding Overconcentration in IPOs

Cramer warns against heavy investments in IPOs during sell-offs, suggesting investors steer clear of new offerings that might be oversupplied:

"Avoid the blast zone, the area where most of the new IPOs are concentrated, and focus on the stocks that are down due to collateral damage. [39:00]"

e. Diversification and Safe Havens

He recommends diversifying portfolios to include safe havens like gold, real estate, and bonds. However, he cautions:

"Bonds are the source of the problem when the Fed tightens. Short-term Treasuries become more competitive with stocks, leading investors to move funds out of equities. [43:00]"

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4. Federal Reserve's Role in Market Dynamics

Cramer delves into how the Federal Reserve's actions, particularly interest rate adjustments, influence market behavior:

"The Fed has a different mandate, stamping out inflation. When the Fed declared war on inflation in late 2021, the market started rolling over with the highest risk groups getting eviscerated. [37:20]"

He explains that while rate hikes can lead to market declines, they don't always result in crashes. Understanding the Fed's actions helps investors anticipate market movements and adjust their strategies accordingly.

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5. Caller Questions and Expert Advice

Throughout the episode, Jim addresses several listener questions, providing tailored investment advice:

a. Tony from Florida on Roth IRAs and Growth Funds

Question: "Am I better off with a growth fund or an index fund for non-deductible Roth IRAs for my grandchildren?"

Jim's Response: "Go for growth, growth, growth because they're young. Take real risks since they have their whole life ahead of them. [10:00]"

b. Investing in Stocks During Earnings Downturns

Question: "Can we buy a stock day one after it reports good earnings but the market buys it down, or should we wait three days?"

Jim's Response: "Buy it at your prices. Start buying a little at the beginning and continue on the way down. Don’t try to gauge the exact timing. [10:39]"

c. High PE Ratio Stocks

Question: "What should we look for to make buying a stock with a high PE acceptable?"

Jim's Response:

"Use the rule of 40: add the revenue growth rate and the margin. If it's over 40, it's a keeper. [40:00]"

Additionally, he discusses the importance of historical multiples and sound financials when considering high PE stocks.

d. Taking Profits vs. Capital Gains Tax

Question: "How do you decide whether to take profit rather than keep a stock longer to receive capital gains tax benefits?"

Jim's Response:

"This is more of a tax adviser question. Consult your tax person as it varies for everyone. [44:20]"

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6. Advanced Strategies and Concepts

a. Margin Calls and Market Declines

Cramer explains how margin calls can exacerbate market sell-offs, particularly during rapid declines:

"Margin clerks demand collateral be put up or sell positions without your consent. This can lead to frantic selling between 1 and 2 PM on a down day. [38:30]"

He advises investors to be vigilant during these peak selling times and to consider purchasing defensive stocks like healthcare or mega-caps.

b. Political and International Risks

Addressing concerns about political instability and international market influences, Jim advises:

"Look for companies that aren’t directly impacted by political frays. Most international worries don't affect the stocks of American companies significantly. [42:10]"

He stresses the importance of focusing on the fundamentals of individual companies rather than external geopolitical fears.

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7. Final Takeaways and Closing Remarks

Jim concludes the episode by reiterating that while systemic risks are rare, mechanical sell-offs and typical market pullbacks present significant opportunities for investors. His key advice includes:

• Stay Informed: Understand the nature of the sell-off—whether it's economic or mechanical.
• Be Opportunistic: Use downturns to acquire quality stocks at discounted prices.
• Avoid Panic Selling: Maintain discipline and adhere to strategic investment plans.
• Diversify: Incorporate various asset classes to hedge against different types of market risks.

"Never panic. Stick with Kramer, and recognize that every bull market is somewhere. [43:50]"

Jim also encourages listeners to join the CNBC Investing Club for more in-depth strategies and real-time portfolio management.

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Conclusion

This episode of Mad Money with Jim Cramer serves as a comprehensive guide for investors aiming to navigate market sell-offs effectively. By drawing lessons from past crashes and providing actionable strategies, Jim empowers listeners to make informed decisions, seize opportunities, and safeguard their investments during turbulent times.

Transcript

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[Jim Cramer]

