My mission is simple, to make you money.

I'm here to level the playing field for

all investors. There's [music] always a

bull market somewhere, and I promise to

help you find it. Mad Money starts now.

[music]

Hey, I'm Kramer. Welcome to Mad Money.

Welcome to Cra, a 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

1800743 CBC or tweet me at Jim Kramer.

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 selloff

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 Tulsy's fantastic Anna

Krena, all happy rallies are alike. Each

sell-off is unhappy in its own way.

It's true. Bull markets send 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 bare market [groaning] or

maybe something worse. Or they might

actually be just a buyable glitch.

That's why tonight we're turning to

history to illustrate some of the common

qualities of selloffs 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 know what? Even the COVID

crash when the S&P lost SB 500 lost 35%

of it 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 headon because they make for

great examples. 1987 and the financial

crisis are actually polar opposites,

although the percentage declines are

really pretty similar. On October 19th,

1987, also known as Black Monday, the

Dow Jones Industrial Average fell 58

points or more than 22% in a single

session. I was trading that day and even

the previous week had been one of the

worst weeks in market history. Black

Monday hit fast and hit hit hard. It

felt there were no buyers to be found

from Dow 2246

where the crash started to Dow 1,738

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 more wasn't

that much money left to be saved. But

most people don't remember that the week

before was horrendous too. The Dow had

already plunged from 2482 to 2246.

That's only a 10% decline. That harsh

pullback encouraged bargain hunters,

intrepid souls who thought they could

flip into uh in Monday morning into some

strength. It bought Friday, flipped it

on Monday, except the strength never

showed up and they got badly burned.

In fact, we just continued into the next

day. What 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 Greenspin

stopped the decline in his tracks when

he said he'd provide all the liquidity

necessary to stabilize the 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 mid1989 for

the averages return to where they were

trading before this big breakdown? The

bare market that began in October of

2007 was a totally different animal. Dow

fell from 14,1 uh 198 uh 1,198. So was

at 14,000. Remember the other was 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

while the other took six week 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 his doppelganger

in 2015, both times when the market

simply failed to work.

Now, all three of these started in the

with the S&P 500's futures pits 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 5 years

before the crash and no one knew the

power they had. See, the power of the

futures 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 of

the underlying companies that stocks are

meant to represent. Underlying corporate

earnings used to be mean much more to

the day-to-day action of a 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 nearly

a substantial decline. And don't I know

it, I left Goldman Sachs in 1987 to

start my own hedge fund because my

returns have been so bountiful for

investors. The Modia rally in the mid to

880 in the mid to late 80s had created

such stupendous gains that a group of

clever salespeople started offering big

funds what they claimed 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 they could use futures uh to

ensure that you no longer be exposed to

stock market risk say down five or 10%

or some other number depending on the

policy you 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 believed 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

futures 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 Charlton's and Mount Banks.

Although history remember them as just

really as idiots, not the crooks I

thought they were. I lean toward the

latter theory because there's no magic

trick. They can get you returns from

investing in the stock market without

much risk. Come on. The two go hand in

hand. Don't believe anyone who tells you

different. Those people are charlatans.

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

crashed then there's going to be

something wrong with the economy, right?

Simply had to be a recession lurking

that stocks couldn't go down on their

own. There had to. Otherwise, how could

the Dow plummet at 22% in a single day

after falling 10% to week four? I say

though, it turned out wrong. The economy

was strong going into the 87 crash and

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 than realized, and New York,

much weaker, that set up the

conflration. And when the Treasury

Department examined what happened that

day, it concluded the futures set off

immense selling, while some specialist

firms on the floor of the exchange, and

some brokerage houses failed to step up

and what known as stabilize the 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 their 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 act

so badly. I didn't want any part of it.

Now, in retrospect, it did make my

career. I 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 at 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 bare market of

2007 2009, so you can figure out what to

do when they really mass. Irma in New

York. Irma.

>> Yes. Good evening, Mr. Kramer.

>> Good Um, I'm planning to open um Roth

non-deductible Roth IAS, IRA 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 to

index in the 30s. Let's go for some real

risk here because they got their whole

life ahead of them and I really want you

to hit it big right now for them. Tony,

I am al 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 you know I'm

a member from day one and will be a

lifetime member. I love you for your uh

thing. What I want to ask you is when

when we like a stock and or 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?

