The Volcano Lover

For weeks, I had been telling anybody and everybody to take something off the table, that this market didn’t feel right, too much margin, too much craziness, too many players, too many sellers. And we had practiced what I preached at Cramer Berkowitz, our $360 million hedge fund, steadily reducing our exposure to a market that seemed to be racing through NASDAQ millennium marks as if they were meaningless base camps on the way to a light lunch atop Everest. Ho hum, Base Camp 5,000. Hmmm, nice day. Air’s not even thin yet. Not a cloud in the sky.

So when Tuesday’s storm struck, we thought we were ready. We had our core positions – the ones that we vow never to get rid of – and quietly began adding to them on the way down. Just like the textbooks advise. We were sharp, ice water in our veins, as we made our first tranche of buys when the market was down about 100 points. But by 10:30, we could tell this was no garden-variety sell-off, where they take them down a hundred, hold ‘em, then walk them back up again as the mid-morning mutual-fund contributions in the day’s mail get put to work.

Our screens were bathed in red. Only some hapless gold contract and a couple of down-and-out silver-mining and gypsum companies flickered green. My right terminal, earmarked only for quotes of high fliers, was pumping red like a ripped jugular. I searched for a stock that wasn’t down double digits, but as most of these companies had somehow run up to the 100s, even the most mellow of declines were teenage, as we call them.

No matter. We were in automaton buy mode – my cerebral research partner, Jeff Berkowitz, and my head trader, Todd-o Harrison, all of us schooled in the panics of the past dozen years. We knew not to flinch. Let others panic. We had raised the cash. We had taken money off the table. Now it was time to put that money to work, unemotionally.

By 11 a.m., the market was dropping faster than Skylab. We got off the trading desk – meaning we went into Jeff’s office, which is twice the size of mine, because, like all traders, I never go to mine unless someone’s about to lose his job – and took stock. We had put a ton of money to work in the first hour and a half, and nothing was holding. We were routinely down three points on every stock we purchased by the time we got the report back. And as swashbuckling hedge-fund managers, we get our reports back instantaneously!

We approached the developing decline precisely and levelheadedly, quietly running down our 36 positions one at a time and trying to figure out if it was time to buy “another round of 5s,” meaning another 5,000 of each stock. Normally, we like to buy 5,000 shares down every point or two when we are accumulating a position. But on a day like Tuesday, we “widen the scales,” and leave more space between buys. No sooner had I said “Buy 5,000 Nokia at $200 and stick a $195 bid in beneath” than Todd would shout that we had bought 10,000 shares at $192. Nokia had plummeted to levels lower than I was willing to pay. In a matter of seconds.

No sooner had we finished our droning cadence from “America Online, $64, buy 5,000,” to “Yahoo!, $161, buy 5,000,” than we had to start back at the top of the alphabet and work our way down again because AOL was now at $62 and Yahoo! would soon be at $151. We were clocking this sell-off at 25 NASDAQ points a minute on the velocity meter, the fastest I’ve ever seen. In the background, on CNBC, I heard the word crash. We don’t break out that term lightly. I had traded through 1987, and I know that a lot of moves down look like a crash, but this thing was only down 4 or 5 percent so far. That’s no crash.

After a couple of bad salads on the trading desk (I haven’t taken a lunch in eighteen years – no money’s made at lunch), we retreated to Jeff’s office to go over it again. An 11:30 a.m. rally had just failed. We had come into the day with an existing call option position that allowed us to “play the upside” for the Nazzdog, trader argot for the NASDAQ, and we had quietly begun to lose millions of dollars in the position. Our scale purchases had not anticipated a 5 percent decline on top of a 5 percent decline, but the ice-water-in-the-veins mentality kept us buying.

