About what everybody else is worrying about the flipside of this is also true there is no point in getting excited about something that everybody else is eagerly anticipating why . Because when the vast majority of investors agree that somethings going to happen, that thing tends to already be priced into the stock market while the real economy moves at its own sedate pace you have to build out goods to transport them to retail outlets and wait for the customer to come along and buy them the stock market has no such limitations. Stocks dont quite travel at the speed of light well, how about the speed of thought . They come pretty close the moment of preponderance of hedge fund and Mutual Fund Managers decide that the economy is slowing or speeding up or flat lining, stocks start trading like thats the case instantaneously. It usually takes some time to build that kind of consensus which is why you rarely see these most happening all at once but once the big institutional Portfolio Managers are on the same page about something you can be confident its baked into the averages that week. It will happen that week now this is some basic economic 101 stuff. I dont have a ton of use for economists as a profession they tend to take a pretty ivory tower approach to the discipline, meaning they have all sorts of models for how the world is supposed to work. Also, they can be very boring. Sorry. But they rarely let the empirical facts get in the way of a good story. If the data conflicts with the model, economists have a bad habit of throwing away the data, not the model. However, as long as you keep that habit in mind, economics can have some very useful concepts for investors one of these concepts is known as the efficient markets hypothesis this theory says at any given moment stock prices already reflect all of the relevant information in the universe thats out there at that moment. When some new piece of data comes out, stocks immediately adjust to reflect the new reality. Youllup a off here purists explaining this theory why its impossible for stock pickers to get any kind of edge, because whatever you know about a company should already be baked into its share price cant get an edge. As far as they are concerned markets are so efficient that investing in stocks is basically the same as gambling if everything you know is already baked in, your studying is meaningless it has to be something totally unknown, because if anyone did know, they would have already acted on already ergo, it would be built into the share price. That means under this theory, the only things that can move stocks are unknown unknowns, to use the parlance of former defense secretary Donald Rumsfeld if youre merely betting on unknown unknowns, you might as well play roulette its more fun. Thats why index fund advocates adore the efficient market hypothesis this theory tells them its impossible for individual investors to consistently beat the average. If you want equity, the only smart way to it doh it is putting it in a nice slow index fund that mirrors the s p 500. As anyone who watches the show knows, i have no beef with that, beyond beef, beef, whatever. In fact, i think theyre the best way for the vast majority of people to invest in the market ive said that since day one of the show even if you have the time and inclination to pick individual stocks and manage your own portfolio, you should still direct a big chunk into a cheap s p 500 index fund its the safest way to give yourself equity exposure and perfect for your retirement accounts its had to be a good individual stock investor it takes real work but its incredibly easy to be an index fund investor, right . 401 k , index fund territory, you can gradually contribute over time with every paycheck. And as long as you believe the u. S. Economy keeps growing over the long haul, you can leave that money in the index fund and check in might be once or twice a month, and i know people with use the ira for stocks im saying index fund, index fund, index fund for retirement. Back on track, they said you cant possibly beat the market because the efficient market hypothesis tells us stocks are perfectly valid. Heres what i feel about that one. [ buzzer ] its bogus the people who presume it they know nothing putting aside i did consistently beat the averages every year at my old hedge fund, giving my clients a 24 compound annual return after all fees the simpl truth is markets are not perfectly efficient. Theyre often irrational they ignore things and make mistakes, misvalue information every single day thats why you can make money picking stocks these anomalies are good for your portfolio this free market economicsis a lo of communism. It makes a lot of sense in theory but it doesnt necessarily work in life so why the heck did i bring up the efficient markets hypothesis in the first place if its such a boneheaded idea . Even if its not speaking true empirically, we know for a fact the markets are all kinds of inefficient, all and its still a very useful idea as an ironclad law of the universe, it can help us as a rough guideline, it can lead news the right direction. Markets do try to be efficient they aspire to efficiency. When a Company Reports a fantastic quarter, its stock will immediately spike because thats the kind of data that can get baked in very quickly. When the Federal Reserve changes policy, tells you it wont be raising Interest Rates as previously planned, thats huge news and it takes longer to bake as we found out the end of 2018. That took weeks and weeks to work its way through the averages stocks that benefit from lower rate, and there are a lot of them will instantly soar but it can take days or weeks or even months for the averages to fully reflect the new normal, because it takes time for Portfolio Managers to reposition they cant just go in and out. They have too much money under management were talking about huge slugs of stock here. No mutual fund is going to buy or sell