how about... a handshake. alright. priority mail flat rate boxes. starting at just $5.15. only from the postal service. i'm jim cramer. welcome to my world. >> you need to get in the game. >> firms are going to go out of business, and he's nuts. they're nuts. they know nothing. >> i always like to say there's a bull market somewhere. >> "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you a little money. my job isn't just to entertain but to educate and to coach. call me at 1-800-743-cnbc. tonight's show is devoted to helping you cramericans avoid some of the most common and money-losing mistakes that investors continue to make. [ booing ] recognizing misinformation when you see it. the best way is with discipline.
[ applause ] tonight i'm laying out the rules to help make money in what can be a confusing and infuriating, certainly irritating, market. if you follow my rules you should be able to recognize an opportunity when you see it and to manage to avoid losing money when you don't have to, no matter the circumstances, including a collapsing euro or a slowing in china or even skyrocketing oil prices. [ train wreck ] let's get down to business. here's the first one. i don't want you digging in your heels when you're wrong. or in the words of the late great economist and investor john maynard keynes, when the facts change, i change my mind. what do you do, sir? one of the easiest mistakes to make and i know it -- why? because i have done it myself. i refuse to change my stripes after the facts are in and i have been proven wrong.
it's natural to dig in your heels when you think you're right but the market is against you. it's a quick and easy way to lose money. yet mad mailers and particularly twitter followers, @jimcramer, refuse to believe this principle. i have been blasted over and over again when dug in my heels. you're always angry when you get run over and want to take it out on the ones who got it right. the fact that i'm open about the process and that i read the angry e-mails and tweets and i engage with people in a cranky way helped me learn stories and learn how to invest better but it's an exercise in pain. ed [ house of pain ] and when the e-mails and tweets are the most hurtful that's when i know i'm the most right.
i got incredibly heavy volume of hate mail in march of 2009 that rallied higher. when the dow jones was down to 6500, pretty close to the bottom there. i said the downside was minimal. i said you had to start buying. i didn't say it was done. it was minimal. there couldn't be much more down side. i put together a model of where the market would go if the worst was at hand including not just a great recession but an honest to goodness depression. bottoms up. i talied the members of the dow jones average and presumed that every single financial in the averages would go to zero including bank of america, general electric. people consider it a financial even though it shrunk. citigroup and jpmorgan. i also took into account the elimination of dividends in caterpillar and 3m and added in alcoa for good measure. dire assumptions to say the least. even under these incredibly ghastly conditions i couldn't see a low that took us down from
where prices were. from the moment i made the call people were telling me i was crazy and i had no idea what i was talking about. [ booing ] a month later with the dow 1500 points higher these people were still there sending me e-mails that were more impassioned claiming it was still too soon to tell. telling me i was no longer at the hedge fund and i didn't know what i was doing. if you find yourself making that argument you're digging in your heels and you should be changing your mind. this is something that's hard for the most emotional investors and traders to come to terms with. believe me. i know. it's also crucial if you want to be a better investor than you are. people do this all the time with stocks. we would never allow ourselves to make the same thing with sports. would you claim that your favorite basketball team still
had a chance of coming back from behind to win an hour after the game ended? what about a week? how about a month? of course not. if anyone did that they would i'm just urging you to apply the same rigor to stocks that you would with sports. you need to acknowledge at some point that the game is over nd and you're wrong. it's part of the emotional side of investing that es just as important as the intellectual side even if few people in the financial media talk about it. it's very tough to come out. most people are embarrassed. swallowing your pride isn't easy. the more time you spend digging in your heels the less you have to take advantage of the new situation and profit from it. how can you know for sure it's time to say "game over" if you find yourself feeling the need to come up with more reasons why things will go your way then it's probably time for you to ponder why they haven't. remember, you have a huge edge on me.
i have a national tv show calling the market's direction five days a week. i try. it's easier to say, just you wait and see and not have to eat crow than it is to admit defeat. you don't have to worry about publically embarrassing yourself. focus on the profits and not your ego. i'm not a politician. they can't change their mind without ridicule. if i don't change my mind uh lose money. that's a far higher judgment. when the facts are in and you have been proven wrong, don't dig in your heels. similarly change your mind. ray in georgia. ray. >> caller: yes, sir. >> what's up? >> caller: i have a quick question. i think i heard you one time say that you didn't like to use stops. for us home gamers how do you protect yourself if you don't use stops or stops with limits? >> first, think about the flash crash.
