Cramer's Rewrite of His 'Capital Preservation 101' Piece
I never would have guessed that this piece, from March 9, would be selected. It really has more to do with how I work in an up tape and has very little inside baseball to be redefined. Let's get right to it.
My scaling out of dribs and drabs has gone off without a hitch, courtesy of some remarkable macro numbers involving productivity.
(Here's the essence of what I do as a portfolio manager. Sometimes a stock goes up because of fundamentals that drive the company. Other times, a stock goes up because a rising tide lifts all boats. I don't like to sell stocks that have particular events that I am waiting for to happen. But I also trade stocks that have good fundamentals even though I have no particular edge. When these stocks go up BECAUSE of larger events that tend to drive stocks as a commodity -- good inflation numbers, good productivity numbers, good spending numbers -- I scale out, or offer stock at selectively higher levels. I do this irrespective of the tax implications because it is better to make money and pay taxes than it is to lose money.)
Just when it looked like the bonds were going to go below where they were after that Panglossian employment number, they got rescued by numbers showing more good growth with no inflation.
(Sometimes bonds can move stocks. When bonds go up in price -- down in interest -- they become less competitive to stocks. People like higher rather than lower bond coupons, which is the same as saying they like to be paid more for risk, not less. When bonds have a big move up, stocks do tend to go up in conjunction, although this is not always the case -- see 1932.)
I still feel better having lightened up a tad. To be sure, I have scaled much more slowly in the financials than anywhere else.
(When I sell, I offer stock. As the market goes higher, my stocks get taken. I sell the stuff I have the least conviction on first and hold on to my stocks that have upcoming catalysts.)
When people ask me what I scale back on, I do things like this: I owned 50,000 shares of
General Motors
(GM) - Get Report
. I bought it because I thought the stock seemed good, the numbers strong and the business on plan.
But I have no edge, no particularly proprietary call, and I could use that capital if the stock market were to come down for reasons unforeseen by me.
So I sold it for a small gain and can redeploy the capital elsewhere. I did the same with some of my tech-telcos. These I just trimmed, keeping enough on for higher levels.
(This process, of selling to finance other acquisitions, is typical of what goes on in our business. So, when General Motors was at 87.5 bid/87.75 asked, I was offering 10,000 shares at 87.75. When that got taken, I offered 10,000 at 88 and so on, until I had sold all 50,000 at progressively higher prices. I used the capital to buy shares of T, which has been on a one-way trip down. Here I bought 10,000 shares every point down beginning at 85. I finished buying 50,000 on Friday at 81 and change. I also bought some Tellabs (TLAB) with it, but I booted that on Thursday. It continued to go up without me, as we remonstrated about on Friday.)
If the market climbs to another level, I will probably let a little more go and continue to trim from other positions. I can be less aggressive after the sales I have made as long as the bonds continue to stay strong.
(All week I was scaling out, so that at the end of the week, when the market was threatening to hit 10,000, I had less stock on my sheets than at the beginning of the week. I have a nifty cash position. Many mutual funds regard that as sinful, but I regard it as cautious and prudent given the 800-point run we had and the coming earnings season. The quarter didn't go that well for many of my companies, particularly companies in the personal computer world. Nifty is 25% cash.)
No brain surgery here -- just some capital preservation. This way I can buy some favorites if they come down without having to borrow money or margin for my positions.
(This comment was very misunderstood. I don't like using margin. I think it is dangerous. If I have a really great call, for instance if I think the market is way oversold on some fear that is misplaced, as I thought in October 1997, I will leverage up. But otherwise I will try not to borrow money to finance stocks. I like to have cash on hand when the market comes down. If I were a retailer, you would say that I regard periods like this one as Christmas, and I don't like to be caught with a lot of inventory on Dec. 26.)
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication his fund was long AT&T, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com.
