[Beginning of Cramer's verbatim comments for this segment...]

Jim:           Tonight’s show is devoted to helping you Cramericans avoid some of the most common and money losing mistakes that investors can make… and recognizing this information when you see it… the best way to do this is with discipline… meaning with rules… oh come on… these are serious rules… focus… and today I have got five to help you make money in what could be an incredibly bewildering, confusing, and even infuriating market… if you follow my rules you should be better able to recognize an opportunity when you see it… and to manage to avoid losing money when you do not have to.

Let’s get down to business… tonight’s first rule…

Do not dig in your heels when you are wrong… or in the immortal words of the late great economist, and equally accomplished investor John Maynard Keynes… when the facts change, I change my mind, what do you do sir… one of the easiest mistakes to make and I know this because I have done it countless times myself… is to refuse to change your stripes after the facts are in and you have been proven wrong… it is natural to dig in your heels and refuse to change your mind when you think that you are right but the market has gone against you… it is also a quick and easy way to lose a lot of money… I have been blasted into reality over, over, and over again whenever I have dug in my heels on either side… you are always angry when you get run over… and you are always willing to take it out on the people who are on the other side… the ones that got it right… the fact that I am open about it, that I actually read the angry emails and talk to furious people… has helped me to learn stories and learn how to invest… but it has also been a big exercise in pain… that is right, and I have to tolerate the pain… even when the emails are the most hurtful… because that is when I know that perhaps that I am at the most right...

For example, I got an incredibly heavy volume of hate mail after the market bottomed in March of 2009, and then we rallied much higher… when the Dow Jones Industrial Average was down to 6500... about exactly at the bottom… I came out here and on Stop Trading and said that the down side was minimal… and I thought that you had to start doing some buy, buy, buy… I knew that there just couldn’t be that much more downside because what I had done was put together a doomsday scenario… basically a model of where I thought the market could go in the worst case… I tallied individually from the bottoms up all of the members of the Dow Jones Averages.. and presumed from my calculation that every single financial in the averages went to zero… goose egg… including Bank of America and General Electric… yes parent company of this network, people consider it a financial because of its big GE Capital division… I also presumed that Citigroup was going to go to zero… and I even presumed that JPMorgan was going to go to zero… and on top of all that I took into account the total elimination of dividends at Caterpillar as well as 3M… and then I added in the potential bankruptcy of Alcoa… for good measure… you have got to admit though, those are pretty dire assumptions… and you know what, even under those ghastly conditions… with all of those bankruptcies, go to zero situations… I still could not get us a low that took us down significantly from where prices already were… from the moment I made that call… remember it was a bottoms up call… I did not say that I like the market… I said look I add all of these up and I take minus 3, and minus 3, and minus 5... and people were calling me crazy but I couldn’t get the Dow prediction lower… and people said that I had no idea what I was talking about.

But a month later, with the Dow 1500 points higher… those people were still there… they were still sending me emails that were even more impassioned… even more angry… claiming that it was still way too soon to tell if we were going to get a bottom… and who was I to say it… now, if you find yourself making that argument… you are probably digging in your heels… when I think that you should be changing your mind… it was hard for me to change my mind… I had been negative… people know, I was negative at Dow 11,000... at Dow 10,000 I told everybody to sell… it was hard for me to change my mind at Dow 6500... it was difficult… but I could not get a number that was lower… you see it is hard for the most emotional investors and traders out there to come to terms… believe me, I know that… but it is also crucial if you want to be a good investor… you have to be willing to change your mind when the facts change… people do this all the time with stocks… but we would never allow ourselves to make the same argument about sports… would you ever say that your favorite basketball team still had a chance of coming back from behind to win an hour after the game ended… how about a week… how about a month… a month after a big loss you say that you are still about to win… of course not… if anyone did that, they would think you are insane.

I am just urging you to apply the same level of rigor to stocks that you would to sports… the facts are always changing in this business… and at some point you need to be willing to acknowledge that the game is over and that you were wrong… I am not trying to be glib about this… it is part of the emotional side of investing that while difficult to measure… is just as important as the intellectual side… even if very few people in the financial media will talk about it… swallowing your pride is never easy… particularly on national TV… but the more time that you spend digging in your heels… the less you have to take advantage of the new situation and profit from it… surely the Dow at 6500 is a better bargain than Dow 11,000 or 10,000.

How can you know for sure that it is time to say to your thesis game over… if you find yourself feeling the need to come up with more and more and more excuses and reasons why things will ultimately go your way… then it is probably a good time for you to start pondering instead why they haven’t… oh and remember, you do have a gigantic edge on me… I am on national TV, on CNBC, which is in about 90 million homes calling the markets direction 5 days a week… so it is so much easier to say, just you wait and see… and not have to eat any crow… than it is to admit defeat… you do not have to worry about publicly embarrassing yourself, you are doing it at home… so focus on those potential profits and not your ego… nobody even knows that you changed your mind… everybody knows that when it got to Dow 6500, holy, Cramer is wavering on his negative thesis… I thought that he was really negative… well the facts had changed… and the bottom line when the facts are in and you have been proven wrong…

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The Bottom Line!:     Do not dig in your heels… change your mind. My first new rule in this special show… when the facts change… you have got to change your mind.

[verbatim recap]

[end of segment]

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