you're stopped out at some horrible price. who knows what you got and the market comes back. you got hurt. more importantly, this is real money. you've got to stay close to your money. you're putting it in a machine's hand when you do that. i want you to say, hey, how is the market doing? i want to stay close to it. i don't want auto pilot. putting the stop-losses in is auto pilot. let's stick with the facts. figure out if it's a buy not a sell and bailing out when the fundamentals may not have changed. skip in new jersey. >> caller: boo-yah to you from new jersey. >> i'm around the block from you in the summer. what's going on? >> caller: hey. i'd like to know are national appropriate investment for ira accounts? >> here's one where i hardly ever do this. forgive me. you have to speak to your accountant for this. there is a penalty that can be paid if you have too much income from these in your i.r.a.
speak to your accounting professional. you don't want to run afoul of that. anup in california. >> caller: hi, jim. how you doing? >> good, man. how are you? >> caller: good. listen, you have mentioned in previous episodes that it's valuable to track a group of fundamentally good stocks and buy when prices are down, much like you scope out a fancy watch at macy's and buy it after christmas. >> right. as long as it's working. >> caller: i was wondering if charting the inflation price to earnings per share ratio for an equity would help to more appropriately time a purchase? secondly, would tracking the inflation adjusted price to cash flow ratio be a better metric due to earnings unreliable? >> i like that idea. that's really, truly rigorous. however in the end what's going to tell you whether to buy or not is if the market takes a stock down, not the company
fundamentals but they are intact. okay. don't be stubborn when it comes to your money in the market. when the facts change, don't dig in your heels. have some discipline. change your mind. "mad money" will be back. >> announcer: build your future. >> happy boo-yah to you. thank you for the money, jim, and what the money translates to, in this case a college education for my son. >> boo-yah. thanks for your passion for stocks. "mad money" does work for the small investor like me. >> "mad money" you're making me money for college. jim, boo-yah. i love you. >> how many shows have kids calling in saying boo-yah? >> announcer: one boo-yah at a time. "mad money" with jim cramer, weeknights 6:00 and 11:00 only on cnbc. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question?
welcome back to this disciplinary edition of "mad money." i'm not talking crime and punishment or the cat of nine tails. i mean investing disciplines. rules to help you side step losses and help you make money in a befuddling stock market like this one. the next one is based on 31 years of insights is among the most important. that is that price matters. price matters so much it means you can buy the stocks of companies you don't like. that's right. ones you don't even like, provided they go low enough. for the right price even inferior merchandise is worth buying as long as it is not deteriorating. sometimes you have to hold your nose and buy the stocks of companies you never expected to want to own in the first place
just because they are so cheap. i will never endorse a stock when the fundamentals of the company are deteriorating. i won't go near anything that could be headed toward bankruptcy because of a hard balance sheet. you need to always get a balance sheet. but there is a lot of space between a best of breed company and one that's uninvestable. this is important. in normal circumstances, the stocks of the lowliest companies that still pass the smell test sell for more than i would ever pay for them. usually because there are too many investors speculating wisely and buying barely adequate merchandise because it appears cheap when it is just selling for the appropriate discount. if the price drops far enough then it's okay to buy a stock when you merely have a low opinion of the underlying company. that's how much price matters. i get enormous volumes of hate mail and vicious tweets on this subject.
normally from people upset i recommended selling a company that i previously said i liked after an increase in the share price. how can you not like it now, cramer, it's hot? there are level where is worst of breed companies are worth buying, even companies i slammed at a high price. worst of breed is different from worst. a worst of breed business may not look like much compared to the best of breed competition but at least it can get into the dog show. how do you know when the price is right on something you wouldn't otherwise buy? there is obviously a sliding scale. the better the company the more you should be willing to pay for it. if you're speculating it's better to look for companies left for dead even though they have a pulse on closer inspection. there is no price to pay for a company that could go under though. never, never, never.
