Jim Cramer - Confession of a street addict

Chapter 3 - Money Man

• First time he started trading, he was down 9.9%, he had  a provision that if he went down 10% his funds would be returned back to his investors.  A legendary trader named Lattanzio told him to sell everything, start over, and learn to trade from Karen
• Karen (aka trading goddess) taught him difference between hedge funds and portfolio manager stuff.  Most PM talk about underweight / overweight sectors, but that doesn't matter in the hedge fund world.
• Analysts at were idiots and they can't make you money.  They know nothing.
• Never take a position unless you knew something that no one else knew, a legal edge.
• She tried to anticipate moves of analysts before they were made, and placing big bets on the direction that analysts were going to go.  That way you never owned anything idly, and always had an exit strategy.
• Karen's strategy
• make dozens of calls to brokers and analysts every day to ask them what they thought of stocks and look for situations where the analysts were growing more positive, and then you fed them positive info that you got from others.  Tell them someone else was going to upgrade.  If you caught them on the phone before they had told their sales forces that their earnings estimates were too high or low, you might have something.  You didn't move until you were fairly sure that you were about to catch the upgrade or downgrade
• The analyst game was a game of sponsorship because analysts like to get behind stocks and bull them.  You have to get in on the ground floor when they start their sponsorship campaign.
• You want to buy something and flip it into the sponsorship => that is the only sure way of making money
• Trading 'flow'
• When big accounts come in adn buy or sell stocks, they move the stocks in the direction of their trading.  If you sold two million shares of a stock it would move from $26 to $24.  Once the selling is finishe,d the stock would lift as the supply dries up.  The goal is to buy the lsat 200k shares and tarde out of it into other buyers who want ot take advantage of the decline.  
• If you do enough commission business that you know who was executing the portion of a big sell order, and also know whether any analyst might be on the verge of recommending that stock, by keeping track of all the buy recommendations at every firm.
• This is essentially a day trading strategy, however she also needed to know if the company was more positive in its outlook than the analyst network, then they could make a fortune anticipating upgrades and downgrades.
• Signs of 87 crash
• Many stocks were giving up gains they had put on the last 2 or 3 years.  Analyst recommendations weren't working.  Sellers frequently overwhelmed buyers by the end of the day, with the market ending considerably lower than it began.  
• Market went from 2800 to 2400 then 2200, Karen grew increasingly adamant that they market would crash, and they went to 100% cash.  The next monday the market crashed 500 points.

Chapter 4 - Building a Hedge Fund

• As Dow dropped from 3100 to 2300, Cramer grew very negative that the country wouldn't pull out of its tailspin.  I thought we had a recession and inflation problem, a banking system that was teetering, and a budget deficit that was mushrooming out of control.  When you overlay Iraq's destabilization of the world economy on top of that you had a market that might take out the lows of the 1987 crash
• Karen didn't care about theoretical underpinnings of the market, just about what made people buy and sell stocks.  Karen knew that big money was human.  It was a beat that if let loose by events would buy everything in sight.  They beat didn't care where stock shad been or how high they moved; it just wanted to buy.
• She said the US would win the war and that would change everything, despite the recession, unemployment, and teetering banking system.  All the technical charts were also ignored, despite them screaming downturn.
• Within a few weeks consumers came back with a vengence, feeling better about themselves.  Oil prices plummeted and stayed low.  The banks were able to use the Fed's lower interest rates to rebuild their balance sheets.
• Cramer and Jeff B's style
• make money every single hour.  also develop long-term capital gains
• style consists of figuring out what would be hot, and what would be the next big buzz.  
• They became merchants of the buzz, getting long stocks and then schmoozing with analysts about we saw and hear that was positive. Or short stocks and talk to analysts about the negatives.
• Analysts existed to promote stocks
• Cramer would read annual reports everyday and built up a network of analysts and CEOs he could talk with.
• They discovered the right CEOs would pull their stocks out of tailspins promptly.  They would zero in on the problems Cramer identified.  The CEOs who followed their stocks cared about their shareholders and took their stock personally.

