Stop relying on past trends to make money

GameStop stuck behind rock & hard place: Cramer

It's human nature to use the past to judge your future. The brain sticks to what it knows, and assumes it will repeat. Jim Cramer is throwing that mindset out.

"History can be a very powerful guide when it comes to picking stocks, but there are times when you simply cannot take your cue from the past, because the future looks so different from anything we've seen before," the "Mad Money" host added.

GameStop is the ultimate example of this. Investors who have stuck with GameStop have been bent, abused and thrown around because they will not acknowledge that things have changed in the video game business.

In the past, GameStop has cleaned up off of fresh videogame cycles when they sold games that run off of consoles. Therefore, being one a little more than a year into a new videogame product cycle, investors would assume that GameStop is doing well. They have always in the past, so they should again now right?

Signage stands in a GameStop Corp. store in Peru, Illinois.
Daniel Acker | Bloomberg | Getty Images

Wrong. GameStop reported horrendous numbers approximately three weeks ago, missing the quarters in both earnings and sales. The stock fell 13.7 percent after this latest quarter, and has continued to tumble since that time.

What is interesting to Cramer is that the bulls have spent most of the year talking about how GameStop should be doing really well. However, there is a reason why the stock continues to fail, and it's not because of the excuse GameStop gave of a delayed release in the new Assassins Creed game.

"It's simple, like many bricks and mortar retailers, GameStop is being eviscerated by online competition, but in the videogame business online competition doesn't just mean you order your games and Amazon ships them to you," explained Cramer. Rather, consumers are downloading their games off of the internet instead. Why would they go to GameStop if they can get the same thing from their couch?

To make matters worse, Wal-Mart decided to get into the used videogame business early in 2014 and is willing to pay more for an old videogame and less to buy new ones. Cramer just doesn't think they have what it takes to compete in the digital space or with Wal-Mart.

Alternatively, technology retailer Best Buy has been climbing at a steady pace.

What has Best Buy done differently? Acknowledgement. Management has openly acknowledged all of the issues that the company has faced.

"They don't avoid these issues, they attack them head on, in stark contrast to GameStop, which keeps proving that denial is not just a river in Egypt, to name another river besides Amazon that has destroyed retailers," Cramer said.

Best Buy rolled out a turnaround strategy that included cutting costs and increasing online traffic. It has acquired $1 billion in annual cost savings as a result. It also refocused on its marketing and digital space, rather than print and TV and have been busy redesigning their website.

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These efforts are paying off in Best Buy's stock price, up 14 percent in the past three months. Unlike GameStop, who is down 17 percent in three months. GameStop assumed its business would be fine for the new videogame product cycle, they failed to realize they are on a different playing ground thanks to direct digital downloads.

This example shows that Cramer thinks investors cannot rely on past trends when it comes to making money. Facing challenges head on, like Best Buy has been showing it can do something to solve them – give investors a juicy stock worth biting into.

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