in the time and effort. i know you are succeeding when you tell me about it, and you tweet me thanking me for help along the way. of course not everybody is up to it, and that's why i say, i have no problem with index funds but in order to be a good investor, which i know you can be, you have to understand what is going on behind the scenes. i am devoting the show to educating in some of the most important lessons i have learned in four decades in the markets. there are lessons i need you to unlearn, myths about the market that need to be demolished. there's the notion the market is always rational and the action makes sense, and that's not true. on any given day, stocks could go up when they should have gone down and vice versa.

as i always say, never forget that the market can often be stupid for whole sessions of trading, and i see it happen frankly around here once a week or maybe even twice. it's our job in the media to make sense of what is happening and sometimes we go too far trying to find the logic and the reason behind moves nothing but tales told by idiots, and on a day-to-day basis the market does crazy things and it's important to be able to say, you know what? these moves are just nuts and don't make any sense at all, because once you start cooking up connections where none really exist, you are in trouble. sometimes stocks or the whole market will go up or down that have nothing to do with the prospects of the companies, and

when it occurs, you want to take advantage of the rationality, and nobody ever made a dime panicking. when we get hit with a huge pull back, there will be stocks that went down disconnected, and hedge funds in trouble start selling and not because they want to, because they have to raise money to pay back their unhappy clients who are demanding their money before more is lost. by the way, you can pick up the copy of "confessions of a street at addict." they have to raise the cash to buy the shares and that's not something for you, and i was a

professional trader. mutual funds don't keep the cash on hand to make these kinds of investments. regular investors see the selling and start to panic, and they even become too afraid to buy or get blown out and start dumping stocks themselveses and everything is down across the board all of a sudden and then the media tries explain the reasons everything is down, and they cop theories and get too negative, and do you really understand these kinds of moves? i have seen them many times in my career. i actually describe what it's like to live through in almost all of my books. i was embarrassed in confessions of a street addict and i was reacting to issues that turned

out to be more hedge fund related, and that's why i mention the book because i need you to understand the emotionalism of the selling. and then in the 2008 and 2009 years, it happened in stocks and it could happen to commodities too, and the oil went up over $100 a barrel, and only after that insane rally did we find out that oil skyrocketed because a couple hedge funds had been selling oil short, and they bet against it and had to buy in or end their positions at outrageous lehigh prices because their investors were pulling money out and then after the huge run oil fell in a straight line to almost that 3$33 a barrel. it was the mere image of what

the worst mistake, the most common mistake you can say these days is to say because of a commodity given at a level deserves to be traded. when i first started trading we measured stocks by the company, and this is 1979 we're talking about. how much cash does it have? are its products selling well? and then the market in its wisdom and all the gray beers and government decided to lump the stocks together in the 1980s and we developed an student that traded the s&p 500, and they started to trade together and whether the prospects were good or bad, positive or negative, and it's only gotten worse every single year since then, and stocks trade as a unit. this turning stocks into one big

commodity, like they are corn or wheat, one by one the country's rised. they were able to pull vast amounts of money together, amounts so large that they dwarfed some stocks. they ran so much money, so the hedge funds gravitated instead of individual stocks which are much bigger and have more liquidity, and the hedge fund manager started to trade in sync with each other, and they spit out the same programs. when so many hedge funds bought the exact kinds of stocks and futures and sold the exact same

borrowed money, and many of the funds were whipped by events that they didn't see coming, and they had to sell everything because they were positioned wrong, and it created an artificial buying opportunity and while many stocks deserved to go down, not everybody desurfed to go down and a lot of companies were doing fabulous and did not deserve to go down at all. many hedge funds still buy and sell stocks the same way, like they are commodities. we saw almost recently with the cloud stocks, bring up 2014, they were hit with huge amounts of new stock, so the good went down with the bad, so the next time you see everything go down at once, or sectors just collapse, before you try to cook

sense, ask yourself if you might simply be seeing the result of hedge funds gone wild. the bottom line, the markets do not make sense on a daily basis. instead of dreaming up of reasons, think about whether the move was caused by the fundamentals of the wall street money management business and out of control hedge funds meaning big redemption and take heart and start recognizing that their irrationality could be your opportunity for big profits. andrew in florida. >> caller: i want to mention another big fan of yours, my mom deserves a hallelujah for being cancer free now. >> yes. >> as a young investor with a high risk tolerance would you

