STICK WITH THE DIPS

By James J. Cramer

For 10 straight years, every time the stock market has taken a hit, you've made big money if you jumped in with both feet. A "buy the dips" philosophy has outperformed any other strategy imaginable. When will this faultless method let us down? When should we be scared to take advantage of a swoon and instead take a powder and lock in the gains of the greatest bull market of all time? Oddly, we have the answer. It's just been obscured by the big event known as the Crash of '87.

Everybody knows the '87 crash was the most god-awful moment in modern stock-market history. But what few remember, other than those who shared the trenches of Wall Street with me back then, is that in the week preceding the crash, the market took as horrendous a drubbing as it had ever suffered. I think about that week often because, had I not lived through it, I would have stepped, and stepped lively, into the charnel house that Friday, since the drop before Black Monday was the quintessential dip.

Until that Friday in October, every 8% decline since 1982 had also been a fabulous buying opportunity. But what made that Friday a death trap, the worst of all possible times to buy? Let's review that moment, because the question of buying or selling the next big dip, rather than the question of whether there could be another crash (answer: sure as shootin') can make us a big pile of money the next time around.

Then, as now, the Dow Jones averages had been gyrating wildly. Then, as now, the market was overvalued on an earnings basis, meaning that people were paying way too much for future earnings versus what they had paid historically. Then, as now, foreigners were buying like mad, and we know they are always late to the party.

So far, we're still buying that dip the day before the 508-point collapse. But unlike 1997, in 1987 all the small stocks--the privates in the army--weren't marching with the generals. They had topped out months before, and the Mercks and Bristol-Myerses alone were still climbing. Put simply, the breadth of the market was miserable. Also, interest rates--instead of moving down, as they are now--were moving up almost weekly. Bonds and stocks had decoupled, meaning that bonds were getting increasingly cheaper to buy versus stocks. That never lasts.

In 1987 Alan Greenspan had just been named head of the Federal Reserve, and green he was. Over at Treasury, the politically savvy but market-naive James Baker spooked traders every time he moved his lips. Today we have the same Fed chairman, but he could not be a more adept helmsman. At Treasury, Robert Rubin, America's foremost fixed-income trader in his days at Goldman Sachs, can coldcock a decline in the dollar with a few choice words.

Mind you, I am not saying history can't repeat itself. However, the backdrop is strong enough right now that I would view an 8% decline as buyable. Any change in the course of interest rates, the personnel in charge of our economy or the broad participation of the majority of stocks would cause me to reconsider. Barring that, the next time I see a dip like that of Friday before the Crash of '87, I'll bet that waiting for a Black Monday to buy will be too late.

James J. Cramer is a hedge-fund manager on Wall Street. Read more of his market wisdom on the Web at TheStreet.com