if you're convincing bankruptcy is not only the table, and if the street just has it all wrong then buying an unattack tive tif company at an a attractive company at an attractive price makes sense. the bottom of the barrel at the end of 2011 the regional banks began to break away from the international banks that were hostage to europe. i disliked wells fargo but i had to warm up. housing market was getting better. i held my nose and told you to buy. even though i said i don't like the bank group. it worked though i was blasted for flip-flopping on the bank group. i would go to twitter and there it was. people say, hey, i thought you hated banks. look, at certain prices, can't hate. when it comes to higher quality stocks it's hard to find a situation where something doesn't interest you but the price is right. if you keep your eyes peeled for companies raising money through equity offerings here's a by to make money.
doesn't take much effort in an environment where so many try to raise capital through secondaries. i'm finding it in european situations. you can find great deals on merchandise that you never would have looked at once let alone twice. these deals happen all the time. i try to get you attuned to them on the show so you can pounce when they come up. just in terms of price on the same day, one day, may 13 of 2009. i will never forget it. it was one of the great opportunities days i have seen. both ford and bb & t, a southern regional bank with bad loans on the books but i thought looked like a survivor if not a thriver sold stock at radically discounted prices. ford's secondary price at a 5% discount to the previous day's close. juicy. and a 24% discount to the previous week's. bbt sold at a 10% discount to the previous close and a 20% discount from the week before. that plus the fact that the
company is worth more after raising makeup than before made the secondary offering a steal. both deals immediately made you money. even if you had no prior interest in either ford or bb & t and thought they were both mediocre at best. at discounts that steep, both stocks, well, the stock price changed my mind. those were great buys. i want you to keep your eye on the price because even less than stellar companies can be big winners if you get a chance to buy them low enough. the ultimate example of the worst of breed buying opportunity came at the bottom of 2008 with amd, a stock that i have hated almost since the beginning of the show. actually, i hated it for 22 years. i hated it when jerry sanders ran it but when it hit $2 and after the graphic chip division took share from intel and
nvidia, the opportunity was too great. i called this one a hold your nose and buy situation. you could have doubled in months. yeah, sure uh you had to trade out because it got to expensive but the makeup was booked. they don't ask you how you made it when you deposit at the bank. price forces you to make new judgments about bad merchandise. just as some fixer-uppers have a price you wouldn't pay in, stocks can become rough diamonds. but dimons none the less. stay with cramer.
environment and teaching you how to analyze stocks so you know when they are telling the truth. and you know when you're being misled. how can stocks, inanimate pieces of paper, be honest or misleading? they can't. but the companies behind them can which brings us to the subject of my next rule. don't take your cue from an inferior company. when a worst worst of breed player says things are bad for the whole industry i don't want you to take it on faith anymore. there are strong and weak players in every sector and the weak players almost always seek to blame their failings on the industry. believe them at their own peril. when dell says things are bad and intel says things aren't bad don't sell computer hardware stocks based on that. there are competitors and suppliers. don't sell apple and ibm which have little to do with dell and intel other than they are all considered tech.
this is worst of breed behavior. you can't generalize. you will never hear a company say, we are doing better because our competitors have better execution and they are eating our lunch. no ceo will come out on the quarterly conference call with the shax appearance, the fault is not in our stars but in ourselves. the guy would be fired in an instant. shareholders don't respond well to that level of honesty. recognize an excuse. bad news for hewlett-packard can be only bad news for hewlett-packard. if they say it's raining the odds are good when you hear from apple or ibm, they may tell you it's only raining on packard's side of the street. kohl's versus macy's. sometimes there isn't pin action
which is why i keep my pin sounds on. you can't extrapolate from one company to the rest of the industry. that's frequently the case when they are one of the losers. [ booing ] it happens in every industry. it's not just tech stocks that ride behind others in the sector when the ball drops. when avon faltered even when herbalife and tupperware flourished they said it was the business model. they were hitting the ball out of the park and avon was stinking it up. procter & gamble said the world was rebelled from high priced products when colgate was running circles around it. we saw it in fast food. wendy's saying the consumer can't afford a hamburger today but it could tomorrow when mcdonald's said it was selling them by the billions. supermarkets, safeway and super value say the consumer was moribund. costco stole shoppers away. when a company with a bad track
record blames poor performance on a tough environment, it's probably just making excuses. not telling you something that applies to stronger competitors which are likely running circles around it. don't believe the hype. patrick in arizona. let's go to della in california first. >> caller: boo-yah, jim. >> boo-yah! >> caller: thank you for helping my husband and i with our investing. our question is would reinstating the up tick rule help stop the volatility of the market? >> okay. i think the answer to that is quite simply yes. but the institutions involved with trading are more powerful than little guys and the institutions want quick trading in part because fees are good for the companies that trade and also because these guys want to short with impunity. i think the markets are created to be able to raise capital and as places to invest for regular people.