>> No. No. No. You buy it at your prices.

You buy a little bit at the beginning

and then like we teach at [music] the

club, you buy it on the way down. We may

have a real battle on our hands now. You

know, we battle [music] in the club and

we've been very successful in most of

our battles. Some of them have been

tougher. But that's [music] the way you

make it so your battle won't be too

hard. Buying it all at once does that

and [music] we don't want that. Tough

days don't last forever, people. But

when they come along, you need to know

how [music] to respond. On May tonight,

I'm giving you a crash course in

crashes, sell-offs, pullbacks, and big

market [music] declines so you'll be

prepared to get the best possible

outcome from the worst possible

situations. So stay with [music] Kramer.

>> Don't miss a second [music] of MadMoney.

Follow at Jim Kramer on X. Have a

question? Tweet Kramer #madmentions.

Send Jim an email to madmoney@cnbc.com

or give us a call at 1800743cnbc.

[music]

Miss something? Head to

madmoney.cnbc.com.

Today I'm teaching you how to cope with

all sorts of declines.

I already covered the crash of 1987 and

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 the pernicious power over

individual stocks. Sadly, it 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? I 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 and

buyers just walked away betting that

there had to be something substantive

behind the destruction, right? Couldn't

Couldn't just be the machines breaking

down for heaven's sakes, could it? The

flash crash started at 2:32 p.m. on May

6th of 2020 of 2010. It lasted for 36

minutes. In that 36 minutes, the Dow

fell almost 1,000 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 crisis. 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 recognized the flash crash exactly for

what it was. Another situation when the

machines were breaking as the futures

overwhelmed the stocks. It wasn't the

fundamentals. We didn't know it at the

time, but a gigantic errand 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 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

selloff because the decline had no basis

in economic reality, which made for a

tremendous buying opportunity.

That was not a real It's too bad. The

system obviously broke down. We're going

to find out that there was a glitch from

there was a glitch in the machines

failed. It obviously broke down. It

obviously broke down. No, 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 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've 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-inute sell. 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

selloff where the Dow fell 1,000 points

right at the opening. Now, that one was

seemingly related to fears that the

Federal Reserve was just to raise

interest rates right under 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

refrain. Somehow, I find myself on air

at all the right times to witness these

events. That Friday before the self had

been it had been a monstously ugly day

as a Fed official late in the afternoon

had suggested it was time to raise rates

despite the Chinese selloff. 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 24th, 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 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 looking they were down 40 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 10:00 a.m. I and my

partisan squawk on the screen were

pretty stying at the time. I remember

turning to David Faber to chat about the

meaning of the selloff. His reaction I

thought was priceless.

>> I I I I don't this is uh I I got to make

some phone calls cuz that's these are

>> you got to find out whether someone bust

>> 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 wrong 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 harder

than almost all the rest of the market.

Now that really made no sense. That's

exactly what people buy when the economy

softens up for sake. 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 midm morning we learned

that that was exactly the case and 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

it and a thoughtful Federal Reserve

wasn't really about to tighten. Not with

China teetering. It was an excellent

TIME TO BUY STOCKS BY BUY.

>> 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. Uh 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 co crash when we were uh down

almost from 7.8% to almost 13% in a

single session. But the CO 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 on air commentary was useful

in 2010 and 2015, and it was then, oh,

that's actually kind of a reason to join

the CBC 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 selloff 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 nobody ever made a dime

panicking. But boy oh boy, did they coin

[music] money taking the other side of

the trade. Money's back after the break.

>> [music]

>> Not all days are winners in the market

and knowing how to handle the down days

is key. We have to cover good and bad

days here on Mad Money and there are

lessons in the really bad days that can

help. So, let's set the stage. Back in

October of 2007, the Dow peaked at a

little more than 14,000 after the Fed

had raised rates over and over and over

again, 17 times. And the economy, after

cheering for just a bit, fell off the

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 had 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 P

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 on the

set that moment with my old friend Aaron

Bernett, 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 unound practices

occurring. Still, it was jarring when I

was told by this executive that he

couldn't believe how many people were

beginning to default on their mortgages.