Chapter 9 - the man with 2 careers

• I told him that I was buying everything in sight...I told him when I heard people advocating panic, as Biggs did the night before, or Grant did moments ago, I had to buy the panic because no one ever made a dime panicking.
• We put $200M to work in that first half hour, buying 25k shares every half point down of all our favorite tech names right into the weakness.  At 10am, when it started lifting, I jumped on my desk and screamed at everyone in the office to start buying something...Don't work about cash, Don't worry about margin.  I want stock, I want it now.
• By 2pm, I was able to trim back our holdings to where I was comfortable that we weren't borrowing too much money, and by 3pm I was off margin altogether.  We pulled in about 6% that day.

 Chapter 14 - Crisis part I

• We put our hundres of millions to work almost immediately, in the 1st hour of the first trading day of the new year.  We just piled right in at one level, rather than buying, 10k shares every half point, on the way down and legging into the positions ofver many days, as we would have when we were less certain of ourselves.
• That was hubris, we'd been so right for so long that we thought we knew the right levels instinctively
• Every few years, there would be some market that seemed impenetrable to all but a few funds that always thought they knew better.  One year it might be Mexico,  and Mexican telcos were hot, or Mexican banks had to be owned.  You would rush in, just when banks were ready w/ inflated stocks and bond offering that raise larges sums of money.  The Mexican 'blue chips' would then peak and crash.
• I had seen Brazilian markets be the 'only place to be' during one spring, the Argentine markets the 'net big thing' a few months after Brazil had been annihilated.
• Occasionally, the rush would be on to the banks in Singapore, or construction companies in Bangkok or casino and hotel concerns in Malaysia.
• In 1998, Russia had drawn everyone.  It would have been fine if LTCM had not because it was the largest hedge fund in the world.  They had attracted so much money because when they pitched you, it did so with a tone that made you feel that the moneymaking was automatic and riskless.
• I always figured that in the private these guys knew the truth: who the heck knows what your return is going to be in this game?  Luck trumped skill so often that unless you were humble about it and realized that things could go wrong, you were simply making a sales pitch for a vacuum cleaner that never broke down.
• When one firm commanded the respect of Wall Street, the brokers who entered its orders would tag along for the ride.  They all talk about what the big money is doing, and when the big money doubles down, by borrowing money from the brokers, the traders at the brokerage house do the trades themselves and tell every other client to do the trades too. 
• LTCM had gone long every piece of paper in the universe, from Mexican day put bonds to Russian government bonds, and shorted against US government bonds as a hedge. 
• One Russia started collapsing, all the traders started betting against LTCM.  LTCM had shopped themselves to all the brokers, so everyone knew their positions.  Collectively, this group began buying long-term paper that drove yields to absurd lows that created an inverted yield curve.
• An inverted yield curve makes S&Ls lose money.  Cramer was long many illiquid small S&Ls that would get killed in this environment because S&L borrow from depositors short term and lend money long term.  With short term rates higher than long term rates, there would be many losses.  Naturally everyone started dumping these stocks.
• With the final collapse of LTCM in Sept, Cramer started buying the dip.  The first day of October the Dow dropped 200 points, mostly in the financials.  They lost $30M in one day.  Hayes Modem dropped from $4 to $2 on bankruptcy rumors.  Not a single 1 of the 100 positions they had went up.

Chapter 15 - Crisis in 1998, Part II

• Cramer had opened his fund for redemptions because Eliot Spitzer needed money.  His fund was down almost 25%, and the market was doing poorly, so many people would be interested in the redemptions.  It totaled almost 1/3 of his fund.
• Cramer had to defend his positions because everyone knows from the quarterly report to the SEC what their biggest holdings are.  Just as the 'sharks' drove out LTCM, they would also kill Cramer's fund..
• He bought lots of call options well above the price of the stocks to make short sellers think he knew something good would happen short term.
• After first 5 days of October, they had lost $50M, they were down $100M for the year
• Cramer called up his S&Ls and told them if they didn't institute buy backs for their shares, he would dump all his holding in the market to drive the stock price down.  This would lead them to be taken over by other banks, so their jobs might be on the line.