My mission is simple to make you money. I'm here to level the playing field for all investors. There's always a bull market somewhere, and I promise to help you find it. Mad Money starts now. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Cramerica. I hope you want to make friends. I'm just trying to make a little money. My job is not just to entertain, but to teach. And I'm telling you, I'm going to do a lot of teaching tonight. So call me at 1-800-743-CNBC or tweet me at Jim Cramer. Tough days do not last forever, but when they come along, you need to know how to respond. You need a game plan ready so you can figure out what kind of sell off we're dealing with and then react appropriately because the early days of decline are never easy to navigate. You need all the help you can get to borrow a line from Tolstoy's fantastic Anna Karenina. All happy rallies are alike. Each sell off is unhappy in its own way. It's true. Bull markets and stocks higher and everyone thinks they're genius participating because it seems so darn easy. Same every time, but big declines much harder. They could be the start of a bear market or maybe something worse. Or they might actually be just a viable glitch. That's why tonight we're turning to history to illustrate some of the common qualities of sell offs so you know what to do the next time the market has an inevitable moment of weakness. Now, really, There only been two truly horrifying sell offs since I started investing over four decades ago. The one day crash of 1987 and the rolling crash of 2007 to 2009. That was the financial crisis. Do you want even the COVID crash when the SB lost SB 500 lost 35% of its value in just over a month. That wasn't nearly as bad as these two, especially when you remember that the market started rebounding almost immediately. So let's deal with the two big ones head on because they make for great examples. 1987 and the financial crisis are actually polar opposites, although the percentage declines really pretty similar. On October 19, 1987, also known as Black Monday, the Dow Jones Industrial Average fell 508 points or more than 22% in a single session. I was trading that day and even previous week had been one of the worst weeks in market history. Black Monday hit fast and hit hard. It felt there were no buyers to be found. From Dow 2246 where the crash started to do 1738 where at last it ended that day it kept tumbling right into the close. I remember thinking saved by the bell. Except it felt like there wasn't that much money left to be saved. But most people don't remember that the week before war was horrendous to the Dow had already plunged from 24 and 82 to 22 and 46. That's nearly a 10% decline. That harsh pullback encouraged bargain hunters, intrepid souls who thought they could flip Monday morning into some strength. You bought Friday flipping on Monday, except the strength never showed up and they got badly burned. In fact, weakness continued to the next day. You know, that day became known as Terrible Tuesday where the Dow kind of just broke down entirely. The market simply stopped functioning. But you know what, I was there and I was actually able to calculate that bottom. The bottom turned out to be about Dow 1400. That was down another 122 points or about 7% from where we closed on Black Monday. At the end of the day it was all just. I pieced them together one by one and people didn't think it ever went down below Dow 1600. But they were wrong. Then Fed Chairman Alan Greenspan stopped the decline in his tracks when he said he'd provide all the liquidity necessary to stabilize the market. Market. Now I still remember that green line when it came over your screen. He enlisted multiple firms around Wall street to help put in the bottom. And the market staged a remarkable two day rally that took the Dow up more than 400 points from its lows. It seemed pretty unbelievable at the time. The effects of the crash lasted for just three months when we had a retest that held. But do you know that it took until mid-1989 for the averages return to where they were trading before this big breakdown. The bear market that began in October of 2007 was a total totally different animal. Dow fell from 14,001 198, 1198. So it's 14,000. Remember the other ones in 2000? 14,000. And it didn't bottom until March 6th of 2009 when it landed at a staggering 6,470. We didn't return to that how 2007 level until March of 2013. Why did one sell off end so quickly where the other took six weeks, six, six years to unwind? Well, that's the question that defines the two extremes of unhappy sell offs. See Black Monday was a mechanical sell off. The first one I can remember where the averages melted down because of pure market dysfunction. It's instructive to unpack Black Monday because the way it played out was reminiscent of two other crashes. The flash crash of 2010 and its doppelganger in 2015. Both times when the market simply failed to work. Now all three of these started with the S&P 500 futures pitch in Chicago. See Chicago overwhelmed Wall Street. New York where the stocks underneath the futures are traded. Black Monday happened because stock traders didn't understand the power of the futures market back then which could flood the stock market with instant unseen supply. No one was ready for it. These days we accept the futures are worth watching, but it wasn't like it back then because they were relatively new instruments created about five years before the crash and no one knew the power they had. See, the power of the future snuck up on us as they were initially a much smaller market than the stocks themselves. Because portfolio managers could go in easily and out easily. Though the futures became the most powerful drivers of stock prices, particularly for hedge funds. Even more powerful than the actual performance the underlying companies and stocks are meant to represent. Underlying corporate earnings used to be mean much more to the day to day action of the stock. The thing is, even with the relatively new impact of futures, Black Monday was highly unusual. We'd had a big run going into the crash of 87. It was a remarkable multi year rally with area substantial decline and don't I know it. I left Goldman Sachs in 1987 to start my own hedge fund because my returns had been so bountiful for investors, the multi year rally in the mid to 80s, in the mid to late 80s had created such stupendous gains that a group of clever salespeople started offering big funds what they claim were insurance policies that could lock in gains and stop out losses after their funds had gone up so much so called portfolio insurance involves something called dynamic hedging where these specialists said they could use futures to ensure that you no longer be exposed to stock market risk say down 5 or 10% or some other number depending on the policy took out. Yeah, it was like a stop loss these the idea was that these policies would let you sidestep the losses. Of course it's impossible to do that but they had such a great sales pitch people believe them because the stock futures were so novel. In reality though, when the losses all kicked in at once on Black Monday the portfolio insurance didn't work. If anything, the future selling from these insurance policies actually accelerated the decline in the stock market causing massive losses for the poor saps who bought these things. Many of the of the actual clients were wiped out. The people who sold these policies they were Charltons and Mountbanks Although history remember them says just really as idiots not the crooks I thought they were. I lean toward the latter theory because there's no magic trick that can get your returns from investing in the stock market that much risk. Come on, the two go hand in hand. Don't leave anyone who tells you different. Those people are Charlottes of course at the time we didn't know that the power of the futures could cause a crash. We figured where there's smoke there's fire. If the markets crash then there's going to be something wrong with the economy, right? Simply had to be recession lurking Stocks couldn't go down their own There had to otherwise how could the Dow plummet 22% in a single day after falling 10% to week four. I say though it turned out wrong the economy was strong going in the 87 crash it was strong coming out of it. There just wasn't any economic correlation with Black Monday at all. It was the interplay between Chicago much more powerful and realized in New York much weaker that set up the conflagration and when the treasury department examined what happened that day it concluded the future set off immense selling while some specialist firms on the floor of the exchange and some brokerage houses failed to step up in what known as stabilized this tape. The latter had no duty to stabilize things but the former were supposed to do so the treasury found out that many didn't do the jobs. Now I was fortunate enough to actually be in cash on Black Monday having liquidated my portfolio early in the previous week because the market acts so badly I don't want A part of it. Now, in retrospect, it did make my career. I look like a true genius. But the truth is I was just frightened of the market and wanted to regroup. I always say, though, it's better to be lucky than good. But discipline can help maximize your luck, which is why we spend so much time teaching you discipline in the CBC Investing club. So here's the bottom line. Sometimes crashes have nothing to do with the economy. They're caused by the mechanics of the market. Stay tuned for more examples of this kind of decline and the more serious animal, the Bear Market of 2007, 2009. So you can figure out what to do when they really. Irma in New York. Irma?

