Rule No. 11: Don't Own Too Many Names
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 RealMoney readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here. Today, we present Cramer's eleventh rule of investing. Read more about his rules:
In my years as a hedge fund manager, I spent three hours every day analyzing the mistakes of the day before. That was my major task, one that I completed before anyone else came into the office, generally between 4 a.m. and 7 a.m. I would analyze every losing trade -- you don't need to analyze the winners, they take care of themselves -- and try to figure out how I could have made more money or lost less money.
I was maniacal about it. And after a couple of years of this, I realized that good performance could be directly linked to having fewer positions. That's one of the reasons I insist on owning only 25 positions, no matter what, for my Action Alerts PLUS portfolio.I never will buy a stock without first taking one off. That's a great discipline and one you should adopt, pronto. All the bad money managers I know have hundreds of positions. All the good ones have a few that they know inside out and like on the way down. That's why I say:
Don't own too many stocks.I know it can be constraining. For instance, right now I like DuPont (DD), Dow Chemical (DOW) and Eastman Chemical (EMN) because we are in a major upswing in chemicals. But my discipline leaves room for only one, so I own the one that I think is the cheapest and the best, Eastman. I don't like tech so I am judicious about having tech positions, which is why I have only Intel (INTC) and Lucent (LU). I long for more Internet plays now that they have come down, but I don't have room for more than Yahoo! (YHOO) or else I will violate my rules. When I lost the most money, by the way, my "sheets," my position sheets, were as thick as a brick. When I made the most money, my sheets were, well, one sheet of paper, double-spaced. And I ran hundreds of millions of dollars. Please remember that whether you are a pro or an amateur, you can always have too many positions.
|1.||Pigs Get Slaughtered||2.||It's OK to Pay the Taxes|
|3.||Don't Buy All at Once||4.||Buy Damaged Stocks|
|5.||Diversify to Control Risk||6.||Do Your Homework|
|7.||Don't Panic||8.||Buy Best-of-Breed|
|9.||Defend Some Stocks||10.||Don't Bet on Bad Stocks|
|11.||Own Fewer Names|
|Check back for more of Cramer's Rules|
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