Chapter 16 - Crisis in 1998, The Trading Goddess Returns

• On Oct 8, at 12:18PM Cramer lost it and capitualted.  He wrote an article entitled 'Get Out Now.'
• Nikkei was down 5.8%, Germany was down 4.5%, FTSE was down 4.1% despite a rate cut  by the BOE that morning.  The S&P futures were down 24 points the 'down limit' (fallen as far as they could go legally), the most he had ever seen.
• Prominent technicians and fundamental analysts were lowering their previous estimates saying we had much lower to go
• The S&P oscillator was very negative.  Decliners outpaced advancers by a 9 to 1 margin
• For months I had been arguing that this market had to bottom somewhere, but these declines, this news, these pressures, the dollar crash, the Japan reversal, Germany, no rally in Britain, the drug stocks rolling over, Abby Jo going negative, Acampora giving up, the impeachment, the goddamned redemptions, no hep from the Fed, it was all unraveling right before my eyes.  And here's my wife wanting to buy, acting as if nothing's going wrong, acting as if it just another day and there are bargains everywhere.
• That day there was a rumor about a possible rare between-meetings conference call by Greenspan.  The market lifted by 20 points on a possible Fed bailout.  At 12:34PM, the Fed was going to act 'relatively swiftly' because 'wealth destruciton was so noticeable'.  The Fed would provide the liquidity necessary to stop any decline.  The would cut rates by as much as half a point, and this would change everything.
• At this time Cramer's article to get out of the market was just published on his website, right when he found out that the bottom would not get any lower
•  The market ended up rallying the rest of the year

Chapter 17 - Inside the IPO

• Dotcom paper overwhelmed supply just as the Fed wanted to relieve the nation's credit crunch.  There was so much cash around by November of 1998, so furiously was the Fed printing money and lowering rates, that it began to seep into the private equity market.
• If alot of people were jazzed about an IPO story, they would try to get as much of the underwriting as possible hoping it would be hot.  They would flip it, taking delivery of the stock for about 30 seconds an dumping at the much higher price that it opened.  Usually it was hopeless overvalued or a real stinker that nobody wanted anyways.
• Marketwatch offered 2.75M shares at $17, it rose to $130 the first day..  theglobe.com opened $90 above where it was supposed to.  Two dotcom's doing this meant a trend was in place.  Marketwatch went up so much because of the tremendous advertising vehicle and terrific placement w/ AOL and Yahoo, but they had no subscription revenue.
• When theStreet.com went public, it was initially priced between $9 - $11.  However, because of who was controlling the IPO process, the later a stock went public the more 'demand' would be there and the stock would open even higher.  The way the made this demand was by batching market orders together that had been opened during the day and then opening the stock late.

 Chapter 21 - Repositioning Cramer Berkowitz

• Needed to figure out a metric to grade the dotcom stocks by.  Earnings didn't matter, revenues didn't matter, valuations didn't matter.  We needed to measure heat, what was hot and what was not.  We needed to measure fashion, to try to figure out what would be popular with the buyers, not what we liked ourselves. 
• Part of our great strenght at hte compnay was the recognition that investing is almost all psychology and very little substance, despite what the multimillion dollar research staffs of Wall Street.
• I knew from my sell-side days that you could spin any story, fundamental, or otherwise to justify any investment
• It seemed that each year we were paying more and more for the same level of earnings
• I wasn't willing to short stocks that we all agreed were overvalued because shorting on overvaluation is a chowheader's game.  There is always some fund manager out there who can cliam a stock is undervalued on 2010 earnings and will buy it up seemingly forever or until his funds runs out of money
• MicroStrategy was the dotcom darling stocks, just as IBM, Intel, and MSFT were the tech darlings.  It was a company with real revenues, earnings, management and prospects.  Until all of those prospects were found to be strictly virtual in nature and nothing was real.  It made up revenues and earnings and fooled everyone.
• Companies have a clear idea in good times what they are going to earn.  The companies played the earnings beat rate game.
• The realization that it was at last over came hard, we had been making so much money on the long side we were extremely unwilling to switch direction.
• When April came, the Nasdaq was still at 4500, but Todd suggested we were on the verge of a collapse of titanic proportions.
• If you took out the props, the tight supply, and the better-than-expected ruse, and you loosened supply and disappointed in earnings, I argued that there was no end to where your stock could fall. => we sold almost everything tech by end of April.
• What a contrast Oct 8, 1998 was when I was so wrongly worried that a bear market loomed.  Then earnings were set to boom; now they looked ready to collapse.  The Net was imploding
• After the dead cat bounce we decided we were done with committing a lot of capital to stocks as long as they remained as precarious a they had become.  Now that the market had finally seen it spirit broken, we not longer feared the short side.
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