Editor's note: Jim Cramer's new book,
Real Money: Sane Investing in an Insane World
, is available in selected bookstores now. As a special bonus to
readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it,
. Today, we present Cramer's eighteenth rule of investing. Read more about his rules:
Pigs Get Slaughtered
It's OK to Pay the Taxes
Don't Buy All at Once
Buy Damaged Stocks
Diversify to Control Risk
Do Your Homework
Defend Some Stocks
Don't Bet on Bad Stocks
Don't Own Too Many Names
Cash Is for Winners
No Woulda, Shoulda, Couldas
Don't Subsidize Losers
Check Hope at the Door
The most important rule of all is:
You have to be flexible because business, by nature, is dynamic, not static. Things change. Markets change. Competitors start new price wars to win share. Companies execute poorly. Customers cancel orders. Events happen that make buying decisions more difficult or postpone them.
Of course, our buy-and-hold brainwashing totally precludes many of us from ever thinking like this. We have made up our minds that things are great for
(KO - Get Report)
, say, and we don't want the facts to get in the way of the story. Or we decided in 2000 that
(CSCO - Get Report)
was a winning stock and we are not going to be dissuaded by the change in the fundamentals to sell it. Our "love" for stocks is so misplaced in this rough-and-tumble world of business.
Not long ago, I thought that
(CHTR - Get Report)
would be a terrific stock if the largest shareholder would simply pony up more money
with the rest of us
to improve the balance sheet.
Instead, the largest shareholder took a powder and the company went to hedge funds and offered them the right to short as much common as they wanted to in return for lending them money. The hedge funds obliged. If the company had adopted my funding method, or if the company simply had done a huge equity offering, we would be looking at a win, not a loss. But the company made the wrong move and the stock went from being a good stock to a bad one.
Many people thought that I had gone from being a good stock picker to a bad stock picker because of Charter. Frankly, I think that management and the largest shareholder made moves that weren't rational. It's hard to invest with someone who exhibits irrational behavior after that person had not exhibited such behavior before. So I had to cut my losses and run. I mention all of this because the unwillingness to recognize this turn for the worse, as bad as it was, would have led to much larger losses than I already had accrued in the stock.
Stay flexible and recognize the vicissitudes of the market and of individual businesses. Or, own bonds.
Your call, as always.