them all at once soon we do reach a new equilibrium. Let me give you the mad money version of the efficient markets hypothesis call it kind of sort of efficient markets corollary. When there is a widely held view, anything, be it positive or negative you have to assume that few is discounted by the market when everyone is feeling euphoric about the strong job market, thats possibly baked in to stock prices already. When everybody is worried about a fed mandated slowdown, its baked in dont expect stocks to get slammed on disappointing numbers. People already anticipated dispoint of view when all the talking heads and journalists and are telling you to be afraid of the same thing you dont need to be afraid. Let everybody else worry for you from the s perspective, the fact that most investors believe something is going the happen means in a way its happened already. Yet its so easy to fall prey to the group think when youre managing your own money. Emotions are infectious like a Communicable Disease when you see all sorts of experts coming on television and saying the same thing while the newspapers print similar stories and your friends echo this stuff back to you, its only natural to assume it is true and you know what . Very often it is true. But that doesnt mean its going to move stock prices by the time we get any kind of real consensus on an issue, that move is probably over. You missed it. The bottom line, you want to be a better investors dont tear your hair out fretting about the same thing as everybody else [ buzzer ] instead, you should worry about the things other people dont seem to care about because the real threat is the one you dont see coming dave in virginia, dave caller hi, jim how you doing . Im doing well, dave. How about you . Caller good. Im from virginia, i was born in plymouth meeting, and i was actually raised in summit. Oh, my. We are doppelgangers yes i love that caller we want to leave half our assets with a certain minimum amount to our two children and retire on the other half theyre both in their mid20s, and we will adjust our lifestyle if we have to in order to leave that minimum now most Money Managers would say at our age in a normalized Interest Rate environment, we should be about 60 in stocks and the kids should be around 85 . So without setting up new trusts, shouldnt we invest the minimum amount as if it were their money now and if so allocate stocks half at 60 and the half at 85 . I think the 85 all in for younger people is definitely right. For you im assuming youre my age, i think 60 to 65, we would certainly feel that were going to go longer than the actuarial table. So i prefer always to put a little bit more stock in there if you want to go 90 for 20yearolds, i would bless that too. Weve got to have the long dated assets in there to make a lot of money over time. And thank you for the kind comments lets go to frank in new york. Frank . Caller yes, jim. Thank you very much. This is first timelong time. Okay. Whats the difference between general stocks and overthecounter stocks . They used to be very different. One was done by different in my day, when i was at goldman, overthecounter was a little different. These days its really blended i wouldnt worry about it. Just stay focused on the fundamentals listen up. Dont sweat what theyre all sweating Pay Attention to what others are ignoring on mad money tonight, to trade or not to trade . That is the question ill tell you how to come out on top by pointing the different ways to approach investors and feel like the market sometimes speaks a different language . Ill tell you how to decipher hidden messages in the tape. And the next time you see a hot ceo . Should you consider buying the company for an eye not so fast. Ill tell you why. Stay with cramer dont miss a second of mad money. Follow jimcramer on twitter have a question . Tweet cramer, madtweets send jim an email to madmoney cnbc. Com. Or give us a call at 1800743cnbc miss something head to madmoney. Cnbc. Com. Apple card. Is a new kind of credit card, created by apple, so its simple and transparent with a new level of privacy and security. It lives here and here. 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Plus, unwrap 250 off a new samsung phone. Click, call or visit a store today. Look, i told you before the break, when you pack into a crowded trade, youre playing with fire. If everybody is on the same page about a stock, or even a whole sector, that means that easy money has already been made, people [ buzzer ] it doesnt mean that you can profit from something, obvious that does happen but when youre late to the party, youre going have lower returns and higher risks that is the nature of the beast. Fortunately, nobody is putting a gun to your head and forcing you to follow the hedge fund herd. In fact, you dont even have to think about spotting tops and bottoms by gauging sentiment if you dont want to there are a lot of ways to invest some take less work than others. For example, there is timing you could try to call every gyration in every average, buying stocks when they go poised for a nearterm bottom. You can trade around core positions. You can take a large holding and lighten up on part of it when it gets overextended and buy it back when the stock sells off. You can keep your battle in your shoulder, waiting for the Perfect Moment, where the whole market sales off dramatically, giving you a chance to buy your favorite stocks for much less than theyre worth back in my old hedge fund, i love doing this stuff. If you have the time, the right information and resources, its a terrific way the try to make money. But the you have a fulltime job, this whole approach is lunacy and i say that as someone who knows a lot about crazy. Regular people who work for a living dont have time to stare at the tape all day. Even if you work the night shift, its not a good use of your precious free time. Thats why i come in here every night to do the show i focus on the