[Caller]

Yes.

[Jim Cramer]

Good evening, Mr. Kramer. I'm planning to open non deductible Roth IRAs. IRAs for my grandchildren who are all in their 20s. Am I better off with a growth fund or an index fund? I want you to be in growth, growth, growth because they're young, you can switch the index in the 30s, but let's go for some real risk here because they got their whole life ahead of. And I really want you to hit it big right now for them. Tony, I am a. I am alone in that, but I don't care. I really want risk taken when they're younger. Tony in Florida. Tony. Hey, Jim, I just want to let.

[Caller]

You know I'm a member from day one. It will be a lifetime member. I love you for your. What I want to ask you is when. When we like a stock and, well, love a stock and it reports earnings that are really good, but then for some reason the market buys it down. Can we buy it day one or do we have to use that rule like everybody says, wait three days before you buy a stock that goes down?

[Jim Cramer]

No, no, you buy it at your prices. You buy a little bit at the beginning and then like we teach at the club, you buy it on the way down. We may have a real battle on our hands now. Now, you know, we battle in the club and we've been very successful in most of our battles. Some of them have been tougher, but that's the way you make it so that your battle won't be too hard. Buying it all at once does that, and we don't want that. Tough days don't last forever, people. But when they come along, you need to know how to respond. On MAN Tonight, I'm giving you a crash course in crashes, sell offs, pullbacks and big market declines. So you'll be prepared to get the best possible outcomes from the worst possible situations. So stay with Kramer.

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[Jim Cramer]

Have a question?

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[Jim Cramer]

Missed something?

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[Jim Cramer]

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[Jim Cramer]

Today I'm teaching you how to cope with all sorts of declines. I already covered the crash of 1987, how it wasn't really related to the economy shocker, so it made sense to buy stocks when the smoke cleared. 1987 was a rare opportunity that took a little time to reveal itself, but when it did, ooh la la. It was also the first instance of the S&P 500 futures exercising their pernicious power over individual stocks, sadly, was the first of many. Which brings me to the fabled flash crash of 2010, one of those negative moments that drove away so many investors who never came back to stocks because they didn't know their value could be destroyed so quickly, almost whimsically. Who wants to keep their life Savings and instruments that can blow up in the blink of an eye. Look, I don't blame anyone for not wanting to be in after the flash crash. What happened that afternoon was pretty much the same deal as black Monday of 87. The futures overwhelmed the stock market market and buyers just walked away betting that there had to be something substantive behind the destruction. Right? Couldn't you couldn't just be the machines breaking down for ever since good it the flash crash started at 2:32pm on May 6th of 2020 of 2010. It lasted for 36 minutes net 36 minutes. The Dow fell almost 1000 points from roughly 10,000 level. Very memorable for me because I had to be on air at the time. Immediately money managers tried to play the pin the tail on the sell off. There were riots in Greece and maybe this time was everyone was focused on southern Europe thanks to endless sovereign debt crises. Others pinned it on the newfound weakness in the US economy of which for the record there really wasn't any. Perhaps because I had the benefit of trading on Black Monday. I recognize the flash crash exactly for what it was. Another situation when the machines were breaking as futures overwhelmed the stocks. It wasn't the fundamentals we didn't know at the time. But a gigantic error and sell order caused tremendous fear of the spread like wildfire. Many buyers just simply disappeared. They walked away. They didn't wait to wait around to find out what was causing the landslide. Had to be something big, right? They just wanted to get out as fast as possible. Lightning on air. I called it a phony sell off because the decline had no basis in economic reality which made for a tremendous buying opportunity. That is not a real place. It's too bad. The system obviously broke down. We're going to find out that there was a glitch from P and Tail and it obviously broke down. The market didn't work. It broke down. The machines broke down. That's what happened. That's exactly what happened. Had nothing to do with the fundamentals. Just more of this nonsense. While some listened and actually bought stocks and what I had to say, many people simply didn't believe believe that equities could be that fragile. And they left. It was shocking. In all the years I've been doing this show I hope I taught you that stocks are not hard assets. They are subject to all sorts of whims that can reduce their value in a heartbeat including mechanical issues like we saw during that 36 minutes. Help. They're just. They're just not perfect enough and people think they are Anyway, the market quickly regained its equilibrium, but not before another round of individual investors left the asset class entirely and they never came back. Okay, how about August 2015 sell off where the Dow fell 1,000 points. Right. The opening. Now I was seemingly related to fears that the Federal Reserve position, you raise interest rates right in the teeth of still one more story about the China market collapsing. Hey, China's been collapsing for ages, right? Back then the Chinese market was the most dominant negative story out there. Kind of, you know, it's always been out there. But the whole economic edifice of the PRC could collapse from too much leverage at any given time. It's been a common frame. Somehow I find myself on air at all the right times to witness these events. That Friday before the sell off had been. It had been a monstrously ugly day as a Fed official late in the afternoon had suggested it was time to raise rates despite the Chinese sell off. It was an aggressive statement that demonstrated a cavalier attitude toward the market's ugly but also fragile mood. Now when we came in on Monday, August 24, we heard that there were some very large sell orders in place for major stocks. We weren't ready though for the gap downs. We saw where large capitalization stocks were shedding hundreds of billions of dollars of value, many down 20% as the market opened. And we had no ability to tell why. Like the crash of 87 was very tough to see what the real prices were. The confusion was that horrific. It was like trading in the fog of war. Yes, the fog of trading. Some prominent stocks were down 40, 50, 50%. It was indeed crazy town. As the market rolled open, the Dow ended up tallying a decline of about 1,000 points. When the smoke cleared at 10am I and my partners in Squawk on the screen were pretty stymied at the time. I remember turning David Faber Chat about the meaning of the sell off. His reaction I thought was priceless. I don't, this is.

