i cannot wait for that. what sport are we talking about? >> talk about a down day, steve wynn. >> giddy up. >> i'm mellissa lee, see us back here 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 cramer. welcome to "mad money." welcome to cramerica. other people want to make friends, i'm just trying to make some money. my job is not just to entertain you, but to teach and coach you. this show, this show is based on one theoretical idea, that it's

possible, if you work at it, to make more money for yourself, than hiding out in mutual funds. the pundits and commentators say it's too hard, that ordinary people can't invest for themselves and should even bother trying, but i know for experience, from running a $4 million hedge fund, that you can do it, as long as you're willing to put in the time and effort. and i know you're succeeding at individualing investing when you stop me on wall street or on "squawk" on the street and tell me about the big wins. not everybody's up to it, and that's why i say, listen, i have no problem with indexed funds, but in order to be a good investor, which i know you can be, you have to know what's going on behind the scenes. that's why i'm devoting this

show to teaching you some of the more important lessons i have learned. there's some lessons you need to unlearn, some myths about the market that need to be demolished. what's most pernicious is that the market is always rational. that the market always makes sets. on any given day, stocks can be nonsensical. entire segments can move for seemingly bogus reasons. the market can be stupid for whole sessions of trading. i have seen it happen around here once a week or between twice. it's our job in the media to go too far, trying to find the logic, signifying nothing.

never believe that the market is supposed to make sense. on a day-to-day basis, the market often does some crazy things, it's important to say, you know what? these guys are just nuts. once you start cooking up connections where none really exist, then you're in trouble, because you can make yourself believe almost anything. stocks can go up or down for reasons that have nothing to do with the profitability of the company. when it occurs, you want to cash in on the irrationality. no one ever made it on panicking, whenever we get hit with a pull back, there will be a lot of stocks that went down because -- hedge funds that are in trouble, start selling, not because they want torqu, but because they have to raise money to pay back their unhappy clients who are demanding their money before more is lost.

that's why we have been known to play bob marley's song. you can pick up "confessions of a street addict." maybe there's a red hot deal out there, a facebook, an albalibab. they got to raise in order to buy their shares. mutual funds just don't keep the cash on hands to make these kinds of investments and we know we're getting enough money over the transom to start participating in a deal to sell other stocks so they can have the cash to buy the new ones, then regular sellers see the selling and start to panic and they become too afraid to buy, or they get blown out and start dumping stocks themselves. and those in the media are

trying to concoct theories, they get too negative. i don't think unless you've managed money professionally to really understand these kinds of moves, i have seen them many, many times in my career, and i actually describe what it's like to live through in almost all my books, i was embarrassed, mightily in "confessions of a street addict" and i was paying attention to things that are much more hedge fund related. we also saw the impact of hedge funds exacerbate moves in the selloff in the 2008-2009 era, and not just in stocks, it happened in commodities too. i will never forget how oil commodityings went up to 1$120 barrel. only after that insane rally did we find out that oil skyrocketed

because a couple of hedge funds got caught because they were selling oil short, meaning they were selling against it, and they had to pay for their stockless, and after that huge run, oil fell almost in a straight line to $33 a barrel. when it was rallying, they had to capitulate, and sell almost anything to raise cash, it was the mirror images of what happened when it went higher. the most common mistake you can make today is commodities that are selling at a certain level. when i first started trading, we measured the stocks by the underlying company. what it might be worth to an inquirer. are its products selling well, does it make a lot of money off of what it says. but then the market in its

infinite which is come, everybody started to lump stocks together in gigantic baskets in the 1980s. we lumped all stocks together in asset class, and they started to trade together in lock step whether the company was good or bad. this turning stocks into one big commodity, mom now they're traded with contractings or futures or etfs. something happened along the way that changed things drastically. money managers were able to pull hedge funds together. that's an amount of money so large that they dwarfed individual stocks, amounts of money so fast that if they tried to buy individual stocks, they would buy all the shares, they