advise me about putting my first bits of money for long-term investment? >> i am going hedge fund, and that's what i did, and i want that 10,000 saved first and then you can take the shots so to speak, and no, index funds, and then mad money for individual stocks. irwin in new york. >> caller: i have a question. i have been investing or playing in the stock market 35 years and have not made any money until i started listening to you two years ago, and my -- >> thank you. >> caller: my question is, i have an account with, say, $100,000, and i have issues in that portfolio. is there a proper way to balance the portfolio? it turns out now that i have almost half the money in one issue what is the proper way to balance --

it's a high quality problem meaning what happened is you made a lot of money in one stock and you have to trim. when it was up a quarter, up 25%, take some off and i changed that to when it's 50% take some off, and ultimately means it can take many years to get there. i saeuy continue to let it run. trim only. nobody ever got hurt taking a profit. john? >> caller: many thanks for your investment guidance and it has paid out well for my family. a while ago you walked us through how you viewed the peg issue. >> yes. >> your thesis spoke mostly to the buy side of the model and you rarely bought a stock that carried a peg ratio of greater than 2.0. >> right. >> can you walk me through how

to use it? >> all i am trying to do is find situations that seem over valued in relation to where the s&p is selling in terms of their growth rate, but there are two kinds of stocks that get over valued and there are the kinds that turns out the out years are going to be tremendous, and i am fine with those and then the ones that are over valued because they are tpadz, and those are the ones that the peg ratio says, sell, sell, sell. if you work really hard and do research you can make money in the market, but as i said, in this segment and many others, if you don't have time or inclinations inclinations, i'm fine giving it to professionals. and coming up, what you should avoid at all costs in a selloff. and then letting you in on the companies that could be worth buying when things turn out, and

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when there are huge losses in the market you will have opportunity to buy good companies with stocks that have become bad because the market turned down, and you will catch me saying things like buy broken stocks and not broken companies. in a really serious correction, everything will indeed go down. certain stocks will decline along with those that deserve to have a loss. how do you tell the difference between a broken company not bouncing back and a broken stock that could be a golden opportunity? i propose a way to help lead you away from broken companies and toward the broken stocks i want you to own.

in 2007, we had multiple selloffs related to a weak mortgage market, and specifically bonds backed by the mortgages. you mix all the ingredients together and what you got was a credit crisis and along that came the big selloffs. the debt ceiling services, it led to a steep selloff and increased volatility. ofourse if you go back in time we had the meltdown and nasdaq in the year 2000 where many stocks folded up and disappeared. in each of the selloffs we had sectors immune to the actual cause of the selloff like the drugs and foods that rallied

apart in march of 2000, a what an opportunity that was unless you were mesmerized by the dot bombs by the year. when you find yourself in the midst of a selloff, look at the companies that caused it. they are probably broken. in 2007 that meant everything touching housing, mortgages or any kind of lending. if there is a reason for a connection at a company, you are looking at a broken company. those companies are directly in the blast zone andhey may be certain to be obliterated, and then there's another group of companies not as bad as the first group but still pretty radioactive and these could be companies not directly related to the selloff, but what caused it should cause the earnings to be hurt and banks were in the blast zone in 2008 and 2009. they couldn't be owned through the crisis. a company does not break just

because its stock goes lower throw, in 2007 a great example would be the infrastructure stocks that would get marked down with everything else in a selloff or oil companies and agriculture, and none of the busisisses were going to o affected by the credidi crisis that caused the correctiti, and we sawt inn 2011, many buying opportunities i in companies that had littleo do with the worries of the potential fall of the u.s. government. how can a mexican restaurant chain take a hit? how about those that got banged down by the government sequester. the defense stocks didn't go down because their budgets were pretty good. often there was a connection to the causes of the selloff and yet the stocks get hit. i came up with something that i think will help you.

syndrome, as to what does that selloff cause? what does it have to do the price to earnings ratio of bristol-myers? most likely nothing. it's likely to call that company a blue chip company, and it worked since 1983. you don't want to buy stocks leading to the climb, you want to look for stocks in an area independent. even if you think you are approaching the bottom and the worst performers going to become the best performers, and once the company breaks it's difficult for itself to mend and that's true for more sectors. here's the bottom line, in a selloff there will be stocks that have clear reasons for going lower, and the first are broken companies, avoid them, please, at all costs. the second group are just made up of broken stocks and that's

exactly where you want to be. still "mad money" ahead, the opportunities created during a market wide selloff. what could be a cause for concern if you are looking to investst and why you should be worried watching some stockss lly. yeah, bad ststks.

