Right place, right time? Cramer walks you through how to look at the macro-economic picture

When you're picking stocks, you need to be very careful about doing the right thing for the wrong reasons. This happens more often than you expect. Let's say you find a great company, well managed, strong fundamentals, good dividend. You buy that company stock and it goes up. It's only National concluded the stocks rallying for all the reasons that you liked it in the 1st place. That's not always true. You might think a win is a win, but sometimes it's more complicated than that. If you don't understand why stocks moving up or down, you're probably going to be very confused when it stops doing that and goes in the opposite direction. And when we're confused, well, guess what happens? We make really lousy decisions. For example, there are a bunch of excellent, well run Consumer Packaged Goods. They call them CPG companies. Maybe you want to buy Procter and Gamble. Long time favorite. There are lots of logical reasons to like them, but like I told you earlier, logic is rarely what drives the stock market on a day-to-day basis. So let but let's follow through here. Suppose you pick up some Procter and gamble because you really believe in management or you like the different or you think that plastic and fuel costs are going down, which will boost the company's gross margins. That's a huge part of the expense. So you buy the stock and then explodes higher. What's next? Well, you have to ask yourself, why is it Rally? It's very easy to tell yourself. I nailed it. This market's finally getting Proctor the credit it deserves. When you buy a stock and it goes up, that means you were right. Why would you second guess yourself when you're right? Well, the answer is simple, because maybe you were just lucky. As I've told you before, it's better be lucky than good. But either way, you need to be able to tell the difference. So when you pack, yeah, let's say you rack up a nice win in Proctor. You should ask yourself if you were right or if you simply happen to be in the right place at the right time. What do I mean by right place for time Rotation, rotation, rotation. There are times when the Consumer Packaged Goods stocks roar higher for reasons that have nothing to do with the underlying companies. Proctor, like all the Consumer Packaged Goods place, is a recession stock because its earnings tend to hold up during a slowing economy. Its stock roars when we get lousy economic data. If you buy these stocks because you believe in the business, but then they go higher as part of a sector rotation that has nothing to do with the business, you still got to win. The bank isn't going to tell you that they can't take that money because they don't accept profits from rotations. But you don't want to get caught with your pants down because the market suckers you into believing that Procter and Gamble is going out based on the fundamentals. But really it was benefiting from rotation into the whole Consumer Packaged Goods stock sector. You know, the Colgate change. This is what I meant earlier about filtering out the signal from the noise. And it is hard to do Why? Because of something called confirmation bias. When you have a thesis and new evidence seems to prove your thesis correct, the natural thing is to believe you were right all along. You should have poked affiliate with skepticism. Maybe you're right. People are right about stocks every day. But maybe it's just a coincidence, darn it, and you should bring the register before that coincidence goes away. So, OK, let me give a concrete example. The residential solar stocks soared in 2020 and 2021 and kept running into 2022, even when most growth place would get pulverized if you owned it. Maybe you thought you were winning because people were embracing renewable energy and the government was subsidizing it heavily. But in 2023, the residential solar stocks they got obliterated. Why? Do you know what had nothing to do with the popularity of renewable energy? And it couldn't be stopped by generous federal subsidies. Instead, it turned out that people can't really afford residential solar systems without borrowing money, meaning the whole industry was actually built not on solar, but on financing. And once people realize long term interest rates would remain elevated for quite some time, the residential solar stocks, they all got crushed. It's not a coincidence something like N phase was roaring 2020 and 2021 when people could borrow money for next to nothing. So let me give you the bottom line on this. It's very helpful to understand why a stock you like is going up or down. When you have a win, don't lazily assume that you simply got it right. Think about what it means if you were merely in the right place at the right time. And please proceed with caution. Stick crap. Don't miss a second of Mad Money. Follow at Jim Cramer on X Have a question? Tweet Kramer hashtag MAD mentions. Send Jim an e-mail to [email protected] or give us a call at one 807 four three CNBC. Miss something? Head to madmoney.cnbc.com.