Now the Nazzdogs were down 7 percent for the day, and our purchases continued by rote. Off the desk, we talked about how we had seen it all and we weren’t going to puke this one out at the bottom, and that the market would soon have to turn, because, well, it just had to, always did. We tried to reassure ourselves. We had been the ones calling to take money off the table. We had done so. We weren’t going to be scared out of what could be the greatest trade of our lives when this market turned. “We were put on earth for this moment!” I said with determination. But at noon, with the Nazzdogs in free fall, we got off the desk again. Nobody looked like a Master of the Universe at that meeting. I knew that Todd-o had been furiously Instant Messaging Jeff at his trading turret, and I could tell we were thinking big now. “Ten percent decline, wasn’t that time to double down?” our trader asked. I made a few faces, and we agreed: Time to take a big chunk of that cash we had so jealously hoarded and put it to work. Because, as my wife and former seven-year trading partner, Karen Cramer, always said, “You’ve gotta buy them when you can, not when you have to.”

And so we did. Coolly, calmly, professionally. Like the late Tom Landry at his legendary unemotional best, sending in some precision 55-yard touchdown-pass play with a quick dipping of his hat.

Forty minutes later, we were back in the war room. The market hadn’t held. Our lunches hadn’t held. Our bet had fizzled faster than anyone could imagine. Nobody spoke. CNBC droned on in the background. No more crash denial. We used the word freely.

I finally blurted: “I have a problem with this Nazzdog position. It’s choking me, it is right here, going here” – I drew a line from my gut to my throat – “it’s just killing me. We gotta do something. We can’t take these losses. It’s too big. It’s the giant steaming elephant turd in the room, man.” Todd looked at the floor. Jeff knew what was coming. All our rationality hadn’t made us a dime. All our cool capital commitment and tungstenlike grit hadn’t called the bottom. We had not respected the bear enough. We had not given him his due.

It was time – as it was in every serious sell-off I have crawled through – to make a sacrifice to the Trading Gods. It was time to take a loss. To admit, in some small way, that we were wrong about this market. No matter our strict scales and our levels and our precision. This sucker wasn’t stopping. Not here, not now, not down 12 percent. Not unless we blinked. Not unless we took action. Not unless we threw a maiden into the volcano.

Todd-o knew I was right, but he didn’t want to admit it. Jeff, Wharton and Columbia Business School scholar that he is, just looked away. No matter how many times this happens, Jeff refuses to bow to superstition, but he never fights us. He knows how bottoms get formed.

“Take some Nazzdogs and sacrifice them,” I said.

“But Jim, this is it, down 12 percent, down 24 in a matter of days, this is what it looks like at the bottom,” Todd said. “You know that.” As he spoke I glanced at the TV: NASDAQ and the Dow were down 500 points each, the worst moment of the day so far. Of course I knew it. “But how are we going to get this goddamned market going the other way,” I asked him, “unless we capitulate?!”

We went back to the desk, and at 1:15 p.m., tails between our legs, we made the sacrifice, selling 1,000 contracts, a sizable chunk of our buydown bet, which we had begun at $19 the day before. Take a look at where we sold those nasty Nazzdogs. Take a look at the time: 1:23. Take a look at the price we got: $6. Oh my, six bucks, six little nothing bucks (multiplied by 100,000, of course). They reflected the maximum moment of decline in the NASDAQ, the maximum low for Intel and Sun and Microsoft and Cisco during this whole downturn. The bottom. The turn.

The moment we got the report, they lifted. Take a look at the price two minutes later: $7. Ten minutes later: $8. An hour later: almost double, as NASDAQ rose inexorably from down 3,600, where we had sold the calls on the index, to 4,100, the largest one-day move up off the bottom ever. That’s an amazing comeback, triggered by our sacrifice to the Trading Gods.

Yes, the market bottomed when we made that sale. I can’t come up with any other explanation. There certainly wasn’t one on my screens or on TV or in the papers the next day. Nothing done by Greenspan or Summers or Clinton or Rubin or Buffett or Abby Joseph Cohen.

Markets bottom only when the gods of humility are appeased with offerings of arrogant strategies by steely-eyed traders designed to withstand the stress and strain of the worst markets. They bottom when guys like me can’t take it anymore.

And that’s why we rallied Tuesday. Fortunately, this time, we only had to throw the maiden in. One day, maybe it will have to be the whole tribe.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had positions in Nokia, America Online, Cisco, Intel, Sun Microsystems, Microsoft, and Yahoo! His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer’s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at E-mail:

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The Volcano Lover