"mad money" " ll be right back. welcome back to the special edition of "mad money" where i teach you how to navigate so-called market correction, the brutal declines in stocks that would leave the best of us in tears without heading to the dirty floor after a stop at the cheap liquor store to pick up scotch to wash our troubles

away. some things are relied on by every good investor, and you know you have to circle the wagons around what you like and leave the stocks y y are not enthusiastic about in the dust.t. we talked about damamed stocks and damaged goods, and that's exactly whwh youeed to do, g go hunting. a correction is just a megasalal on stocks. it's not what you find in sam's club or costco any day of the week. i will tell you about a couple types of stocks, types that i like to hunt on days where it's down, and the more selloff these stocks look more attractive to me. the new high list is always a great list to go hunting if you are looking for good investments. you gently don't end up here for no reason, and stocks that are

hitting new highs are thought to be expensive, and this is what big declines were made for. you look for stocks that get knocked off the new high list and are down a little because of the market wide correction and you are likely to find a lot of very good merchandise, and not all worth buying and some of the stocks coming off buys could be damaged goods, and then there are other stocks that could be dislodged from that list because market conditions got so horrible that everything went down at once. when you find a stock that actually needs a correction to take it down, genuine wall street skwreulgtss is a huge decline, you probably have something wonderful there. not all the time that you have to wear your discretion for each individual stock but usually the ones that get knocked for the highs by a correction are the stocks recovering hardest and

they are part of the reason for the carnage. thth's the first group of stocks i want you lookiki at while youou are out there bargain hunting. you shoulddavenetock pulled back from i i highs on that list at all times. you want to list the stocks you want to buy if the market took a nosedive tomorrow, and even if you normally would take a pass on them they are so expensive. there's a second kind of stock to keep your eye on during a selloff and these are the stocks that sell with huge dividends, dividends that become a whole lot more attractive to the share price as it goes lower, and just like you should be watching the 52-week high list for stocks. you should also be keeping your eyes on stocks that you would

higher and a market correction will send the stock lower, and pardon me if you know this already, and i am trying to reach everybody, including second graders, and 3-year-olds. the dividend yield is the size of the dividend, say one dollar divided by the share price, and one dollar dividend divided by a $20 share, and that's a stock with a 5% yield. as the price goes lower the yield goes higher and you have to remember that. sometimes you get a selloff that is accidental high yielders, and meaning stocks that did not seem to be dividend placed, but suddenly their dividend is meaningful. i know dividend investing is not sexy at all, but when i tell you nobody ever woke up unhappy the next morning when they brought

me a stock with a big dividend, trust me. you want stocks guaranteed to put money in your pocket, and that's w wt a dividend does. don't buy a damaged company and not just t t stock hurt by itself you may believe that company will cut its dividend. a good rule of thumb is to look at the companies earnings or profit if the earnings are twice the size of the dividend secure. 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 and these are the best places to bargain hunt in the decline of any magnitude and

you trying to spot them. let's go to jane rose in new york. >> caller: long-time listener. i wanted to know how interest rates will affect my dividend stocks. >> people will sell higher yielding stocks when rates go higher and that happens every time. why? bonds can offer more attractive yield with more safety so you swap out the alleged safety in some stocks and go for the true safety and i personally like growth and yield and therefore i would not be a seller of the stocks but it's what happens in the marketplace and always has and it has happened since '79, and get ready, and don't be shy. jason in new york. jason? >> caller: hi, jim. how are you doing? >> good. how are you? >> caller: doing great. i have a lot of friends that do real estate investing for the monthly ininme, and how do i do

that with ocks? >> i have to do a segmeme where there are stocks that offer monthly income and the ones i know i'm notot that f fd of. i have to find new ones. and the ones that were doing it, turned out to be some of the more dangerous ones. let me revise my thinking. when there is huge drop, go shopping. i will tell you how you can get your take on the averages and come out on top. plus, if you are getting ready to get back in the game, sometimes the warning signs are not so obvious. i have all the details of when a rall could be a red flag. plus, you tweeted and now i a answering. i will take some of your toughest questions and "mad money" will be right back. each day with a delicious bowl of heart healthy kellogg's raisin bran.