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[Jim Cramer]

These are. You got to find out whether someone. Boss, these are enormous moves. I got to make some phone calls. I mean I remember when he said, I said, yeah, that's it. I got to make some phone calls. That's how confused we were, that's how long we knew it was. But you can't just go out and say it's wrong again. We figured there had to be something very bad in the economy. Somebody knew something we didn't. Something mysterious, something otherworldly, something nefarious. Maybe China had actually collapsed. Maybe there was war somewhere, maybe something occurred in Europe we didn't know about. We had to be assumed there'd be a good reason for that kind of decline. I was suspicious though, because some of the hardest hit stocks were the recession proof names, especially the biotechs, which for some reason declined hard. Harder than almost all the rest of the market. Now that really made no sense. That's what people buy when the economy softens up for Evans, like they are safe havens. Once again, I suggested it was the machines that were causing the problem, that the futures had overwhelmed the stocks and the computers are going Haywire. Just like 2010, just like the flash crash. By mid morning we learned that that was exactly the case. The stock market then underwent a beautiful metamorphosis into a furious rally. Jumping 500 points from the bottom, Strong stomach buyers came in and took advantage of the opportunity. The economy was gaining strength, not losing, and a thoughtful Federal Reserve wasn't really about to tighten that. With China teetering, it was an excellent time to buy stocks. Why was there such fear and confusion at the time, both in 2010 and 2015? Why were those mini crashes so frightening? I think investors weren't ready for either flash crash because post 1987 the government had put in what are known as circuit breakers. They were supposed to cool these declines by stopping trading momentarily. But the circuit breakers created a false sense of security that oddly still exists today, even as they failed to work properly on both occasions and did very little to stop the destruction of your nest egg. So please, when you hear talk of circuit breakers protecting you from fast declines, no, don't believe it. Fear can't be legislated or regulated out of the market. It will always be there. There will always be people who react horribly after an initial event, even as that event is mechanical and not truly substantive in nature in any way, shape or form. Now, there have been many declines worse than the flash crashes of 2010 and 2015. I can think of three days during the COVID crash when we were down almost from 7.8% to almost 13% in a single session. But the COVID crash was very straightforward. We knew exactly where the problem was. Government shut down the whole economy to fight a deadly plague. Zero confusion. Flash crashes were different, by the way. If you thought my own air commentary was useful in 2010 and 2015 and it was then. Oh, that's actually kind of a more reason to join the CNBC investing club. We show you how to run a portfolio in real time. We take all this stuff into account. In fact, these kinds of moves are never going to go away. As we get further from the last one, I always anticipate the next one. So what's the bottom line here? If you can figure out when a sell off is caused by the mechanics of the market breaking down, then you might have an incredible buying opportunity. First though, you have to determine whether the sell off is related to the fundamentals of the economy or not. If it is, stay tuned. If it isn't, stay tuned anyway. But recognize you have first class panic on your hands. And you Nobody ever made a dime panicking, but boy oh boy did they Coin Money Taken the Other side of the Trade Babe on His Back.

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[Jim Cramer]