they have been driven out by this and it makes it so the market can go up and down quickly because the little guy doesn't trade like that. only the hedge funds do. they need to see the up tick rule staying away from the market. they liked it abolished. i didn't. now patrick in arizona. >> hi, jim. >> what's up? >> caller: let's talk about diversification. >> sure. >> caller: i understand there are three factors. sector, industry and class. which ones are the most important, which are the least important that we should use in making a diversified portfolio? >> i use the s&p groupings. if the financials are 15 to 17% that takes care of the group that's banks, insurers, tech, 15%. that's hardware, software, industrials, companies that are cyclical in nature. that's another one.
the foods. i like to use the s&p groups. those are the ones that make it so i can say point blank empirically this is diversified from the group. ♪ >> sweet little lies. a good craftsman doesn't blame the tools. when a company blames a tough environment it's an excuse for you to not buy. stay away. stay with cramer. ♪
can to beef up the disciplines to make you a great investor. this is a market full of misdirection like on the football field. they fake this way, go that way. if you trust the people on television you'll get burned. this next rule, to paraphrase friend, buddy, pal, pub luck enemy is about not believing the hype. not all upside surprises are worth getting excited about. when a company reports earnings per shares higher than the analysts who research the company for a living had on average expected the headlines will say upside surprise. simple. right in the headline. stocks are supposed to go up when the companies they are attached to deliver higher earnings than expected. what the headlines call an upside surprise and what impresses the professionals in a quarter are often different things. this distinction gets confusing because sometimes when a company reports an upside surprise the
stock will go down. for a home gamer looking at the coverage of a quarter it seems arbitrary and capricious. what the heck can it higher. we see it now. the stock will go down. we talked about what it will earn in the future, not the past. no. i'm talking about the confusion that results from the headline writers not drawing a serious distinction between a high quality upside surprise, a real one. and almost slight of hand. we like companies to deliver the first kind. the low quality doesn't attract much interest. how do you tell the difference? simple. one's organic. the other is manufactured.
a high quality upside surprise, a real better than expected quarter is generated by higher than expected sales, organic which leads to better than expected earnings per shares. stronger sales could mean a few different things, but they're good. more people overall are buying the product or the company could be taking market share from competitors or it is growth coming from a new business. a real upside surprise tells you the environment has improved or the company has improved. since both indicate it should be able to sell at a faster clip in the future. that's a reason to buy as the big boys on wall street value stocks based on revenue growth. it's rare for stocks to go down. even in the depths of our great recession, these revenue upside surprise stories advance. apple produced upside after upside. almost entirely on much better than expected sales of the iphone, ipad.
as we preach on "mad money" a high quality earnings beat can be accompanied by a dividend increase. particularly one of a great magnitude. that's a terrific tell of the future. perhaps the best of all. because once the dividend increased, it's not easily cut without embarrassment. much better than the announcement of a buy back which can be. what about the sleight of hand kind? a low quality earnings beat is based on a better bottom line. then the sales number which is what e i'm looking for. management cut costs. they got the head count. maybe they bought back stock. a lot of people are still fooled by out as the increased earnings
per share indicate a smaller share cap and not that profits were better. food and drug companies generate what i call a sleight of hand style of upside surprise where they can't manage the real thing because they don't have real growth. the reason the big boys don't care about so-called upside surprises, even in the journalists think they matter. any large enough company with a halfway competent management and good ceo in a predictable line of business like food and drugs can ensure the earnings per share beat the streets expectations as long as the quarter isn't really bad. food and drugs use buy backs. or they manage at their discretion. that's how they beat estimates. doesn't take anything special or
indicate that things are in a way better. it tells you management is shrewd when it comes to making sure the earnings per share number doesn't disappoint anyone. if creating the upside is that routine i have to tell you, believe me, it's not a surprise to the big boys. bottom line. now you can tell what the big boys at the wall street fashion show want to see in the quarter. you won't make the confused assumption that the headline earnings per share number is all that matters. the company's ability to deliver better than expected sales which turns into a better bottom line accounts for a lot more. ron in north carolina. >> caller: good evening, jim. thank you for taking my call. >> boo-yah. >> caller: i have a question, sir. the multiple ipos some people are issuing, does that diminish the common stock price? >> the ipo sets the common stock price. you mean a secondary? >> caller: yeah.