had so much cash, so the hedge funds gravitated to the s&p 500 futures markets, which are much bigger and have more liquidity than any other stocks. the hedge fund managers started to trade in sync with each other, they all had the same intel, the algorithms. in 2008, when so many hedge funds bought the exact kinds of stocks and futures and sold the same kind of commodities. many of these hedge funds were positioned wrong. they had to sell everything. at the time i called it hedge funds gone wild, and i told you it was going to create a fabulous artificial buying opportunity. a lot of those companies were doing fabulous, they didn't deserve to go down at all. this continueses to has been to this day, because so many hedge

fund managers continue to buy and sell stocks and commodities, we saw it most recently with the internet and cloud stocks, when these groups were hit with huge amounts of new stocks and insiders selling secondaries, so the good went down with the bad. when you see the market starting to move in lock step or certain sectors just collapse, even as many of the companies in the sector are doing well, before you start to cook up excuses for why the moves make sense, ask yourself if we might simply be seeing the results of hedge funds gong wild. the market doesn't always make sense. instead of dreaming up reasons based on the fund mmms, think about whether the move was caused by the fundamentals of the wall street money management business. and out of control hedge fund meeting big redemptions, then take heart and start recognizing that their irrationality could

be your opportunity for big profits. andrew in florida, andrew. >> caller: hey, jim, real quick, another fan of yours who deserves a allelujah boo-yah, she just beat cancer. my question is about your rule about investors mutting your 401(k) into indexed fund. would you advise against me putting the first bits of money into stocks that are made for trading not for long-term investing. >> i'm still not going to break any rules, a lot of people think i'm just listening to individual stocks, i want that $10,000 saved first then you can take those shots, but we're index people here, and mad money for individual stocks. i win in new york, irwin. >> caller: i have a question, i have been playing in the stock

market for about 35 years, i hadn't made any money until i started with you two years ago. >> thank you. >> caller: my question to you is, i have an account with let's say $100,000 in it and i have five issues in that portfolio. is there a proper way to balance the portfolio, because it turns out now that i have almost half the money in one issue. what is the proper way to balance it out? >> this is a great question, what's happened is you probably made a lot of money in one stock, you have to trim, i used to use the rule, when it was up 25%, take some off, now if it's up 50%, take some off. it can take many years to get there. i say continue to let it run, and just trim as you get 50% and

100%. no one ever got hurt taking a profit. john in idaho. >> caller: your investment guidance has literally paid off well for my family. you talked about the fundamental metric that you actually used for your investment decisions, you stated that you rarely bought a stock that carried a peg ratio greater than 2.0. do you also use the peg ratio on the sell side and if so, can you walk me through how you use it? >> all i'm trying to do is find situations where it seems overvalued, where the s&p is selling in terms of their growth rate. there's two kinds of stocks that get overvalued. i'm fine with those, then there's the ones that are overvalued because they're fads and those are the ones that the peg ratio says sell, sell, sell, that's the one i don't doubt. don't listen to the naysayers, i

think if you work really hard and do research, you can make muff money in this mark, but if you don't have the time or the inclination, then leave it to the professionals. and the type of stocks you should avoid in a selloff. and it's not all bad news, i'll let you in on the companies that could be worth buying when things turn south. and send your tweets to me @jimcramer, i'm about to answer them on the show. we'll be right back. what if we could bring you better value

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when there are huge losses in the market, you'll have opportunities to buy good companies with stocks that have become bad because the market turned down. you'll hear me say buy broken stocks, not broken companies. really serious correction, almost everything will indeed go down, certainly a lot of stocks that don't deserve to will decline, right alongside stocks that deserve to be lower. i think the big question is, how do you tell the disturbance between a broken company that's not bouncing back and a broken stock that can provide a golden opportunity. i'm going to help lead you away