Not all days are winners in the market, and knowing how to handle the down days is key. We have you covered good and bad days here on Mad Money, and there are lessons in the really bad days that can happen. Help. So let's set the stage. Back In October of 2007, the Dow peaked at a little more than 14,000. If the Fed had raised rates over and over and over again 17 times. And the economy, after cheering for just a bit, fell off a cliff. Took the stock market with it. It's one of those things that you could have seen coming if you paid attention. Specifically if you paid attention to me back on August 3rd of 2007 when I excoriated the Fed for having raised rates so much, oblivious to the damage it was doing to the real economy. I have talked to the heads of almost every single one of these firms in the last 72 hours and he has no idea what it's like out there. None. And Bill Poole has no idea what it's like out there. My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business. And he's nuts. They're nuts. They know nothing. All right, what did I mean by that? Well, shortly before I came out and set that moment with my old friend Aaron Burnett, I've been talking to the head of a major Wall street firm about problems in the mortgage market. Pretty much everyone who followed the mortgage market, which is incredibly important to the healthy economy, knew that there were a lot of unsound practices occurring. Still, it was jarring when I was told by this executive that he couldn't believe how many people beginning to default on their mortgages. Yeah, here's the keys. He told talked about how many mortgages of the 2005 vintage used a term that I previously only associated with fine wine. Just weren't money good. Something that only happened once in our country's history and that was never supposed to happen again. That's the Great Depression. I was in chaos. But you know what? I had a lot of friends at a lot of firms. So I started making a lot of calls. I wanted to see if this 2005 vintage thing was in trouble everywhere. I was ashy when I got off the phone as the problem seemed to be spreading like wildfire. I called mortgage bankers. I called guys who ran major firms. Yeah, that's what I said. My people, everybody said the same thing. We're in big trouble. And that's why I went off so strongly on my rant. Sadly, the Fed didn't listen, especially this fellow, Bill Poole, who at the time was an incredibly important Fed official. He was so sanguine about things that I had to single him out in the rant. Years later, when the Fed's transcripts for that period were released, I found out that my rant was put up, but only as a joke. Soon after my they know nothing rant, we had a series of horrendous defaults of large banks and savings and loans, some of which were thought to be too big to fail and failed anyway, including the largest savings and loan and two of the largest and most fabled brokerage houses. I did my best to try to get people out, even on the Today show, to urge anyone who needed money near term to take it out of the stock market before it was all lost for investors. What is your advice today? Whatever money you may need for the next five years, years, please take it out of the stock market right now. Very dramatic statement for savings. I thought about this all weekend. I did not want to say these things on TV well, sure enough, the market fell another 40% for a bottom. It's a good call. Now, if you bought any time from the when the stock market peaked at 14,000 until it was cut more, more than in half by March 9th of 2009, you lost a fortune, probably never came back in stocks, probably gave up. So how do you know to avoid buying this kind of dip? How do you tell the difference between that lead up to the financial crisis and the sell off? That's a buying opportunity like Black Monday in 1987. Well, first you have to ask yourself about the state of the economy. Is business really getting crushed? Is employment falling off and falling off hard? Is the Fed standing pattern even raising rates when the real signs of cracks like major firms going under, big companies unable to pay their bills. Are there actual runs of multiple financial institutions? Right. The country not just in one area. If the answer is yes, then you have a decline that could be joined at the hip with the real economy. One that is true. Systemic risk. That's the term meaning that the entire country could collapse. That's how it was during the financial crisis. It's why I got so angry when people say, hey, this is going to be like I get angry every time. Oh, it's going to be as bad as 2007, 2009, when there's of course nothing like that occurring. Because like I said, only twice in 80 years has it occurred. Even the COVID recession wasn't as bad because the moment we got a viable vaccine, everything immediately brought back to normal. We heard about systemic risk when some of the regional banks went under in 2023. But within a few months we were over it. So if you're worried about systemic risk, the odds are you're worrying too much. Second, you want to know if there's anything in place that can actually save the economy or turn it around that's important to our elected leaders did very little to soften the blow of the financial crisis. What brought the market out of its funk was a statement by then Fed chair Ben Bernanke. So forceful statement made on 60 Minutes no less, that he no longer let American banks go under it. Boy, he was letting him go under left and right. Till then we had watched the Fed was just sitting on its hands. But the moment Bernanke decided that he needed that something needed to be done. Stock market bottom. Were there ways to spot the bottom? I got a couple of signs that can help. There's a proprietary oscillator I watched our buy on and very heavily for the CNBC Investing Club. It's a paid subscription. Product measures buying or selling pressure. When you get a minus five, that indicates most likely too much selling. Hey, when you get a minus 10, well, you got to do some buying even if everything seems horrible. We were getting signals that things were much worse than that near the bottom in 2009. Another way to look at it. I got one. I like to see who's been pessimistic or concerned about stocks but is reluctant to say anything positive. Who then changes his to the best example of that kind. That big switch came from the late great Marc Haynes who had this to say back then. I'm going to step out on a limb here. Hold on, everyone waiting. I think we're at a bottom. I really do. I think we're going to have a rally. There we go, man. Unafraid to make a call and well, I don't know whether it's going to tell you rally, but I think, in other words, I think today this is for real. Man, what a call. Look at that. March 10th of 2009, the day after Bernanke was in 60 Minutes. Just a huge contrarian call from someone who hadn't been willing to make one until that moment. Best call I've ever seen. Now, it certainly made a ton of sense to sell when I said to sell in October of 2008. But before you say to yourself, what happens if no one warns you again the next time? Well, I got. You know what, I got some good news for you. It's a little sobering, but it's good news. News if you waited long enough, six years to be exact, you actually did get back to where you were before the bear market began. All right, six years. But if you sat tight in the worst market in living memory, you eventually got back to even and went on to make a killing. Yes, it would have been better to take something off the table 2008 like I told you to. But a lot of people struggle to get back in a lower level because they got burned out of the whole asset class. They did worse than the ones who simply sat tight. So here's the bottom line. The financial crisis gave us a once in a lifetime bear market with true systemic risk. But that's the exception, not the rule. Let's take questions. Let's go to Stackwell in Washington. Stackwell.

[Caller]

What'S going on, man?

[Jim Cramer]

I don't know. Having a cup of water right now. What's going on with you?

