Mad Money

What Investors Can Learn From Journalists

Monday was Cramer’s day of atonement. He reviewed some of his most egregious errors in an attempt to keep viewers from making the same mistakes. At the heart of one the biggest lay something he called “arrogant certainty.” Sometimes being too sure, he said, can cost you a lot of money.

Avoid Hubris

That’s what happened with his Potash recommendation in the summer of 2009. The company’s conference call was more pep rally than quarterly report, and Cramer took the bait. He recommended POT on July 29 at $92.08. Less than two months later, though, the company issued a Friday evening press release, cutting its earnings estimates, and that crushed the stock.

What did Cramer do wrong? He listened to Potash and only Potash. Despite a number of other warning signs, he took management’s cheerleading at face value, something that investors should never do. 

The fertilizer business was in terrible shape, and Cramer knew as much for a full year before the Potash call. That’s why he’d been recommending Terra Nitrogen, because it offered a dividend that paid investors to wait for a turn. He urged viewers to remember this the next time around. When business is bad, stick with companies that offer good yields regardless.

Cramer’s second mistake was not watching the end markets: corn, wheat and soy. Prices were down, and dropping, for the first two, while the latter was simply flat. Farmers won’t buy more fertilizer if that’s the case. Nor will they pay up for it. This was a big tell that Cramer completely missed.

He was tripped up in two other places as well. Cramer never checked the charts, as one of his trusted technical analysts was negative on Potash, and he’d already called Monsanto a sell. Investors should never rely solely on the charts, but they are part of a larger picture that should be considered. Also, Monsanto was a much better company. So why endorse POT in this environment if it were the lesser stock?

Cramer’s message wasn’t that companies could never be trusted. But investors need more reason than a bullish conference to buy a stock. Everything that management says needs to be verified. He admitted that he didn’t do that with Potash.

“When you’re too reliant on what a company has to say about itself,” Cramer said, “and not reliant enough on the big picture, you can really screw things up.”

“I screwed it up,” he said.

Call Cramer: 1-800-743-CNBC

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