from broken companies and toward the broken stocks that i want you to own. what's a broken company. corrections have causes, right? in 2007, we had some selloffs, lots of bad subprime mortgage loans. specifically bonds, backed by the mortgages. you mix all those ingredients together, and what you got was a credit crisis, and along with that came your big selloffs. in the wild summer of 2011, we had concerns of debt ceilings in the united states, topped up with an s&p liquidity downgrade. the same with the battle between the democrats and the republicans in 2012 and 2013, including the government shutdown and sequester. in each of these selloffs, we had sectors which companies that

were immune to the actual cause of the selloff, like the drugs and foods that rallied strongly after the nasdaq fell apart in march of 2000, and what an opportunity that was unless you were mesmerized by the dot bombs of the era. when you find yourself in the midst of the selloff, look at the companies that caused it, they're probably broken. so that meant in 2007, you're looking at a broken company. those companies are directly in the blast zone. and they might be certain to be obliterate obliterated, then there's another group of companies that's not as bad as the first group, but still radioactive. whatever caused the selloff -- their earnings will be hurt. almost all the financials became victims because they had

invested in bonds that unfolded, they couldn't be owned through the crisis. a company does not break just because its stock goes lower, though. in 2007 a good example would be infrastructure stocks that would get clobbered in a selloff. we saw this again in the summer of 2011, presenting many bringing opportunities in companies that had very little to do with the default of the u.s. government. or in 2012, with dmsic companies -- how about all those companies that did no business with the government, but got banged down by the government shutdown and sequester. how come the bonds didn't go down? there often wasn't a connection to the causes of the selloff, and yet these stocks get hit. and what we did, i came up with something i think will really

help you. i call it the bristol myers syndrome. as in what does that sell off caused by a cypress bank failure, or a mess in ukraine have to do with the earnings ratio of bristol meyers? probably nothing. you want to look for stocks in areas that are independent of a selling marnlt. even if you think you're approaching bottom and the worst performers are about to become the best performers, that's not really a safe bet. once a company breaks e it's difficult for itself to mend, and that's only more true for sectors which control half of the stock's movement. here's the bottom line n a selloff, there will be stocks that have clear reasons for going lower and just get sold off with everything else. the first are broken companies, and the second are good

companies with broken stocks and that's where you want to be. how to zero in on the stocks worth buying, and the common practice in corporate america that could be a cause for concern if you're looking to invest. and why you should be watching for some stocks to rally.

welcome back to this special edition of "mad money," where i teach you to navigate so called market corrections, the brutal decline in stocks that would ordinarily leave the best of us in tears, if not heading straight for the dirty linoleum floor with only a brief layover at the liquor store to pick up some cheap is so much to wash our troubles away. that may be a way of handling a market journey turn, but it's not what we do on "mad money." some selloffs are part of the process, and have to be anticipated, even relied on by every good investor, you know you have to circle the wagons around what you really like, and leave the stocks you're not enthusiastic about in the dust. when you're talking about damaged stocks and damaged goods, when hunting for a bargain in a selloff.

you need to go hunting. a correction is just a megasale on stock. it's not like things you might find on sale at your sam's club or a costco any day of the week. i'll tell you about a couple of types of stock that i specifically like to hunt for on days that the market is down. first i want to find stocks that have pulled back from their high during a selloff. it's always a great place to go hunting. you generally don't end up in a new island for no reason. but stocks selling off their highs are thought of as expensive. you might like the company, and think the stock is great, but just not at the top of the the high, you look for stocks that get knocked off that new high list, maybe 5% or 7% off their 52-week high, because of their market correction and you're

likely to find a lot of great merchandise, not all of them will be worth buying, some sell off for good reason, that have something to do intrinsically with the company. but some stocks are dislodged off that list because market conditions got so horrible that all the stocks went down at once. wh you've probably got something wonderful there. buy, buy, buy. not all the time, you'll have to use your discretion for each individual stock, but usually the ones that get knocked from their highs by a correction, will be the stocks that recover hardest and fastest from the carnage, unless they're part of the reason for the carnage. that's the first group of stocks i want you to be looking at while you're out there bargain hunting, you should have one stock that's pulled back from its high on your selloff list.