[Caller]

Oh, man, you know, I'm trying to have a cup of water. I got a lot of bad weather out here, man. Trying to get it together. I can definitely say we got to give a big shout out to you from the great Northwest, though, Jim. You're doing a great job.

[Jim Cramer]

Done, done. Thank you. I'll take that shout out now, now.

[Caller]

Because we get a lot of advice from all around the world. I figured like this, you want good bread, you might as well go to a qualified baker. So what I want to go and say to you, man, is it, I'm curious, is your feelings on using high yielding dividend stocks as a form of investment. Because the reason I'm asking is I like to know that if you feel they're too risky or if they cut dividends down or lose market value, are you going to be hit? And if you do agree, as our barbell approach or can we take a balance in our, in our portfolio a certain way that you feel stack well.

[Jim Cramer]

I love it, I love it, I love it. Now, I don't want to reach. I don't want dividends that are so high yielding that something's fishy. What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly. That is nirvana for me and that's the way I would love to invest if I could own individual stocks. The 2008 financial crisis gave us a once in a lifetime bear market with true systemic risk. But you have to remember that's the exception, not the rule. Much more may have money ahead. In this special show, I'm giving you a flash crash survival guide with some takeaways from the crashes of 2010 and 2015 and the best ways to pop for market pullbacks. Then I'm answering all your burning questions with my colleague Jeff Marks. So stay with Kramer. In tonight's special survival guide edition of Man Money, we're discussing how to deal with brutal sell offs, specifically how to defend against them, take advantage of them even, because you know I like to be opportunistic. Now, I've told you not to be glib about the systemic risk sell offs that involve potential collapse of the US economy. But those are easy to spot because it'll seem like the world's falling apart like in 2008. You don't need me for that. But now I want to help you game out the other less dangerous kind of crash, the mechanical kind caused by a broken market in a healthy economy. Now, the best way to deal with these sudden declines is to recognize that there's a bottoming process, one you can spot. So what should you? Do I have a solution that has worked in even the toughest of times. I like to look at something I call the accidental high yielders. I actually call them a H wise on the show. Those are stocks of companies that are doing fine, have good balance sheets. That's very important by the way. But their share prices have fallen so low that their dividends are starting to give you an unbelievable return. That's right, good yield. How do you spot these? When you look at the historic level dividend yields you've gotten from certain stocks. I also want to look at the Yield on the 10 year Treasury. If a stock typically yields a 2% suddenly is paying double that because of a market wide decline, then you're probably looking at an accidentally high yield as long as the stock's been going down for no particular reason. And that's why when you're hunting for these dividend stocks, you should focus on companies that aren't particularly sensitive to swings in the economy that have very good balance sheets. Second, if the yield level isn't giving you opportunities, I'd use a mechanical sell off to pick some stocks that you like. You can begin buying them using what's known as wide scales. That's why I recommended during the 2010 floor flash crash, I told people to use wide scales. Pick one of your best stocks out there, Premier stock, and buy some using limit orders only. Don't use market orders because you might end up getting terrible prices. Frankly, you should never use market orders because especially stupid during a crash. I like this method because if the market does come right back as it did after the two flash crashes, you've picked up some terrific merchandise at amazing prices. Then you can flip the stocks for big profits or you can hold on them for the long haul. But take a look. I actually demonstrated exactly how this works during an appearance on TV. When the flash crash happened in 2010, PG is now down 25%. That's true. If that stock is there, you just go and buy it. Can't be there. That is not a real price. When I looked at it was a 61. I'm not that interested in it. It's at 47. Well, that's a different security entirely. So what you have to do though, you have to use limit orders because Procter just jumped seven points that I said I liked it at 49. So I mean, you know, you got to be careful. The market was down 900 points, we're now down 6. Remember, I buy 50,049. I now flip it at 59. I just made, I just paid 500. Yeah, that's the crazy is what I'm talking about. By the way, a lot of people end up doing that proctor trade I've been thanked for, I mean like a dozen times people thank you. Remember the limit order advice really does bring true. Now we've talked about meltdowns and true systemic risk and gut churning moves that are untethered from the economy. But how about the garden variety pullbacks we experience all the time? What causes these declines? Well there are usually a bunch of different varieties. First you've got the sell offs caused by the Federal Reserve. That's probably the most frequent reason for stock dumping. There's a reason that businesses business media constantly talks about the Fed. When the economy is weakening, it's the Federal Reserve's job to try to restore growth, which they did with a plum when Covid shut down the economy in 2020. As long as the Fed's printing money, almost every decline is a viable one. Just fact life. It's been like that since I got the business. But when the economy strengthening, it perhaps starts to overheat. Well, the Fed has a different mandate, stamping out inflation. When the Fed declared war on inflation in late 2021, the market started rolling over with the highest risk groups getting eviscerated. Now nobody wants persistently high inflation. Those of you who missed the 70s and 80s now know from the post Covid Covid experience. But we also don't want the Fed to break the economy like it did when it raised rates 17 straight times in lockstep going into the Great Recession. It caused the Great Recession. Now there are plenty of times when the Fed's tightening, but the stock market didn't get crushed because the economy didn't get crushed. And that's how we got the incredible bull market in the first half of 2023. However, whenever the Fed tightens, some prognosticators will come out of the woodwork to tell you the market will crash or at least take a very big header. That's inevitable. So when you hear these comments, please don't panic. Fed rate hikes don't necessarily lead to crashes. In fact, I've seen plenty that do. Next to nothing. But there are rational reasons why the stock market deserves to go down when the Fed tightens. And I'm not ignoring them. First, stocks are only one of the are only one of the assets available to individuals and institutions. For instance, there's gold, there's real estate, of course, the bonds. I like gold as a safe haven. I Believe that every person should hold some gold, preferably bullion. But if not, then the gold is a hedge against economic chaos. Real estate, actual real estate can be a good hedge, but most people don't have the money to invest in that kind of real estate. The big institutions can buy. Now we do have real estate investment trusts, but they're not as reliable proxy for real estate as a whole. Finally, we have bonds as an investment alternative. And bonds are the source of the problem. And the Fed tightens. You see it yourself when short term Treasuries give you more than 