City, that soda. This is sort of our valentines day. Im not here tomorrow to share it with you. I would love to take a swig of this. Look, look see that . Now i know where your true affections lie its the other woman its the other woman what is this . Butter cup. A woman in every port, mel. And you ate half this, by the way. Half is gone. Happy valentines out there. To everybody, a day in advance. A day early. Which is the way to do it. Dont go anywhere. Mad im jim cramer, welcome to my world. You need to get in the game. Stearns are going to go out of business and hes nuts, theyre nuts, they know nothing. I always like to say there is a bull market somewhere. Mad money, you cant afford to miss it. Hey, im cramer. Welcome to mad money, welcome to cramerica. Other people want to make friends, im trying to save you money. Im teaching and coaching you. Call me at 1800743cnbc. Of night i come out here and help you find highquality companies with stocks that are worth owning, stocks that will reward you by going higher or paying you juicy dividends or maybe even both. But perhaps because of my four decades in the business, i sometimes leave too much unsaid. I take too much knowledge for granted. Knowledge you need to know to be the best investor you can possibly be. Were taking timeout to impart some of the knowledge in a special show about the way stocks work and interrelate with the companies they stand for and represent, two different things. On mad money, we analyze companies, trying to see what makes them tick what expectations they are supposed to be, the metrics. We dont trade those companies. We invest in their stocks and never forget the company and stock are not the same thing. I know. That might sound really obvious, the kind of thing you go without saying, but people constantly make the mistake of equating a company with its stock. And its the kind of mistake that can absolutely wreck your portfolio. Especially in volatile markets where many stocks trade off the big picture, macro roh data about the broader global economy, the fiscal cliff. Budget compromise, something in europe. Thats whats known as the macro. Rather than whats known as the micro. Meaning information about the actual companies behind the stocks. Fact is, its all too easy to assume a company and its stock are synonymous. A stock gets crushed, okay . And when assume there must be something wrong with the Underlying Company. Why else would the stock be pounded . When a stock surges, we presume the company must be doing something right. But thats simply not ow the markets work. Often shares of a Company Stock will have big moves up or down for reasons that have absolutely nothing to do with the underlying business it happens all the time and it doesnt mean the market is crazy or irrational. What is irrational is believing it will always be a straight line, a lockstep, between the performance of a company and the performance of its stock. Why is that wrong . Shouldnt stocks trade based on the changes and prospects of the Underlying Company . Isnt that the way the market should work when it isnt broken . Dont we spend lots of time analyzing companies, a free and fair way, showing them to figure out what makes some businesses better than others and teaching you to identify situation where is companies are improving. At least better than people think, right . Better than expected bt. Im always telling you the most important determine every of a higher stock price is increases from earnings. Nothing correlate morn more with rising share price than estimate kriss. Dividend boosts of decent magnitude. Why not enough to steady companies and buy the stocks that look like they have the ability to grow earnings faster than expected or grow the dividend . We cant buy companies, unless youve got hundreds of millions of dollars to throw around, its simply not an option. Instead, we buy shares of stock in those companies. Shares that trade on an open market. We have lots of buyers and lots of seller whos might have very different motivations from you, when you find a highquality company with seemingly excellent prospects, you cant assume shares will gi g. Er higher since you need to take the way the stock trades into. Stock has its own method of training. Like a dna for stock. Dont get me wrong. Over the long haul, the best way to pick stocks by identifying winning companies, ones that are growing faster than others expect and improving dramatically in actual performance. Especially on daytoday basis. They can trade wildly with little relation to whats happening with the company. Those movements can be so con founding that you end up selling low, or buying high. Or you give up entirely, and you know i think you need to stay in the game if you are going to augment that paycheck. Save money for retirement, vacativ vacati vacation, tuition, necessities of life, all the things you want to have the money for. If you assume every move in the stock market makes sense, you will end up passing some incredible opportunities. All aboard to buy merchandise thats been marked down for irrational reasons, meaning no reason whatsoever, and you will miss moments when you sell stocks that are run up too much courtesy of market mechanics rather than anything relates to the Company Underneath the stock in recent years, weve witnessed the rise of a ton of factors, and at least near term, over the longterm, they do tend to converge. That may be longer than kuwait. But over days, even weeks, months, you have all sorts of things this can make the stock of an improving company fall or deteriorating companies rise, many use Exchange Traded funds to get exposure to entire sectors, some allow them to buy or sell, giving them double or triple of the buying or selling back for the original buck. Regardless of needless proliferation of ets and we can o trade in lockstep with each other. And the good in complete tab dem with the badding is and ultimately, the facts show out. The house is in the neighborhood. And nobody wants a good house in a lousy neighborhood. But the influence of epss back noxious, pernicious even it makes the sector more important than it should be, have you High Frequency traders who can actually really i have