Mad Money

Latin America Is Always a Trade

Cramer's Golden Rule #3

Listen to Cramer: No matter how good the fundamentals of a Latin American stock are, it will always be a trade. The reason is simple – every institutional investor on Wall Street treats Latin American stocks as trades, not investments. And these are the guys who move the market. So Home Gamers just need to stay one step ahead of the Street.

Actually, the Street has a lot of preconceived notions about Latin America – and they’re not necessarily true. Example: Latin American stocks are levered to the U.S. Federal Reserve. We raise rates, our neighbors to the South watch their stocks get crushed. Now, for the most part, rates in the U.S. have absolutely nothing to do with the performance of businesses in Latin America, but that fact doesn't matter. What matters, Cramer says, is that everyone out there running money was trained to believe that Latin American stocks are levered to our business cycle, so they'll trade the stocks like that, even when they’re wrong.

Wall Street can be really, really wrong. But since the big institutions are the guys who decide what a stock is worth at the end of the day, it doesn't matter. The only important factor is what the Street believes.

A perfect example of this principle in action is Cramer’s call on BanColumbia in August 2005. He recommended the bank at $19 and change, and by the following March it had doubled. Cramer did say to take profits on the way up – and you always should – but he didn’t tell Home Gamers to cash out and put their money elsewhere. The result? By June CIB had dropped to $23. Still up from the buying point, but nowhere near the gains investors could have enjoyed if they got out at the top.

Bottom Line: It's not an appetizing rule, but given the way the Street works, it's a good one – Latin American stocks should always be treated as trades, because no matter what they say, that's exactly how your fellow investors are treating them.

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