>> secondary can depress. the stock will shoot up and the brokers soften it and announce it could be a secondary. the stock trades down and that's the buy of a lifetime. i often like to by secondaries after the market has been softened. think about omaha beach. they soften it up with gunpowder, the navy, aircraft and then send in the soldiers. that's a buy. let's go to vincent in colorado, please. >> caller: i'm a business and economics student at the university of denver in tivo land. if the one and the real go up and brazil's market stays strong because of the new middle class there should be a way to take advantage. the firms will be pleasantly surprised if they switch from exports to the internal market. is that true? what are the best picks? who's going to take advantage? who the firms flexible enough to take advantage.
>> how about cpfl energia? utility companies are typically growth companies when our country was growing. that makes sense. i would recommend a bank stock but those a dicier. the utility is the best way to go. joe in arizona. >> caller: a desert boo-yah to you. i'm philadelphia born and bred living in tucson. >> good for you. you got out. we don't have any teams that are winning. what's up? >> caller: thanks for recommending to the home gamers to switch into good high quality stocks paying big dividends. followed your advice and felt better in this crazy time. >> particularly when it was down in the september, october period. we didn't get hit with the strategy. >> they were great stocks. >> in calculating the p.e.g. ratio how do you calculate the growth rate. is it simply current year divided by prior year?
>> yeah. well, i like future year estimates. i looked into the step function. last year, this year, next year. it's between this year and next year that i care most about. i honestly do use the street estimates to calculate what the p.e.g. ratio is. with the exception of stocks like apple over the course of the last few years i'm satisfied using street estimates. an upside surprise leads you to a major down side. i'm urging you, don't believe the hype. check the sales before the earnings to be sure it's a real and not manufactured surprise. and not manufactured surprise. stay with cramer.
one of the most natural misleading mistakes people make is to assume people on tv criticizing the market, telling you to sell or avoid stocks have to be telling the truth. wrong. or who talk up individual stocks. when we hear someone touting a stock on television we accept the idea that they own it and
treat everything they say with a healthy dose of suspicion. at least we learned that much after the volatile last decade in the market. but we hardly ever reserve that level of september simple for people who bad mouth the market. more often than not investors assume that people who criticize the market either don't have an agenda or must not be pushing one. they've got to be the right guys, right? they've got the ethic. to most people expressing a negative view is a way of bolstering your credibility. to me, as someone who brought in about half the profits at my old hedge fund by shorting stocks, betting against stocks, this attitude is surreal. people who criticize the market on television, in print or on the web are not necessarily trying to help you. when people like a stock they are branded a tout. when someone hates the market how often do you think, wait,
this person might be shorting it's easy to recognize people need stocks to go higher. but the idea of shorting stocks is less familiar to home gamers so it is less likely to make the connection that some people need markets to go lower in order to outperform their averages. in fact, in my professional opinions there is more dishonesty from the short sellers in interaction with the media than the longs. you have to remember there are people out there who want to push prices down every bit as much as touts who want to drive them up. i'm saying the guys are touts. both of these sides can be misleading. sure. they can be doing rigorous work, the shorts. they can be pressing the truce when it is convenient meaning when a short is going against
them. while the money managers have to disclose positions in any stock they talk about they never have to say, i'm underinvested, lagging the benchmarks getting left in the dust by competitors so i have to give myself a decent entry point. if they don't own and aren't short anything there is nothing to disclose but they might have an interest in knocking stocks lower because of how they are positioned. you're just never going to hear about it. believe me. at any given time there are people in the industry who would benefit from a broad stock market decline and be more than happy to go on television and make the case that it will happen and encourage you to get out while you can. as stocks become stronger, the bull market gets stronger. meaning they were betting on stocks to go down with more short positions or under invested meaning they have less in stock and more in cash are underperforming. they are becoming more and more desperate. money managers who have been
