A cautionary tale from TheStreet.com:

How to Play the Nightmare, Part 1

By James J. Cramer, 5/22/00 3:07 PM ET

Can it ever be fun again? Can trading ever be the picnic that it was? Can money ever be made like it was made? Should we just turn off CNBC and stop reading about the market and turn back to other pursuits that are less costly and more fun? Were we just deluding ourselves?

In this multipart series that runs this week, I will answer all of these questions and more, as it has become increasingly clear that this business is no fun whatsoever. Worse, it is losing people fortunes. Let's start off with an incredibly sobering note that I got from one of our readers last week. I think it says it all about where we are right now. I would print it verbatim, but spared the fellow's name even though he was willing to use it because he felt so strongly that others learn from his debacle.

"I am a very dedicated reader of the site and you in particular. But I must share with you the horror of this market and my activities in particular. I must have taken a really big dumb pill two months ago or things have really changed big time. I have managed to lose my entire $2.5 million account in the last nine weeks. I am very experienced and have invested and traded for 13 years.

"I am 33, single and have no kids, thank God. I will be the only one who really suffers this bad dream. I have let my parents and good friends down big time. I think they hurt for me more than the numbness I am feeling. Jim, I knew to take something off and even went to a trusted friend to beg him to make sure I did. The dinner meeting on that Friday was followed by a Monday where I went from $1.9 million to $800,000. I was stunned, frozen stiff, couldn't act to take something off then, heck it was too late, right.

"WRONG! The following Monday I went down to $400,000. Now it was really too late, right? Yeah, right.

"WRONG again. The market had just crashed and heck, Brocade was going to report blowout EPS in a couple of weeks. It should run ahead of the numbers just like last quarter I was thinking.

"WRONG!! This is something I must live with for the rest of my life. It is very difficult, since I knew what to do but got caught in the decline so fast. I will recover eventually, but geez, I wish I could turn the calendar back two months for once in my life. I need a mulligan so bad it hurts.

"I broke the No. 1 rule, survival, be left standing. I have given 5-6 gift subscriptions of TheStreet.com over the past year. I sure hope they listened to take something off and be left standing more than I did."

Yep, that's right. This letter writer lost it all. And $2.5 million is a lot to lose. Heck, anything is a lot to lose. I present this sobering email because, 1) I don't want it to happen to you, and 2) It is never too late to take something off the table.

When I started this "take something off the table" call a couple of months ago it was in reaction to a woman screaming at me in a parking lot after I had spoken at the Miami Herald investment conference. She was telling me that I would lose it all. No way, I said, I am taking something off the table.

The following day I wrote a piece for the site outlining again, that I was redoubling my efforts to take something off the table. We took a huge amount off. We even personally switched some money to New Jersey municipal bonds, something I thought I wouldn't do unless I knew thermonuclear war was coming between Jersey and New York!

So, let's get something straight. From Jeff, as I will call this letter writer, it was not too late to take something off three times. But then it was too late. Don't make his same mistake. If you are riding on big, big wins and they aren't as big as they were but they are still big and you have taken nothing off the table, you are being foolish. The most you will lose is opportunity cost and the taxes to the federal government.

Jeff, by the way, owes no taxes. He has no money! So much for the tax man.

Second, it can happen to you. I don't care how good you are. Objectively you are not better than Julian Robertson, Stanley Druckenmiller or Stanley Shopkorn. Trust me on this. I think I am really good. I have the long-term record to match these guys. But their departure shakes me to my bones. These are mentors, teachers and Hall of Famers.

They are guys I learned to respect when I started 20 years ago. I can't say that my teachers and mentors got too old. I can console myself that they might have gotten too big, but that's a little chimerical because they had been big for years. I respect my elders. These guys were pros. When it is too hard for the pros, it is too hard for the amateurs, no matter what the size.

Third, Jeff wasn't a newbie. He had traded for 13 years. He had obviously been through the 1990 and 1994 and 1997 and 1998 downturns and lived to tell about them. He knew enough to play the Brocade (BRCD:Nasdaq - news - boards) upside, a company that is hard to understand, but has done spectacularly and was a good percentage bet. (We made the same one and we are pretty good at the upside surprise game.) Yet, this downturn caused him to lose everything. This downturn is the big storm, the one that gets you.

Fourth, the downturn isn't over. That would be wishful thinking. Sure it could end. But as we will see from this series, time will cause it to end.

Not events. Time.

Fifth, and finally, I am writing this stuff for one reason only: to be sure that you have some money left and can live to play again. The most salient thing in Jeff's note to me is that he recognized the cardinal rule: Survival, to be left standing.

That's what this game is all about. That's what we talk about in the huddles at Cramer Berkowitz. We want to be left standing after the bears romp. Maybe we have to play dead for a while. Maybe we have to hide. Maybe we just have to leave the park altogether for a while and stay in cash.