you want a list of stocks you would buy if the market took a nose dive tomorrow. even if you would ordinarily take a pass on them because they're so darned expensive. that way when the -- there's a second kind of stock to keep your eye on during a selloff. and these a stocks that sell with huge dividends, dividends that become more attractive because the price goes lower. just because you should be looking at the stocks on the 52-week high list, you should be keeping an eye on stocks you would buy if their dividend yields higher. the dividend yield is just the size of the annual dividend,

divided by the share price. $1 dividend, with a-as the price goes lower, the yield goes higher. sometime you have a selloff that is so severe that you get accidental high yielders, mainly stocks that didn't ever seem to be dividend plays, but are falling so hard, so fast. or even a trampoline for a quick bounce back for when times get better, and they tend to get better. i know dividend investigating isn -- investing isn't sexy at all. but when you're looking at a big decline, you want to get more conservative, you want stocks that are guaranteed to put money in your pocket and that's what a dividend does, but of course remember there's no guarantee that any stock bounces back. don't buy a damaged company just because it's a dividend. you can bet that company might cut its dividend, which defeats

the entire purpose of hunting for stocks that have newly acquired dividends. look at the company's earnings or profits, if the expected earnings are double the size of the dividend, they're generally good. bottom line, a selloff, it's an opportunity to buy, especially stocks that have just pulled off their highs and stocks with nice yields that have grown larger thanks to the decline in the overall market. these are the best places in bargain hunt in a decline of any magnitude, and i'll be right there alongside you trying to spot them. let's go to janet rose in new york. >> caller: hi, cramer, long time listener, i want to know how interest rate also affect my dividend stocks. >> people will immediately sell higher yield stocks when rates go higher. bonds can offer a more

attractive yield with more safety, so you swap out the alleged safety of some stocks and go for fry safety of bonds. i personally like growth and i like yield, but it's what happens in the marketplace, it always has, it's happened since '79, get ready and act accordingly and don't be shy. when there's a huge selloff, use it to spot bargains, to get into stocks that you should be, that have prices that you like. coming up on "mad money," when it comes to shopping for stocks, do you go up against the indexed funds? if you're getting ready to get back in the game, sometimes the warning signs aren't so obvious. i have got all the details on when a rally could mean a red flag. and i'll take some of your toughest questions, "mad money" will be right back.

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. now there's an entire cottage industry of commentators and pundits devoted to telling you that you will never, ever, ever beat the market, you simply cannot win. so it's better to put your money in an indexed fund than in individual stocks, if you don't have the time or inclination--you know i believe your first $10,000 should be saved in an indexed fund. nevertheless, i also believe you can beat the averages, but only if you know what you're doing, using the reaccesepreprecepts w about every night.

that's why i spend so much time trying to educate you about how stocks and the stock markets work. i want you to be a better investor or a better client. if you want stocks but can't do the work, hire a professional, hire somebody with good word of mouth from your acquaintances, they can do the betting for you. but i'm devoting tonight's show on the lessons i have learned in my 35 years of investing and trading. especially when times get tough out there on the battlefield. from getting back to even, that's the book i wrote right after the great recession, i think that's going to help you avoid getting burned. and that is don't necessarily put a lot of faith in buy backs, they may sound great, don't they? but they aren't created equally, and they aren't a place to run to in a selloff, even though you think it's a nice trampoline

underneath. as we saw when the oils came crashing down, when oil plunged in 2014, a lot of oil companies walked away from their buy backs. i used to believe that large companies used buy backs to take their stocks out of the equation u in order to boost their earnings picture share. buy back -- but i like dividends more because of their superior down side protection and their preferred federal taxation status. companies spend about a trillion dollars buying stock over the last few years and that's money that i thought would have been better being paid right to you in a dividend. unfortunately, these buy backs haven't given you the value we thought they would in many cases, and in some cases, they turn out to be a huge waste of money. let's be a little skeptical, the