market like a hawk so you can take a less intense approach to investing, one that lets you go to work and have a personal one. So how should you approach the market if youre not prepared to devote your entire waking life to watching stocks whats the safest way to handle individual stocks parttime . For starters, let me just say again that index funds are a wonderful thing. Wouldnt bit wonderful if everyone said jim didnt like Investment Funds did you listen to it what i describe is too daunting, dont hesitateto say individua stocks are not for me and put most of your mad money, the cash you invest thats not part of your retirement portfolio into a nice Retirement Fund that mirror the s p 500. I tell you this a lot because its good advice being a savvy index fund investor, it is easy, or relatively so sure, if you manage your portfolio well and do your homework and stay disciplined, i think you can beat, ive seen it hundreds of time not everybody has the time or is comfortable taking on more risk to chase a higher return thats perfectly fine. You need to do what is right for you. Keep that index option in your back pocket. Assuming you do want to try to profit from individual stocks, lets talk about how you can do that without the market taking control of your life and just constantly living in a bowl of worry and confusion. From the getgo, you need to accept that the best is enemy of the good there is no point in trying to buy or sell stocks at the Perfect Moment nobody is that talented. Even making the attempt will make you nuts. You need to accept results that are good enough rather than trying to chase perfection for example, if a steck you like hammered down from 50 to 60 and you pull the trigger, but then it goes down another couple of points before it bottoms and rebounds to 60, dont kick yourself for making a mistake. You made a great bet you should have made a couple of extra points if your timing had been flawless, but a win is a win, people. Second, regular viewers know that i dont believe in buying whole. I believe in buy and hold is reckless buy and homework is prudent. Meaning you need to keep researching your companies after you buy. I think its good idea to buy stocks slowly on the way down and sell them gradually on the way up all that requires a certain amount of active management. But dont feel compelled to be too active the last thing you need to be is flitting in and out of stocks with every gyration. I dont want that you think you can time things perfectly in and out, but most gains occur in concentrated bursts, and youre liable to miss them if youre on the sidelines. If youve got the time and the inclination to trade, thats great. However, most people dont when you a fulltime job and youre trying to manage your own perfect, you have to be willing to sit tight there will be selloffs. There will be rotations out of one group into another there will be crazy action on a week to week and even a daytoday basis you dont have to constantly adjust your holdings based on the moves. That would be wrong. If you believe in the stocks you own, and you shouldnt own anything you dont believe in. Just sell them then you should be willing to stick with them when the backdrop gets tough. You cant just bail. Ideally, you would be able to trade in and out but like i told you, the best is the enemy of the good. Dont chase perfection when everybody is panicking over the latest crisis, you might be tempted to sell everything by bailing on the stock market, but sooner or later you have to get back in the whole point of sidestepping the decline is how to sell high and buy low unfortunately, its really hard to nail the timing if you dump everything, there is no guarantee youll be able to buy your stocks back before something changes and the market comes roaring back, something we saw in the spring of 2019, after fed chief jay powell told us some rate cuts might be on the horizon. Wow. Okay that would breathe new life into the economy. So whats the solution if you dont want to give yourself apanic attack every day, keep doing the homework so you know what you own. When your stocks surge higher, use the opportunity to ring the register on part of your position to raise cash after a 20 move or more, you need to take something off the table. A little something, okay when your stock hits, put the cash to work but you dont have to nail every shortterm top and bottom. Thats too darn hard to trade or not to trade, that is the question. If youre trying to be an investor who doesnt need to stare at the tape all day long, its nobler in the mind to suffer the slings and arrows of outrageous fortune you dont need to be perfect at managing your money. You just need to be good enough. You shouldnt waste your time trying to anticipate every little gyration in the market. Its too darn difficult and will rarely prove to be worth it. Lets speak to ryan in new jersey ryan caller hey, booyah, jim how you doing . I am doing well, thank you. How about you . Caller im doing good. Im doing good im looking to invest my first 20,000. I know thats putting the first pen into a s p 500 index fund is smart, but what to do with the other ten . I dont have time to do my homework im wondering if its a good move to go with index funds and etf. Yes if you do not have time, you must and i dont want the small sector etfs. I prefer a total return fund that has all sorts of stocks or a fund that has a high growth. I dont want sector by sector because those tend to not make people money because people buy them high and sell them low. Lets go the riley in georgia. Caller yes, thank you for taking my call you are the man. Thank you caller yes, sir, what kind of percentage would you recommend of building your portfolio . I think 10 is fine i know that its been terrible but you dont want insurance to pay off, do you . Its insurance, and nothing else dont try and anticipate every gyration in the market just do the homework on what you own. There is much more mad