Host Of CNBC's "Mad Money"; In 1987 Managing Partner of hedge fund Cramer & Co.
I think a lot of people forget that the week before was a really horrible week. It was the worst week in the market in recent memory, and there was a tremendous amount of pressure going into that day. I had sold the last of my stocks on Friday at the advice of Karen Backfisch, who subsequently became my wife. She was working on another trading desk and was saying that everything is going wrong, and you just have to get out of everything. It was one of the most prescient calls I've ever seen. The weekend before was the weekend that my good friend Eliot Spitzer got married to Silda Wall. I remember Karen telling Jonathan Alter from Newsweek at the end of the party that we were going to crash on Monday. Karen had been in the business for four years and had an uncanny ability to size the markets. She had said just to get some puts. So when I came in on Monday all I had was some Johnson & Johnson puts, because she had so frightened me out of owning anything. It was one of the things that made my fund a fund that people wanted to give money to for the next five or six years. People would ask me how I was positioned on the crash, and I would always have my trading run there. I didn't know anyone else who was in cash for the crash, and I have to give her 100% of the credit.
My regret is that I didn't get bullish immediately, but again, another thing that people forget is that the stock market ceased to work for about a week. There were shortened hours every day because they couldn't keep up with the paperwork. The over-the-counter guys were not functioning or answering their phones. I was afraid to go buy stock, because you didn't really know where stocks were. You couldn't trust your Quotron. That Tuesday, the next day, was one of the great buying opportunities of a lifetime, because there was nothing the matter with the companies, it was the stock market malfunctioning. That began an amazing wave of stock buybacks and takeovers, particularly from overseas, because stocks were well below where they should have been. After being hideously overvalued, they became hideously undervalued within seven days' time.
What I took away from it was that you should have puts on and you should always have cash. The lesson to these quant people is that they have too much faith in prices, in the market's ability to value stocks. There was recognition after the crash that stocks and stock prices were fragile and were instruments that may or may not be correct valuations of what you own. You recognized when you were in the crash that there was no certainty to anything. People today have become very complacent that the system works. What we saw during that period is that the system could have a breakdown.
