Viacom (VIAB) - Get Report and Twilio (TWLO) - Get Report were two recent instances where the Action Alerts PLUS charitable trust team chose to follow a set of investment rules, exited the stocks, and missed out when they rebounded.
The Action Alerts PLUS trust operates on a set of rules, one of which is to sell, not buy, on momentum. The portfolio successfully did this with Goldman Sachs GS by selling at $220 and leaving itself the opportunity to buy more when the stock dropped almost 10%.
It did not follow that rule in the cases of Viacom and Twilio.
Viacom is handicapped by “suboptimal management,” Cramer told AAP members during this week’s monthly call.
"[E]ven as it went down, I felt that we could not buy more of it. Would it have been right to buy more? Yes. But did it violate my rules of what to do when management is ... over its head, not knowing what to do? It was what my playbook says to do."
Since the AAP sold Viacom, the stock is up by nearly 40%.
The trust’s decision on Twilio was "a little tougher," Cramer said.
In November, Twilio rereported its full-year earnings forecast after saying that it had to redo the filing “due to a calculation error.”
“We owned it," Cramer said. "We got an accounting error. My rules say accounting errors equal sell. Even though I liked the company. … They told me it was innocent and I didn't listen because my feeling is that when you have an accounting error, you have to go and I didn’t want to break my discipline. And Twilio subsequently doubled.
“These are going to happen. You're going to make a judgment about management. … You can have an accounting adjustment that is wrong. You bail. And the stock goes higher.
"That's the price of rules, people. And it usually, usually does not work out like that. The price of rules has saved me far more than the violations of the rules.
"Should I have violated the rules?" Cramer asked. "Hindsight is 20/20. I know what I've done. And when I have looked the other way at an accounting irregularity, it is almost always going to zero."