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now there's an entire cottage industry of commentators devoted to telling you you cannot beat the market and you cannot win, so it's better to put your money inn index t tn to invest on y yr own. i i t that. an index fundorks fine for me, and i belelve your firir $10,000 should be saved in an index fund.

neveheless, i think y can beat the averages, but only if you know what you are dng using the preseps we teach every night here. i spend money trying to educate you on howhe stock market works. if you can't get advice do the index fund, if you can do the homework pick your own stocks after youut away that $10,000. if you can't do the vetting, hire a professional. i am devoting tonight's show to some of the most important lessons i learned in more than three decades of investing, and avoid some of the worst mistakes and pitfalls of investing. right now i kind of have a rule i want to bring back to getting back even, and that was the book i wrote after the great

avoid getting burned, and that's don't necessarily put a lot of faith in buy backs. they sound great, but they are not created equally and not a place to run to in a selloff although you think it's a nice safety net, but many buy backs can't be relied upon as we saw when the oil came crashing down in 2014, and a lot of oil companies walked away from their buybacks. they reduced the number of shares outstanding, and it worked almost worthwhile. buybacks were the exceptioioand it's aay to rewardrd share holders with cash, and i like vidends more because of the protection and the preferred taxation atus. mpanies spent a trillion over the last few years and thahas

money i feel would have been better being paid to you in the dividend. they have not giv you the value we thought they would in many cases. when you see a company with a large buy back with a paoupby dividend, let's be skeptical. in the wake of the 2008 crash, it's not hard t find companies that squandered their money buying back at high prices. some companies have been a wle lot worse than others. for example, here's a group that i like now but they spent a lot of money doing the wrong thing, the health maintenance companies. they are a good performer since the affordable care act but they have been stingy with the cash and elected buy back stocks and it would have been better if they gave me the great yield they would have offered. we see the same thing with some

prices. it led to the stable and higher run one stock has had, and intel did the same thing, and then they instituted dividend policy and their stock continued to rise. and my least favorite in the group, exxon. i don't tell people to sell because it has a great balance sheet but i like higher dividends and buybacks together. why do they like buybacks more than dividends? itit net income divided by the total number of shares and a buyback can create the perception of growth, butut it's just earningsgs at's been the c ce of the pharmaceuticals. the bubuacks would bee actual

you see low single digit revenue, and in other words not a lot of growth for sales and almost no growth and yet low teens earnings growth for many of the stagnant businesses. the sales aren't doing anything, but because of the buyback series, they do okay. we want the income. what about the notion that a buyback can help a bear market? the evidence says otherwise, short sellers are just ordinary sellers in a panic and can over power any company's buyback if it's trying to pump up its stock especially if there are restrictions on how much stock a given company can buy on a given day. dividends repelz short sellers because they pay the dividend tpemselves. remember, they borrow the stock

first to sell it short and whoever borrows the stock must pay the dividend to the holder. buybacks didn't do anything in 2008, didn't do an ounce or good and did not hold the stocks up after short sellers hammered every bank in sight. it gave you little to no downside protection. and then they had the issue, tons more, in order to meet the regulators' demands, andnd the powerr to detryry stocks was granted by the short sellers and by thehe securities exchangee commission when appeaead in the uptick rule that i remember fondly and that forced s srt seseers to wait for above market prices beforeehey could offer

these guys with the biggest buybacks in the world. you see executives trying to call bottom in their own stocks by announcing buybacks. it's a babe ruth-style stocks don't work. and maybe some don't understand the way their own stock works, and they pour fortunes into trying to create the appearance while their business is still in decline. that's about the best buyback i have ever seen, and it's a company by a terrific dividend to boot. that's the combo i want and it's the best products manufacturer in the world. disney is extremely opportunist

stock of its own stock back during the ebola scare. and auto zone, there's one that has always been a buyer in weakness, and it shrinks the float and also has worked if you take a look at the long-term chart. the bottom line, buy backs by themselves are no reason to own a stock and in some circumstances are a reason to sell it, and you never want a stock that has useless buybacks, and you shouldn't rely on the largest buyback to help prop up a stock if the situation is dire. the way i see it, these are false signs of help, and too often just a darn waste of share holdld's money. "mad money" is back after r e break.k. immune health h combining... ... two types of good bacteria.

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