Let's get one thing straight: There's a difference between an honest mistake founded on solid reasoning that simply didn't work out, and a mistake whose rationale is so imaginative, Peter Pan would giggle at it. I'd like to share with you two examples of the latter. 

Now, don't get me wrong -- I like Jim Cramer. He's loud. He's witty. He makes people laugh. He's pretty rich, from what I understand. And how can you go wrong by starting your day with an excessively-loud "booyah"? Still, on two very important occasions, our beloved Cramer gave two deeply ill-fated predictions that offer Fools a pair of priceless lessons.

A tale of two tops
The last two market tops -- one in the spring of 2000, the other last October, when the Dow pushed through all-time highs -- had little in common. In 2000, stocks were insanely overvalued, to the point where many knew it was a bubble. The question was when, not if, it would pop. Last fall, the brewing problems were more subtle. Save for a few ingenious hedge fund mangers, most people didn't have a clue that inflation, credit markets, and housing would send markets into such disarray.

Rationality? Sell, sell, sell!
Here's what both market tops did have in common, at least for Cramer: He buried his head under the pillow and pretended logic made no sense. He told investors to discard everything they'd learned over the years as nonsense. He told investors to keep buying stocks just because it felt good. Without peeking, I'm sure you can guess the outcomes.  

Exhibit A: Feb. 29, 2000
Mere days before the market started its multiyear post-dot-com-bubble slide, Cramer wrote an article for The Street.com (NASDAQ:TSCM) describing how his hedge fund was taking care of business. Taking money off the table? Selling stocks that had no revenue, no earnings, no assets, and maybe even no office space? Nah. Cramer's thoughts on the market were bit more direct:

"[Y]ou have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at [his hedge fund]. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management."

Whoa. "Graham and Dodd," mind you, are Benjamin Graham and David Dodd, the two master investors on whose theories Warren Buffett formed the backbone of his career. Even investors in respectable Internet companies at the time, like Yahoo! (NASDAQ:YHOO), eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN), learned that the subsequent market crash hit because investors had ignored what Graham and Dodd taught everyone -- primarily, that the price you pay for a stock determines your returns. Always. No ifs, ands, or buts about it.

Scorecard: Logic 1, Cramer 0.

Exhibit B: Oct. 31, 2007
At the end of October, right before markets began their descent to their current lows Cramer gave out investment advice on his wildly popular show, Mad Money. Here was his game plan at the time:

"You should be buying things and accept that they are overvalued, but accept that they're going to keep going higher. I know that sounds irresponsible, but that's how you make the money. Right now, up is down, left is right, peace is war."

Right, Jimmy. Up is down, peace is war, and prosperity is crying over a brokerage statement covered in red ink. Not surprisingly, stocks that did look quite overvalued at the time -- Chipotle (NYSE:CMG-B), Crocs (NASDAQ:CROX), and Google (NASDAQ:GOOG), to name a few we singled out at the time -- failed to follow Cramer's path to success. And why should they have? There is never a time when you should knowingly purchase an overvalued stock just because your internal Ouija board says it's the right thing to do.

Scorecard: Logic 2, Cramer 0

Foolish takeaway
Yes, I've cherry-picked every bit of information in this article to neatly fit my argument.

Why am I picking on Cramer? Not because I think he's a buffoon, but because the average John Q. Investor can learn a valuable lesson by realizing (a) ditching tried-and-true investment advice never makes sense, and (b) even astute investors can make boneheaded decisions if they let the market's emotional rollercoaster carry them away.

Don’t worry, Cramer. We still love you. Long live excessive shouting and chair-throwing!

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Fool contributor Morgan Housel does not own shares in any of the companies mentioned. Crocs is a Motley Fool Hidden Gems Pay Dirt pick. Google and Chipotle Mexican Grill are Motley Fool Rule Breakers selections. eBay and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.