track record looks better in the huge rally in 2009. it's still hard to find companies that squander their money buying back stocks at higher prices, leaving nothing to show for the billions spent on buying back stock. but companies are a whole lot worse than others, this is a company i like, but they spend a lot of time -- they spend a lot of cash, and they have always been stingy with the cash, it would have been better if they gave you that great yield. buy back stock at absurd prices, you know what that did? play cisco for a while, the big network seller, until it decided to boost its dividend, which i think led to the stable, higher run that that stock has had. intel did the same thing, bought

a whole lot of their shares, maybe the worst offender out there is exxon, it buys back more stock than just about any company in the world. but it offers more protection than other oil companies. i don't tell people to sell the darn thing, it's got a great balance sheet, whatever, but i like higher dividends and buy backs together. so why do executives like buy backs other than dividends? a couple of reasons, a buy back can be a great way to create the perception of growth, but it's just earnings growth. that's been the case of many of the old pharmaceuticals in the consumer packaged goods companies. the other buy backs would be actually anemic growth. that's how you can see low single digit revenue, in other words not a lot of growth at all for sales, and almost no growth and yet low teens earnings growth for many of these st stagnant businesses, that's right, the sales aren't doing

anything, but because of the buy back, shares go up. so companies think it's worth it to just keep buying back their shares. give it to shareholders. what about the notion that a buy back can help cushion a bear market. short sellers are just ordinary sellers in a panic, can almost always -- especially as there are restrictions on how many companies on how much stock a company can buy on a given day, again a dividend does a better job by creating meaningful yield support, especially in a low-year-old environment. short sellers have to short stock and they pay the dividend themselves, they borrow the stock first, to sell it short and whoever borrows the stock, must pay the dividend to the real holder. you want futility in buy backs? the bank stocks in 2008, buy

backs didn't do anything. as soon as the shorts were on with their newfound power to bang stocks down over and over again, wouithout waiting for li. they bought back all that stock, then they have to issue tons more in order to meet the regulators' demands. the power to short sell stocks was granted by the securities and exchange commission. it previously forced short sellers to wait for above market prices before they could offer stock. you couldn't stop these guys with the biggest buy backs in the world, especially when the fundamentals were deteriorating for some of the best stocks out there. and then you see execs call the bottom in their own stock.

babe ruth called stocks are -- not understand the way the stock market works, they should watch the show, or maybe they don't understand the way their own stock works, at least as well as you would expect. they pour fortunes into trying to create the appearance of a bottom while their stock is still down. the exception? apple, run by tim cook, they buy back their stock, they got a buy back with a brain, that's about the best buy back i have ever seen, and it's a company with a terrific dividend to boot. that's the combo i want. disney too is extremely opportunistic, it bought a lot of its stock back in the ebola scare of 2013, because people were staying away. autozone, there's one that's always been a buyer on weakness.

it shrinks the float and it also has worked if you take a look at the long-term chart for azo. buy backs by themselves are no reason to buy a stock, and in some cases are actually reason to sell it. no company is wasting money it needs to survive on buy backs, or spending money it doesn't even have has proven fruitless. and you shouldn't rely on even the largest buy back to help prop up a stock if the situation is dire. the way i see it, these are false signs of health and too often just a darn waste of shareholders money. "mad money" is back after this.

now after a selloff, in order for stocks to reverse and move higher, they need to have fuel. the fuel necessary for a rally and what that fuel, what is it? it's cash. sometimes fuel comes from retail investors who are taking money off the sidelines and putting it back in the market. with hedge funds desperate to own stocks rather than shorting them, then you're in the 1,000 bull dances. you don't need me for certain, that's when everybody seems so smart. as long as more and more dough is flowing into stock markets, it's easy to find stocks that can go higher, you've got to buy the dips each time they occur. but it can take a long time for