Whatever. The goal is survival, preservation of capital for when the bears have eaten so many salmon that they lull themselves to sleep or go into hibernation. If you don't believe me, like the marshal in the Fugitive said: "I don't care."

I know I am right...

-- DeeEmBee (macbeth1@pacbell.net), May 23, 2000

Answers

Friends -

James Cramer is not a bear even on his worst day, and he's been saying to take something off the table since January. If you are still fully invested in the market and you have not read carefully the story related by "Jeff", please do so. If after doing so, you still choose to keep the majority of your funds in equities, well, vaya con Dios and may your optimism prove true after all.

The markets have sawtoothed down since mid-March. They continue to make lower lows and lower highs. They tested new year-to-date lows again today before recovering and have shown consistently low volume for almost two months now. That, folks, is a bear market almost anyway you slice it, but just the beginnings of one.

Now please consider: we have not yet seen a true panic selloff. For all the drops we've seen so far this year, there's been no real, sustained, sell-anything-and-everything panic. The selling has been fairly steady and quite orderly, and it has been destroying people's accounts. We have not seen the worst, and what we've seen thus far is pretty ugly.

Please, consider the article and "Jeff's" story, and remember:

"Bulls make money. Bears make money. Pigs get slaughtered."

-- DeeEmBee (macbeth1@pacbell.net), May 23, 2000.

DeeEmBee-- Good article. I took it all "off the table " about a year ago. Perhaps a little bit sooner than I really needed to, but so thankful now that I did. Hope no one here got hit too hard. It will be interesting to see how the market and economy develop over the next few months!

-- Dory (crtwheel@eburg.com), May 23, 2000.

i,ve been loaded-broke-regained-comfortable-un-comfortable. but in the light of eternity---it,s all vanity. the greatest treasure is =ETERNAL-LIFE-FROM JESUS. you can lose STUFF-but if you lose your eternal-soul. you,ve lost IT ALL.

-- al-d. (dogs@zianet.com), May 23, 2000.

Why can't I get too upset when a 33 year old loses $2.5 million? He shouldn't have had that much to begin with. If he has any character, this will be a positive experience.

-- Lars (lars@indy.net), May 23, 2000.

Dee:

Thanks for posting the article. I've taken to not even looking at the market until after the close - too hard on the blood pressure :^)

I'm still about 75% invested but I have been taking all the profits on each bounce and moving them into high quality bond funds. With the recent interest increase, there are also some money market funds and CD's that are getting into double digits that are worth a look also.

We're off for about a month stating Friday for the South Pacific where all I have to worry about is the coup in Fiji so the stock market will seem like small time stuff until I get back.

-- Jim Cooke (JJCooke@yahoo.com), May 23, 2000.

Lars,

Why shouldn't he have that much money; because you don't?

Even when I was poor, I was a Republican, because I knew that it was wrong to tax the rich to give to the poor. Your comment reeks of socialism.

-- J (Y2J@home.comm), May 23, 2000.

Jim,

"getting into double digits"

Are you saying that there are some money market funds and CDs that are approaching 10%? Please clarify. Thanks.

-- J (Y2J@home.comm), May 23, 2000.

J--

Oh, come on, ease up. I am also a Republican and I also have taken a hit in the stockmarket. And I am in favor of anyone acquiring wealth (legally). But no, I am not a millionaire and I can't get too execised over some whippersnapper that loses $2.5 million that he probably inherited or made by speculation. Jim Cramer seems to think this guy's crash was tragic. I say "live by the sword, die by the sword" (catchy, eh?). He and Cramer should take their lumps and stop whining.

-- Lars (lars@indy.net), May 23, 2000.

Jim -

Yeah, I've also taken to just checking late at night, long after the close. No sense getting all worked up when my retirement money is now sitting in truly boring vehicles like money markets.

I listened in this afternoon at Bill Fleckenstein's "Shooting the Bull" interactive event at the Silicon Investor site. Bill gave the viewers the straight dope on "old-fashioned investing" (as opposed to what's happening right now) and what fundamental valuation and history tells us about the likely trend for the markets, especially Tech. Not pretty. As Fleck sees it, Greenspan "pumped air" into equities because of the potential LTCM and Y2K crises and now all that air needs to get out. I'm thinking that NASDAQ 2000 or thereabouts by year end seems a pretty safe bet. All you tech investors: calculate the stock price of your faves based on a historically aggressive P/E ratio of, say, 30. Compare to its current price. Do not say that you haven't been warned.

BTW, if anyone wants to hear straight from the sources what some PC manufacturers are saying about current trends, Fleck passed along the 800 number for the latest conference call: 1.800.839.2871. No password required.

Bon voyage, Jim! Hope you'll post some smiling-and-tanned pix when you return.

-- DeeEmBee (macbeth1@pacbell.net), May 23, 2000.