5% risk free. Lots of people cash out of the stock market and park their money in Treasuries. Hey listen, it's not a bad return as the Fed tightens bonds, particularly short term pieces of paper, become more competitive with stocks. You'll notice as the Fed jacks up rates, high yielding dividend stocks are going to be among the worst performers because suddenly they got some serious competition from fixed income. So please be careful. These dividend stocks as safe havens when you're dealing with a sell off off caused by the Fed. They're very different from accidental high yielders that can spring back when the Fed starts tightening. The second reason why stocks can go down legitimately when the Fed raises rates because the Fed isn't perfect. They've raised rates when they should have stood pat or even been cutting rates fast because the economy was already slowing rapidly. Although in recent years Jay Powell has been much more responsible about not pushing us off a cliff than some of the previous Fed chiefs, he here's the bottom line. Garden variety pullbacks can be gained as long as there's no systemic risk involved. But sell offs in the wake of the Fed raising rates, those are trickier, although they can lead to decent opportunities as long as you stay away from the high yielders that become less attractive when the Fed tightens. And stick with the accidentally high yielders that might just give you the delicious bounce when the Fed's done tight. Matt Money will be back after the break. Tonight we're talking sell offs specifically during this block. What causes garden variety pullbacks? Many times the problem is indeed the Fed as I mentioned before the break. But sometimes there are other issues that are driving the carnage. For starters, there's the issue of margin. As a former hedge fund guy, I'm well aware that there are many times times when money managers borrow more cash than they should. So when the stock market goes down, they don't have the capital to meet the margin clerks demands. These kinds of margin induced declines have repeatedly happened, including say February of 2018. That was a good one when funds that had borrowed money to bet against stock market volatility in the so called VIX cut their heads handed to them. They were short the VIX betting the market would remain calm. Stupid. At the same time they bought the S&P 500 using borrowed money. Again, real stupid. When the stock market fell, these managers were forced to dump their S&P 500 positions that raise capital and unwind their trades. There were so many managers doing this at once that their selling ended up causing some severe market wide loss. These margin induced breakdowns often occur after the market's down for several days in a row. That's why I'm often lucky to tell you to be aggressive in the first few days of a big decline. Because there will always be margin clerks against these managers who buy buy stock with borrowed money and it doesn't happen immediately. They got to have to keep chopping. How do you spot these margin call driven declines? You know what? I use the clock. Margin clerks don't want their firms to be on the hook for overstating individuals, for overstretched individuals, or for hedge funds. They want to get out before the night. So margin clerks demand the collateral be put up, raise some cash or they sell you out of your positions without your say so. I always consider the margin margin clerk, the butcher, and the butchering occurs between 1 and 2 o'clock if the selling runs its course by 2:45pm Yes, I find it's actually that specific. Then I think you have a decent chance to start buying safety stocks. The kinds of stocks that tend not to need the economy to be strong to advance. Like the health cares. You might also want to buy the secular growth plays that work in any environment. Mega cap stocks. I thought I talk about them all the time, especially the members of the CNBC investing club because we like to own the best ones for the travel trust. What else can create viable opportunities Sell us from Overseas? I cannot tell you how often I've heard commentators who scare the bejesus out of us because of imported worries, say from Greece or Cyprus, Turkey, Venezuela, Mexico, countless other places. I always tell you to ask yourself, do any of these woes truly impact the stocks of the American companies in your portfolio? Do they really make you want to pay dramatically less for an individual US stock? Usually the answer is no. Unfortunately though, you can't just start buying stocks hand over fist into an overseas driven sell off. You should always assume there are people who don't Understand how unimportant these worries are in the vast scheme of things. And of course those people are going to panic and sell after. You would have thought they would have known better. That's why these international declines clients often last for three days. Again, the best way to figure out if they're done is to watch the clock as the sellers usually need to be margined out against their will if there's going to be a bottom. Another kind of sell off the IPO related decline. Remember, at the end of the day, stock markets are markets first and foremost and markets are controlled by supply and demand. So if the bankers start rolling out lots of new IPOs and then these companies sell more shares via secondary offerings, you, you could end up in a situation where there's just much too much supply and not enough demand. By the way, we saw this near the end of 2021 after we've been drowned under the weight of 600 odd IPOs and SPAC deals. Oh man. Don't buy, don't buy. My suggestion, Avoid the blast zone, the area where most of the new IPOs are concentrated, and focus on the stocks that are down due to collateral damage, especially once with yield protection. Sometimes we get declines triggered by multiple simultaneous earnings shortfalls. Oh, you got to be real nimble with these if you want to buy stocks after an earnings induced pullback. Isolate the sectors where the shortfalls are curry and avoid them like the plague. There's no reason to stick your neck out here. Instead, buy unrelated stocks that have been hit by the much broader selling via the S&P 500 futures that then there's the trickiest kind of risk, one that's truly Tolstoy ask political risk. I often find this risk tremendously overblown. Whether it's because of strife between parties or trade policies, or even all out war risk. I am not a political guy and I hate talking about this stuff on air and off air. But with every stock you own, you need to ask, does this company have direct earnings risk when it comes to Washington? If not, then you've got nothing to worry about. However, if you own something that's directly impacted by say a trade dispute with China or a government shutdown, well, it could turn into a house of pain. I know political risk is enticingly negative because, well, there are so many pundits everywhere wading in and giving you 2 cents. I think these guys want to scare you. My suggestion? Tune it all out, please. Instead, look for companies that have nothing to do with the political fray even as their stocks may be brought down by it like we see every time there's a debt ceiling standoff. I can't tell you how Many times since 1979 I've seen politics used as a reason to sell stocks. Now, they may be a reason to sell some stocks, but rarely is anything in Washington been enough to sell everything. Here's the bottom line. There are all sorts of sell offs, but unless they involve systemic risk, which is increasingly rare, like in 2007, 2009, they're going to prove to be buying opportunities long term. You just need to recognize what's driving the decline, note the signs that it might be subsiding and then take action to buy, not sell, and never to panic. Stick with Kramer. Good evening, Mr. Kramer. Thank you.