seen them hijack an entire market, causing massive across the board moves that make no sense in the fundamentals of the individual companies, especially moments of extreme volatility, new waives distort the stock picking beast. I hate it, and when times get tough for companies, they can get tougher for stocks, i spend a locality of time talking about foreselling, the idea that stocks can get slammed because Financial Institutions like hedge funds that own them are in trouble. Theyve borrowed too much money and need to raise cash in order to send some back to investors this happens of time hedge funds make the same bet. Money manager whos bet heavily in europe and lost when the eurozone indebted eurozone crisis, they didnt just have to sell european assets. They are had to sell unrelated stocks too. Especially if incest investors clamoring to get money back, and this is exactly what happened when we crashed in 2008 and 2009. Most stocks went down to absurdly low levels and it happened again with mf global. They ran out of capital and then the reverse happened in 20126. Those who bet in all stocks had their heads handed to them, when they put the foot down on their necks and stopped the back sliding Financial Institutions. It didnt party, look, if a bank was solvent, insolvent, they flew up together, most hedge funds have to make gbets for or against stocks when shots pile into a stock and get unexpected good news from a company, you get a short squeeze that propels the stocks to absurd heights. Since short sellers have to buy to close out positions. Remember, the market is the market which means its dominated by supply and demand. Not enough supply of a given stock or kind of stock to set that, you will see stocks rise beyond what it is expected to be based on fundamentals and too much supply relative to demand, they get hammered beyond what you think they might go to. We saw this with areas like chinese internet ipos. Returns were staggering, but gains became smaller and smaller as we got more and more chinese dotcomes flooding the market. Same thing as what happened with the end of our own dotcom boom before we saw so much Insider Selling, we saw shares upon shares, it could happen again, deluge, social media in 2011, 2012, a repeat of what happened in 2001, 2002. In the end, no chinese deal is worth participating in. Demand well oversaturated. This is one of the reasons chinese ipos reached lowest levels in 2012 in a decade. An 80 decline from 2011, 90 decline from 2010. And the last buyers out of the chute, they were crushed by ways of insiders bailing, seemingly at any price imaginable, just like what happened in the country in 2001, 2002. Super hot stocks became super cold. The public first fascinated and then turn turned on them with a vengeance as fundamentals were never really good to begin with bottom line, recognize whats happening with stocks doesnt always necessarily reflect whats going on with the underlying business and use that to your own advantage. A company in terrific shape sees stocks smashed for reasons unrelated to fundamentals that could be an amazing buying opportunity. Sometimes it can take a long time for the action in a stock to sync up with the performance of the company it represents, a tiny piece of. That way you wont be frustrated with what you thought should happen, if you heard fabulous news and instead, wait until the market gets smart and rewards your stock with the moves that it deserves. Larry in massachusetts. Larry. Caller greetings, rabbi cramer, from boston, formerly pennsylvania, formerly north bergen, new jersey. Whats up. Caller thank you for building the temple for Financial Wisdom and doing what mom felt was your highest and best calling and you are gracious to all of us. Im an enthusiastic subscriber to action alert. You talk about buying in wide scale, could you go into detail about buying down a good stock with bad news, particularly what percentage drop in the stock price, versus catching a falling mine . This is a tough question. Whether there is somewhat real money and somewhat in stay mad. What you got to do, look at the situation and say, look, i want to build a position thats 10 of my portfolio, what if i started buying 20 stock. Bought some at 20, some at 15, some at 12, would i be larger than 10 of my portfolio . If thats the case, buy down in a pyramid. Thats what i want. A pyramid buy. Joel in new york. Caller how are you, dr. Cramer . Real good, doctor, rabbi, whole thing covers. Whats going on . Caller joel from queensberg, new york. A big booyah to my wife gail, who handles all my trading. Gail rocks. Caller whats meant by restricted stock and how does it affective de dividends and preferred . It means you literally have to get it to be free to trade there are ways you have to do it, with restrictions that the government puts on it. You dont have to worry about restricted stock. Doesnt factor into the fundamentals of the company, which we really care about. Dont miss a second of mad money. Follow jimcramer on twitter. Have a question . Tweet cramer, madtweets. Send jim an email to at madmoan cnbc. Com or call 1800743c flnch bc. Tomorrow, guest host jack welch on the economy, markets, and more, plus pepsico and General Motors respond to earnings. First on squawk box, tomorrow 6 00 a. M. Eastern on cnbc. [ male announcer ] any technology not moving forward is moving backward. [ engine turns over, tires squeal ] and youll find advanced Safety Technology like an available headsup display on the 2013 lexus gs. Theres no going back. Transit fares as in the 37 billion transit fares we help collect each year. No . Oh, right. Youre thinking of the 1. 