Yeah. Here's the keys. He talked about

how many mortgages of the 2005 vintage.

He 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 a

gas. 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 ashing when I

got off the phone. is 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 P, who at the time was

an incredibly important Fed official. He

was so sang 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 went 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, please take it out

of the stock market right now.

>> Very dramatic statement for

>> I thought about this all weekend. I did

not want to say these things on TV.

>> Mhm.

>> Well, sure enough, the market fell

another 40% before it bottom. It's a

good call. Now, if you bought anytime

from the when the stock market peaked at

14,000 till it was cut more more than

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 leadup to the financial crisis and

a sell off if it'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 pattering rates from 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 around 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 has 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. But there's of

course nothing like that occurred

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 were 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, too. 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

Bernani. was a forceful statement made

on 60 minutes or less that he no longer

let American banks go under. Boy, he was

letting them go under left and right

till then. He we had watched the Fed was

just sitting on its hands. But the

moment Bernaki decided that he needed

that something needed to be done, the

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 and I rely on it

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 there's mo 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 tune. The

best example of that kind of that big

switch came from the late great Markes

who had this to say back then.

>> I'm going to step out on a limb here. Uh

>> this is the big Hold on everyone.

>> 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 and well,

>> I don't know whether it's going to be

market 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 Bernani was

on 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 warned 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. If

you waited long enough, six years to be

exact, you actually did get back to

where you were before the bare 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 in 2008 like I told you

to, but a lot of people struggled to get

back in a lower level because they got

burned out of the whole asset class.

They 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 bare market with true

systemic risk. But that's the exception,

not the rule. Let's take questions.

Let's go to Stackwell in Washington.

Sackwell.

>> But but but booyah Jim, what's going on,

man?

>> I don't know. Having a cup of water

right now. What's going on with you?

>> 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. Um, 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.

>> Done. Done. Thank you. I'll take that

shout out.

>> Now, now, because we get a lot of advice

from all around the world, I figure like

this. If you want good breads, you might

as well go to a qualified baker. So,

what I want to go and say to you, man,

is that I'm curious if 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, is there a barbell approach or

can we take a balance in our in our

portfolio a certain way that you feel?

>> Stack. Well, I love it. I love it. I

love it. Now, I don't want to reach I

don't want uh dividends that are so high

yielding that something's fishy. What I

want are very solid companies with good

balance sheets that 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

[music] stocks. The 2008 financial

crisis gave us a once in a lifetime bare

market with true systemic risk. But you

have to remember that's the exception,

not [music] the rule. Much more may have

money ahead in this special show. I'm

giving you a flash crash survival guide

with some takeways from the crashes of

2010 and 2015 and the best ways to

profit from market pullbacks. Then I'm

[music] asking all your birdie questions

with my colleague Jeff Marks. So stay

with Kramer.

[music]

In tonight's special survival guide

edition of one, we're discussing how to

deal with brutal selloffs,

specifically how to defend against them.

Uh 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 selloffs that involve

the 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's worked in even the toughest of

times. I like to look at something I

call the accidental high yielders. I

actually call them a hy on this show.

Those are stocks of companies that are

doing fine, have good balance sheets.

That's very important, by the way. But

they 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 of dividend yields you've gotten

from certain stocks, you also want to

look at the yield in the 10-year

Treasury. If a stock typically yields,

say 2%, suddenly it's paying double that

because of a marketwide 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 the uh the 2010

flash rash, 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 it's

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 to 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.

>> PNG is now down 25%.

>> If that's true, if that stock is there,

you just go and buy it. It can't be

there. That is not a real price. When I

walked out, 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 Proctor 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 68.

>> So, remember, I buy 50,49. I now flip it

at 59. I just made I just made 500 G's.

>> Yeah, that's the craziness of what I'm

talking about. And by the way, a lot of

people end up doing that Proctor trade.