[Caller]

Thank you for everything you do. You've been such a wonderful source of information with your teachings. I have to say thanks.

[Jim Cramer]

Thank you for all your advice and saving us from ourselves. Your advice let me quit a job that I hated. I love you to death.

[Caller]

Thank you for everything you do. Thanks for making us money and more importantly, thanks for keeping us from losing money.

[Jim Cramer]

I always say my favorite part of the show is to answer questions directly from you. So tonight I'm going to take a few burning investing questions from our investing club members. And of course, course, if you like this, be sure to join the club. Let's start with Peter who says as a younger investor is able to add funds to the market bi weekly when paid and the trust having a set amount of funds. How do you recommend putting new money into the market? I've been working on just on this concept and you literally want to do it straight line. You don't want to care about the market at all. If you want to put $50 to work, say in the market, do 25 and then skip a week and then do 25. Absolutely. Just precision like that. Never try to make a judgment of the market because we're thinking the market's going to go up over time. Next we have Michelle in California. Ask how do you know when to break your cost basis? Michelle, I first of all, when I do it with Jeff Marks, here's what we do. We say no, no, no, no, no, don't do it, don't do it. We actually use kind of a checklist. If you have to go down not on like a quarterback looking deer, we're going to get picked off here, picked off here because it is so dangerous to go above your, your basis. Only if there is something that is so compelling that has changed dramatically not just but Dramatically will we ever do it? Because it's a very bad discipline to break. Now, Jeff in Florida asks if a stock has been in the red for a couple of years. And I averaged down during that time. When is a good time to sell some of that stock? Do I sell someone, it finally gets back to even, or do I risk it and what. And what until I have more substantial gains? Oh, my God. I'm so glad for this question. This is something I've worked on and worked on work, and it's called the stuck in the mud concept, which is that just your stocks done nothing for a long time kind of drift down and then suddenly starts going up or goes up, goes up. See, you have to stand when it gets up a little bit more like to where your basis. Here's what's going on through the market's mind. Everybody else see at last that stocks move it. I want to buy it. It is really important that you don't trust it. Don't touch the stock. Let it go higher, because that's the magic moment. You'll see it's out of the woods. Let me have it. It's been stuck in the market for so long. Bingo. Don't touch it. Let's go to Joseph, who has many stocks that are recommended have very high PE ratios. What should we look for to make make buying a stock with a high PE acceptable? All right, there's two ways to look at this. One way is to say, okay, here's what we do. I'm going to look at the past and see whether it's historically traded a high multiple. And then when we see the actual earnings, it turns out the multiple wasn't that high when it was there. That's one way. The second way is to do rule of 40, which is to say, okay, I want to know what the growth growth rate is, revenue growth rate, and I also want to know what the margin is. Add them together. If it's over 40, then it's a keeper. Okay? And that's important because what you're trying to do is figure out whether gross margins are good and revenue is good because that can give you a key about what's going to happen down the road. Our next question comes from Tim in Alabama, who asked, how do you decide whether to take a point, take profit rather than keep a stock longer to receive capital gains tax? Okay, this is. Unfortunately, this is more of a tax adviser question, I find, because I run a travel trust and I don't run my own money, I can't own stocks. I'm a little oblivious to this. It's just not my world. So I'm going to have to defer to you and your tax person because everybody's different. All right, look man, I love the course. As you can tell, I get kind of fired up. Don't forget that stuck in the mud. That is often a mistake that people may make and drives me crazy. I like says always a bull market somewhere. I promise I find it just because you are here on Mad Money. I'm Drew Kramer and I'm going to see you next time.

[Disclaimer Voice]

All opinions expressed by Jim Cramer on this podcast are solely Kramer's opinions and do not reflect the opinions of CNBC, NBCUniversal or their parent company or affiliates, and may have been previously disseminated by Kramer on television, radio, Internet, or another medium. You should not treat any opinion expressed by Jim Cramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Kramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Mad Money disclaimer, please visit cnbc.com madmoneydisclaimer Are you looking.

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