Jim Cramer can always tell when Wall Street enters the heart of earnings season, because investors will tend to shoot first and ask questions later when they've gotten it all wrong.
"This market is littered with these mistakes," the "Mad Money" host said.
When Cramer first entered this industry, it was a much different ballgame. Journalists did not have as much of a rush to break earnings stories, in an attempt to match companies' reported sales and earnings numbers with consensus estimates.
Cramer explained that these days, multiple wire services will try to get ahead of the competition by scanning numbers in the release and then matching them against predetermined cheat-sheets to see if sales and earnings are better or worse than expected.
Once the comparison has been done, the journalist will then attempt to derive a reason from the release to try to explain why things might have been better or worse. Then, it's on to the next story.
This process happens all the time. But since this week is the biggest week of earnings announcements for the entire quarter, Cramer warned investors to be careful.
"People end up losing fortunes trading off of these slipshod bulletins that purport to describe what happened in a given quarter," Cramer said.
One example of headline confusion was when Hasbro reported on Monday. The toy company reported, and the vast majority of media outlets determined it was a terrific quarter for both sales and earnings. At first glance, it made sense to Cramer, given that the stock was up 30 percent for the year.
Despite the headlines, Hasbro's stock opened up pretty much unchanged. So, if it had a grand slam for earnings, why weren't the numbers up big?
It turns out that when the company conducted its conference call, things were not going that well at Hasbro. Chief Finance Officer Deborah Thomas utilized suboptimal language when she explained that gains in a number of older franchises such as Nerf, Play-Doh and Monopoly were offset by declines in brands such as Transformers, Furby, My Little Pony and Littlest Pet Shop.
This made Cramer nervous, as many investors have bought Hasbro stock over the years because of strength in its Transformers and My Little Pony franchises.
As a result Hasbro's stock was pummeled on Monday, down more than 7 percent.
Then there was Netflix, as many skeptics believe that its best domestic growth days could be over. Yet, somehow it clawed its way back up almost 3 percent on Monday. Some find management's story blaming credit card expirations for the weakness in the U.S. to be credible.
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"The main takeaway is that you simply cannot possibly make an informed judgment until you find out what the heck is really going on at a company," Cramer said. (Tweet this)
That means investors need to listen to all of the commentary from management about a current quarter and its forecast for the future. Usually, that occurs a third of the way into the conference call, right before the Q&A session.
So, while there are always outliers to every situation, Cramer has seen incorrect news flow for various mega-capitalization stocks out there. He reminded everyone that it is rolling the dice to take action on a stock based on headlines — and gambling is not a sound investment strategy.