History's Lessons

Those who forget history are doomed not to repeat it. In order to try and make money in the present, it is imperative for investors to understand how others made money in the past. If you know the history of the stock market, you will be in a much better position than those who don't.

There are a lot of people who claim that stock prices are a random walk, meaning that they're completely unpredictable. But the folks who espouse this view normally don't have much experience managing money. I don't have a problem with the so-called random walk hypothesis. There are a lot of economic models that back it up. But as any economist will tell you, those are just models. They exist to help academics explain reality, not represent it. And in the real world, companies and stocks tend to follow patterns, patterns you can much more easily recognize if you've seen them before.

I'm not talking about charts. I mean economic cycles, product cycles – you could even look at what's happened to the banks over the last year and a half, compare it to the savings-and-loan crisis of the late 1980s that culminated between 1989 and 1991, and come up with a financial catastrophe cycle.

One of the most important things that we do on Mad Money is explain how past situations, especially periods of time where Cramer was managing money, are similar to the present. For example, we've been talking about the S&L crisis for over a year because it's been the closest analogue to where we are right now. At first we used this as a template to explain why you should sell stocks like Citigroup, which almost went under in the early '90s, and buy biotechs like Genentech, which got taken over at a nice price, as that group outperformed in 1990 and 1991 – although back then it was Amgen that was the leader.

Now that we could be seeing some light at the financial tunnel, we've been using the same playbook on Mad Money, to identify regional banks that look similar to the banks that came out of the S&L crisis on top. That's why Cramer's recommended International Bancshares, and especially FirstMerit.

I have a challenge for the people who claim you can't use history to help inform your stock picking decisions. Let's find some proof, and we can start with FirstMerit. We think this Ohio bank will take advantage of the weakness of its competitors to buy troubled banks from the FDIC and take market share. And, of course, we think that will ultimately lead the stock to go higher. This call is based on the fact that FirstMerit reminds Cramer of Fleet, which came out of nowhere and became the dominant bank in New England thanks largely to the S&L crisis and the Resolution Trust Corp., before it was acquired by Bank of America .

If FirstMerit doesn't work out, that's a point against our argument. If it does, well, then I hope those who maintain that you can't get a handle on what the market will do in the future by looking at the past will spend more time studying their history.

Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.

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