I've been thanked for million I don't

know I mean like a dozen times people

thank me. Remember the limit order

advice really does ring 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 CO shut down the economy in

2020. As long as the Fed's printing

money, almost every decline is a viable

one. It's just a fact of life. It's been

like that since I got into business. But

when the economy is 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 postcoid

experience. But we also don't want the

Fed to break the economy like it did

when it raised rates 17 straight times

in lock step 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 institutions. For instance,

there's gold, there's real estate, of

course, and bonds. I like gold as a safe

haven, and I believe that every person

should hold some gold, preferably

bullion. But if not, then the GLD 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 rei 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 in the Fed Titans. You've

seen 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 of these dividend

stocks of safe havens when you're

dealing with a sell-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 slow

slowing rapidly. Although in recent

years, J Pal has been much more

responsible about not pushing us off a

cliff than some of the previous Fed

chiefs. Here's the bottom line. Garden

variety pullbacks can be gained as long

as there's no systemic risk involved.

But selloffs in the wake of the Fed

raising race, 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 [music]

when the Fed's done tightening. Money

will be back after the break.

Tonight we're talking selloffs.

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 cornage. For starters,

there's the issue of margin.

As a former hedge fund guy, I'm well

aware that there are many 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 clerk's 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, the

so-called VIX, got their heads handed to

them. They were short the VIX, betting

the market would remain calm. Stupid.

And 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. They had to raise

capital and unwind their trades. There

were so many managers doing this at once

that their selling ended up causing some

severe marketwide 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 uh you

know 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 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 clerk the butcher, and the

butchering occurs between 1 and 2:00. If

the selling runs its course by 2:45

p.m., 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 healthc carees. You

might also want to buy the secular

growth place that work in any

environment. Mega cap stocks, I thought

I look, I talk about them all the time,

especially the members of the CBC

investing club because we like to own

the best ones for the charitable trust.

What else can create viable

opportunities? Sell us from overseas. I

cannot tell you how often I've heard

commentators who scare the be Jesus out

of us because of imported worries say

from Greece or Cypress, 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 selloff. 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 often last for

three days. Again, the best way to

figure out if you're 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 selloff, 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 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

spack deals. Man,

>> the house of pain.

>> 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 ones with yield protection.

Sometimes we get declines triggered by

multiple simultaneous earning

shortfalls. Oh, we 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 occurring 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. Then there's the

trickiest kind of risk, one that's truly

toltoyesque, political risk. I often

find this risk tremendously overblown

whether it's because of strife between

parties or trade policies or even allout

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 so many pundits everywhere we

waiting in and giving your two 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 a political freight,

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, look, there 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.

[music]

Note the signs that it might be

subsiding, and then take action to buy,

not sell, and never

to panic. Stick with cream.

Booya. Jim Kramer. I'm a first time

caller, [music] a happy club member, and

want to thank you for being the people's

champion of investing.

>> Thank you for helping [music] me become

a millionaire.

I always say my favorite part of the

show is answering questions directly

from you. So tonight I'm going to take a

few burning investing questions from our

investing club members. And of 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, uh, 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 asks, "How do you know when

to break your cost basis?" Michelle, I

first of all, when I do it with Jeff

Marx, here's what we do. We say, "No,

no, no, no, no. Don't do it. Don't do

it. Don't." We actually use kind of a

checklist that we 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 bases.

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

[snorts] in Florida asks, "If a stock

has been in the red for a couple years

and I average down during that time,

when is a good time to sell some of that

stock? Do I sell someone when 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 worked on and worked on,

worked on. It's called the stuck in the

mud concept which is that just you okay

your stock's done nothing for a long

time kind of drift down and then

suddenly starts going up or goes up goes

up see you understand when it gets up a

little bit more like to where your bases

here's what's going on through the

market's mind everybody else at last

that stock's moving I want to buy 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 people

say it's out of the woods let me have it

it's been stuck in the mud for so long

bingo don't touch it. Let's go to Joseph

who asked, "Many stocks that are

recommended have very high PE ratios.

What should we look for to make a 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 I'm going to 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 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 asks, "How

do you decide whether to take a point

take profit rather than keep a stock

longer to receive capital gains tax

treatment?" Okay, this is unfortunately

this is more of a tax advisor question.

Uh, 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. Oh, man. I

love the call. 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 say there's always a

bull market somewhere. I promise I find

it just for you right here on Mad Money.

I'm Jim Kramer and I'm going to see you

next time.

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