6 million daily Customer Care interactions xerox handles. Or the 900 Million Health insurance claims we process. So, its no surprise to you that companies depend on todays xerox for services that simplify how work gets done. Which is. Pretty much what weve always stood for. With xerox, youre ready for real business. More likes. More tweets. So, beginning today, my son brock and his whole team will be our new senior social media strategists. Any questions . Since we make radiator valves wouldnt it be better if we just let fedex help us to expand to new markets . Hmm gotta admit thats better than a few likes. I dont have the door code. Whos that . He won a contest online to be ceo for the day. How am i supposed to run a business here without an office . [ male announcer ] fast, reliable deliveries worldwide. Fedex. Welcome back to tonights special edition of mad money, when i try to move stocks up, what really moves them and how they diverge from the companies they purport to represent. I talked about the need for investors to get familiar with how stocks trade. You need to know about the traders that drive stocks in Different Directions and watch shortterm moves in stock prices, take advantage of them rather than pretending like so many pundits do, shortterm gyrations are beneath their notice and will pollute gains. May we never be so selfimportant or arrogant to think that entry and exit points dont matter. They control the ability to outperform the market and make a lot of money. We care more about prices at the supermarket sometimes than we do the prices of stocks we buy. Thats just plain wrong. So how do we square the idea that when you buy a stock, its price can become unglued from the underlying fundamentals of the company. With my insistence you do your homework . Whats the point. Keep track of the fundamentals, read quarterly Conference Calls and myriad research pieces, now readily available on the web to keep current. Why bother . If stock prices are going to bounce and at the mercy of macro factors that companies cant control, sound familiar . Or if they are held hostage by hedge fund that trade them, why the relentless focus of learning as much as you can about the Underlying Company. Am i nuts . Why . Especially given that homework is the onerous and most polk folks, the least interesting part of the process . The fundamentals matter a whole lot and they are knowable. The reason we focus on fundamentals, just about anybody can do it, and the information is readily available, public, and on the web and in short, when you may think the homework is tedious and boring, its easy to predict so much of whats out there that is simply unknowable, investors look for an edge, a leg up that provides them with an advantage. That will never change. Not all advantages of the same scale, but by following my standard homework regimen, have an edge over most of the people who trade the stocks you follow. How on earth is that possible . Yours involve looking at publicly available information. According to some economists and arm chair investors and a lot of gray beards critical of the show, it should be baked in to the stock. Meaning the share price should reflect everything you know from the research already, but you know something . Come on, you and i know thats not how the market really works. Lots of people are lazy, Money Managers and technicians, look at the fundamentals and dont get down and dirty to the nitty gritty of the Quarterly Earnings conference if you keep up with the information you will know more about the stock that many professionals do. And if thats not an edge, i dont know what is. Homework is about taking control of your own financial destiny. Eliminating as much emotion as possible. Thats what were trying to do. Get that out of equation. Thats why i focus on the homework. I know it will get results. Knotted just any results, the factual, objecttive kind, not the fiscal cliff that might be irrelevant to the stocks or Federal Reserve minutes. I mean, anything to your position. The homework wont always give you information, enough information to tell you which direction a stock will head, and wont protect you from the whims, yes, call them children in washington that play with the economy willynilly and affecting any number of rogue nations in europe. But it isnt an all or nothing proposition. Familiarizing yourself with a company should ever be dismissed as less than useful. And i said at the top of the show, stocks trend to drift back in line with where they deserve to delayetrade. In addition to knowing a lot of pertinent things, you can assume your stock will end up with a certain price range, really. If you wait long enough it will happen, happens a big percentage of the time and if you keep up with the homework, a good, clean way of deciding whether or not to cut your losses in a stock that isnt working, which is an incredibly valuable tool when you are trying to claw your way because your stock went down because of a typical market selloff. You need to know whether you should perhaps be a buyer, if nothing is going wrong with the company. You know whether opportunity is knocking or your head is about to be knocked to the canvas. On the other hand, it will give you the conviction to stay with a good stock hammered by the market forred wrong reasons, you will know why you are buying or selling something. Isnt that good . Wont be beholden to anyone but yourself. Thats why i teach every night. Now, the better are you at av d avoiding stocks with a risk reward thats good for bad or bad to good, the better position to take more calculated, intelligent risks, more aggressive with your investments, these skills are useful no matter what, but paramount from needing to protect your capital and needing to risk. Thats what the fundamental research and investing is even though these skills are handy, they arent compel asking minpe not give you the total picture and the boredom factor. Think about whaf auto done out here. Years trying to make it more accessible and interesting, even intriguing if not entertaining. No sin, given that so many focus on scaring you out of your shoes, and i have shown a willingness to get investors engaged, keep them engaged, especially on this show. Ive filmed while wearing a hazmat suit to compare hasbro to mattel. Taken a nope on a cozy bed of cheerios, driven on set on my law mower to look at john deere. I cant even put a dollar amount on the gizmos that i have wrecked. And i have even looked at onehit wonders and rappers like biggie smalls. I have ship chiped a tooth not to tell you to touch a stock of crispy creme. I ate pepperoni dog food and threw up on the set all over my wing tips. Im not kwerned that ma ee ee e miss the homework because we have ways of making you motivat