left behind by the market and their competitors feel like cornered rats ready to be butchered by a feral feline. a lot of hedge funds can't afford one year of underperformance. i know this. i was in it for 14 years. it takes goodwill with your clients. you have to have a good record if you want to explain how you barely made money at a time when stocks were soaring and still have a business when you're through. you have to be careful. when stocks are the strongest many of the hedge fund managers will plant negative stories the press to take advantage of the media to spread as much negativity as possible to get stocks down so they can buy or because their shorts need to work for them. saw a lot of it in 2008-2009. uh wish it wasn't the case. it would be wonderful if we lived in a world where everyone was honest and no one tried to
manipulate the market. since that's not the world we live in, the best way i know how to protect you from this chicanery is by shining a light on it and making sure you know what to watch for. remember to always be on your guard. the people bad mouthing the market aren't one bit more altruistic or honest than the people who come on tv shows and tout stocks for their own benefit. "mad money" is back after the break. ♪
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goldman sachs. he said try to buy stocks that are back five to eight percent on a pullback because of the market going down, not the fundamentals. remember, the stocks on the new high list are hard to come by. but as long as they are going down not because of fundamentals but because of the market you might have a good buy. some stocks pull back because they have run up too much and those are interesting, too. remember, i really and truly want you to be sure the easy way is to be sure it's the market that brought it down, not the stock itself with a press release or analyst downgrade. here's one from txu99. are dividend stocks a crowded trade? this drives me crazy. jeremy siegel wrote stocks for the long run. one of the greatest investors ever. professor at wharton. he's done a 20, 40-year study about dividends and how they are important in the stock price increase. it's only people who trade and
trade ridiculously and high frequency. these are the people worried about this nonsense. okay? they are the ones who are trying to gain short-term trades. i don't want you doing that. buy the dividend and reinvest it. take a look at the performance of the dow in 2011. 5.5%. why? the yields were higher for the dow stocks. if you reinvested them you got an 8% return. how is that considered crowded? how about smart? mad mail. boo-yah, cramer, from jerry in rhode island. i have always had trouble selling a stock. it is hard to sell winners. i now sell call options on my stocks and if they go past the strike price it takes the decisions out of my hands. i know it limits my upside but i like the automatic nature of it. am i crazy? yes, you are. any strategy that cuts off the upside but doesn't limit the downside is what i call a stupid
strategy. people like covered calls, additional income. no. if something great happened with your stock you can't participate. meantime something bad happens that's terrific. you're short the call. you can't take action. you're afraid of a takeover. i know very smart people who sell covered calls. it is a sucker strategy, to me. i buy stocks because they are going higher. i don't want to cap my upside. here's one from schultz in arizona. jim, how much gold should uh hold as a percent of my portfolio? ever since i started the show, i felt that 10% and 20% should be the benchmark when gold flew up to 1800 in 2011 i felt, you know what, let it pull back. you can sell some. but keep the core position. why? i don't regard it as a stock. it's a currency. alternative currency to the fiat, printed currency in the united states and europe. i trust gold. i don't trust paper. that's why between 10% and 20%
makes sense. hello, mr. cramer. i watch your show and now i'm interested in investing. thank you, that's good news. i'm a new investor but i'm afraid i won't pick the right speculative stocks. first of all, one out of five stocks is speculative. were limiting the amount of speculation because speculation keeps us interested. it makes us pay attention but it's dangerous. i speculate in biotech. that's my chief one. i find companies with more than one drug so if they have a failure you are still in the game. those have been the most fruitful. check the big winners like regeneron which started in 2005 and had a monster run through since the show began. that's the speculative bio tech stock i look for. here's one from sharon in maryland. jim, thanks for a great show. following your strategies you
have moved most of my holdings into high yielding stocks and mlps. when is it time to sell the high yielders? if the stock prices weren't so high i would be inclined to reinvest the dividends in the winners. sharon, when the high yielders are no longer high yielding you want to sell them. you trim them back. when the market brings them down, buy them. that's the strategy from 2009, 2010 and 2011. it worked and those were some of the roughest years ever. thank you, e-mailers, tweeters. stick with cramer. they say money never sleeps, neither does gym cramer. follow him on twitter. ♪
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