A nightmare from my hedge fund days informs my current view

My shoulders slumped. I didn't know if I wanted to cry, throw a water bottle at someone, or both. The market had closed maybe an hour and a half ago, and out of the corner of my eye, I saw the unthinkable on the screen: "Western Digital sees preliminary fourth quarter earnings well below estimates." Disaster. I felt faint at my standing desk; I started to fall apart, soon falling to the ground. But I woke up a second before impact, at 2:47 a.m., to find that hellish Cramer & Co. at the same time I always come to my hedge fund. Do you know that this nightmare happened last Sunday night? I was remembering an incident that happened 37 years ago when we owned 4.9% of Western Digital, and it blew up in my face and ruined my year. I started Thursday's July Monthly Meeting of the CNBC Investment Club with Sunday's nightmare because you need to know that such a scenario is playing out all over the Street again, just like it did almost four decades ago. Component stocks Western Digital, Seagate, Sandisk, and Micron, as well as newcomer SK Hynix, have posted massive gains. Western Digital is up more than 180% this year alone, and owners are all afraid of this nightmare. They're afraid of it because that's what happens all the time. There's always a boom and then a crash in these stocks, and that crash wipes out everything you've done and then some. Or at least it used to be. These semiconductor parts manufacturers were always going to sink or swim. We have never experienced a cycle that lasted this long. Companies like Applied Materials or Lam Research and their suppliers and their more agile cousins like Dell, Hewlett Packard Enterprise or their more agile cousins like Corning, Qnity and Intel, as well as others like Arm Holdings and Advanced Micro Devices, had always risen sharply but then fallen much harder than expected. This was inevitable, just as Western Digital had pre-announced years ago, because the cycle had turned before I saw it coming. However, this time we discover that we must forget forty years of knowledge. We need to erase the muscle memory. As illogical and reckless as these words may be for investing, “This time is really different.” Contrary to everything we know, stocks that are on the rise are no longer going bankrupt. They continue to explode. And for those who want to skip because they are experiencing my same Sunday nightmare? They miss huge moves. Chips are rationed; Companies like data center dominant Micron and Applied Materials, which makes equipment for Micron, are getting long-term contracts for their products for the first time. Experienced fund managers do not believe this would be possible, even if it were to happen now. These seniors prefer to be short rather than long, and short selling (which are bets that stocks will fall even further) is part of the fuel that makes owning at least some of them imperative. That's right, is everyone expecting something from China for an unknown company? Japan? Malaysia? - Flooding the market with memory chips, causing the entire chain to collapse. You see this when you look at the price-to-earnings multiples for Micron rival SK Hynix, which is selling at six times next year's earnings estimates. This is because there are people who believe these forecasts will never be met - or, as in my Western Digital dream, that the actual numbers may only be a quarter of the forecasts, making the actual P/Es significantly higher and not very attractive. It's this tension that causes many of these stocks to go parabolic. In some cases, it's that struggle that makes the breakdowns we just experienced worth buying. Why are stocks really falling? I think these are all emotions. Not the basics. It's all about what happens when amateurs hijack stocks and send them into an unsustainable parabola. I don't care how high you think a stock will go. Fundamentals mean nothing if or when it goes parabolic; You need to sell at least half because parabolas halve before hitting bottom. We are in the bottom phase as the weak hands have almost disappeared. Professionals with long memories have now joined retailers, as I did before at Western Digital, and that's why it's so hard to hit the bottom. However, we have never seen this phenomenon of consistent earnings before when it comes to these companies (component plays, not stocks). We may not see it again. But it's happening, and that's why we're trying to build a larger position in Intel amid this frenzy: We think central processing units (CPUs) will be the next thing to go out of supply after memory chips. This potential scarcity is why Intel is my favorite stock. (Jim Cramer's Charitable Trust is long INTC. 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