Lars -

I didn't hear "whining" in Cramer's column, just someone telling about how foolish they had been and how they made stupid decisions knowing full well what the wise decisions were. It's a cautionary tale and one that needs telling. Would you prefer that we keep all such stories from being told, for fear of being called "whiners"?

Cramer states that seeing talents like Soros and Robertson decide to get out of the game shakes him up. He passes along "Jeff's" story and calls it "sobering". I for one am glad to hear it, and to see it in print. Hopefully it sobers up a few more folks before the party really does end and there's a rush for the exits.

-- DeeEmBee (macbeth1@pacbell.net), May 23, 2000.

Dee:

Well, today's market was one where I would have been happier to look at early and not late. The swings lately are really wild. It looks like then Naz is heading for 3000 with a bullet so I wouldn't put anything past your prediction of 2000 this year.

I hope we don't return and find the market crashed again. The last time we were really out of touch with the world was in 1987 when we took rafts down the Colorado through the Grand Canyon. Things were fine when we started and the big crash hit the day we came out. I hope it's not a bad omen:^)

J, check out http://www.bankrate.com/brm/rate/high_five_home.asp

It has the highest rates for banks and CD's across the county. There are already CD rates near 8% and few more pushes by Greenspan will get us up to 10% before the year is out.

-- Jim Cooke (JJCooke@yahoo.com), May 24, 2000.

Jim,
Thanks for the info. Happy traveling!



Lars,

I'm sorry. I jumped the gun on your post, and I was wrong to do that. I fully agree that we shouldn't pity the guy for LOSING the money. I just don't think it is bad for someone(even that young) to HAVE lots of money. After all, that is the American dream, right?

An aside about this market, I really have my doubts that this market has created that many wealthy investors. In my opinion, those that understood historical valuation measures got out long ago before making any tremendous amount of money, and those that didn't understand historical valuation measures have ended up like the guy in the above article. If they weren't smart enough on the way up to be scared of stocks with triple digit P/E ratios(assuming an E at all), I really don't think they suddenly grew wise and got out at the top of the market.

-- J (Y2J@home.comm), May 24, 2000.

Dee: THANKS....for the 'sobering' post. I for one dont really understand market valuation, but you did help me alot when I asked you questions.

I saw awhile back a documentary on YOUNG people who were virtual millionaires overnite due to market. They are OUT there. I for one can say "i feel" for this guy. I surely wish I could have made that kind of money at his tender age. In all honesty, who here wouldnt? but one thing for sure (knows self somewhat), I'd of sadly done the same.

I have told my hubby @ beginning of this year that I believe interest rates would be double digit before end of 2000. I have stated before, I HAD my house for sale, have 7.5% now, when Greenspun started hiking, I pulled the house off market.

Hubby just began w/401k at work and is 'gambling' w/it IMHO, but it is his $$ also. I tell him often, put it in 'safe' mode, your messing w/our retirement, he wont listen.

I have small IRA growing where I work, part-time, so it isnt much, but is safe.

I think the market is 'gambling' although it wasnt always that way, or was it.

Thanks Deee, I for one appreciated this, I plan on showing it to hubby later on.

-- consumer (shh@aol.com), May 24, 2000.

Consumer,

The stock market has always been a form of gambling - it's just a little more like casino now than usual. Values are starting to come back in line with historical figures so that's a good sign that some of the "fever" may be slowing down.

Your husband is absolutely right about what to do with his 401k money. I think I remember reading that you're only 38. That gives you at least 20 years until retirement, I assume. Investing in the market over the long term has always been the best return for your money and certainly will better than something too conservative at your age. Just don't get too excited about the fluctuations you see on daily basis. Keep putting the money in stocks and you'll have a nice sum of money to live on when you retire.

-- Jim Cooke (JJCooke@yahoo.com), May 24, 2000.

Consumer -

Jim and I are very much in general agreement about the stock market. I have made a personal investment decision to change my allocation to a VERY conservative approach for the time being. I do not counsel anyone about their precise allocations, because there are as many approachs as there are investors. Over time, a diversified investment portfolio (equities, bonds, real estate, etc.) will yield very satisfactory returns, and as Jim points out, you've still got plenty of time to let the money grow. Let that 401(k) take advantage of the various ways in which a diverse set of investment vehicles will grow over time. That's the time-honored approach and it will serve you well.

My concern has rather been the "players", taking massive investment risks. Far too many of them have actually been daytrading their retirement accounts using margin. THAT's just plain crazy and that's why I've been posting these cautionary tales. Unfortunately, it's probably too late now for many to recover. That 40% decline in the Nasdaq since the March peak (5000 down to 3000) has effectively wiped out a lot of people who really believed that "it's different this time." They will have to start over now, sadder, but wiser.

-- DeeEmBee (macbeth1@pacbell.net), May 25, 2000.