regular people to become accustomed to putting the money in stocks again after a serious selloff. it's scary. now with no money flowing to the market or even with outflows, you can still have powerful moves in the stocks and sectors that are trying to assert their leadership in the tunnel oirmoi. if people are still reluctant to invest, then the money will simply be pulled out of the least interesting group of stocks, and put it in the ones with the more power. people with food and drug stock also happily sell them in order to raise more cash. this kind of selling move is called a rotation. there's just one problem with rotations, without new money flowing in, the advance often becomeses zero sum and ultimately can and probably will run out of fuel. as soon as the selling in defensive staples come to an

end, the leaders run out of steam. when investors on the sidelines are still reluctant to commit cappal, you can get a rally in what i call the wrong stocks, the stockings that signal slowdowns or even recessions, the stocks that have been used as fuel in the recent advances. and all the cash that investors pull out of them can be poured right back in, or that food and drug stocks would still be going lower, no matter that it just might be because these nondurables are getting so cheap, they represent great value. i want you to be ready for it. you never want to see any of the consumer staples roaring higher in a sustained a vance, where they're the only one going higher, because they think the economy is going to get worse or simply stay in awful shape or a long time to come. that's why one of the most horrifying things you can see in the stock market is a powerful

rally, in the so-called wrong stocks. what are the wrong stocks? i want you to think about altria, coca-cola, general mills, if that's all that's going higher, that's trouble. there's nothing more disconce disconcerting than watching a drug or a food stock fall -- until and independence there are vast amounts of money coming in from the sidelines, you need to be more aggressor. watch the sector leadership to help give you a read on macrosentiment, in order to time when to expect more of a sustained rally. in the meantime, look for opportunities to buy high quality names where the stocks and not companies are broken. and beware of management tactics like buy backs that artificially prop up stock prices only to see those stocks go right back down. remember the coast isn't clear

until the vast preponderance of stock goes go higher. that's when you know it's safe to go back in the water. and with the higher than average runs we have had recently. (burke) at farmers, we've seen almost everything, so we know how to cover almost anything. even a coupe soup. [woman] so beautiful. [man] beautiful just like you. [woman] oh, why thank you.

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my fingers are hurting from battling all the trolls, my new trash to troll campaign. if only there was an easier way to answer the nice tweets. hey, we have a tv show. let's give my poor hands a break and give you the answers you deserve. at even after who lets us know, i let my nose run when listening to @jimcramer because when i sniffle, i miss something. you know, may i suggest that you get some "mad money" klenex, that way you'll be in sync with what i'm saying. next, is a at willing blam is

wondering, is there anything to purchasing silver or gold? silver is a much less worth why would commodity, but it can be found, where gold is getting hard to find. i think actual bullion is a good insurance that has not paid off in a long time. sometimes it's good when insurance doesn't pay off. and you have started my ignition for investing. i want you to tweet that every single day for the rest of your life, because it makes up for all the trashy trolls i have to worry about. this is an idea is @jim crimer, you should have a short video made on cramer called mad tweets against you. i think that's a good idea. it looks like @cubeone as a dilemma, what to do, have enough

stocks in a portfolio but too much cash. in my travel trust, i say you have to wait. i know it's painful, but you've got to wait. don't violate basis. in 2014 i violated basis and it was not a good year, and i personally attribute that to violating basis, or i did not let the prices come down enough to make the next trade meaningful. maybe you could develop tech, i want one of those self-charging tables, one of those cordless tables from ati, that's what i really need. here's @dmj, my financial buys are always warning me about watching the market every day, it's more frustrated than ever. i like to check in on the market if i were on vacation wherever i

check in, don't be obsess ive about it, you're trying to buy good companies with stocks that are good with prices you like, just to watch it all the time, doesn't make that happen. much better to do home work and try to find the next idea. and the next one, asking me for information of how to do home work together. i just use google but there's other ways. i have written whole books on how to do home work, my best one is "real money" but my most recent one, has a whole chapter on how to analyze stocks, i think that can really help, anding oand of course, stick with cramer.

i like to say there's always a bull market somewhere, i promise to try to find it right here on "mad money." i'm jim cramer and i'll see you next time. find ping-pong.

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