Price discipline used to mean saying "looks like I missed that one" when a stock is up six points. What has the old pros scratching their heads -- if not headed outright for retirement -- is that such discipline is now Wrong!
Don't misinterpret me. There is a sign on my quote machine, written by my wife a decade ago, a little beaten-up yellow Post-It, that says "Discipline is more important than conviction." I am a huge believer that discipline, per se, keeps you in the game when times are tough.
But the rules have changed for when times are good. What qualifies as having "missed" a move in this new world is not the same as it used to be. What passes for discipline in some of the highfliers in today's market is the discipline to stay long and not take the profit, a hard, hard discipline indeed, and one that requires MASSIVE conviction.
Let me give you an example. The other day,
, my partner, calls me after a presentation made by
, the cable modem company. Ever since I interviewed management of @Home on Squawk Box I have paid close attention to these guys and I keep on waiting for the stock to go down to get in. It hardly ever does, as the company is in a national rollout of an exciting product.
Jeff was impressed; he liked the story. Gross margins, it seemed, are improving. The stock was up six at that moment. Everything that I had been taught about the market in my first 15 years of trading said "you missed that one, wait for the next pitch." But in this market the discipline is different; you have to ask yourself whether the stock could have an even bigger move from these levels. You can't pass on it just because it is up. I reached for stock and got long.
This difference between the market now and the market I cut my teeth on is a very important point that I will come back to over and over again in 1999. Here's why: That Wednesday take of @Home was 20 points ago. TWENTY POINTS!! In two days!!!!!! What kind of discipline forces you to miss a 20-point move? Whatever kind it is, it's not working. Moves like we have had in Net and Net-related stocks are so outsized that we have to ask ourselves, when a stock is up six, whether we indeed have missed it, or is the stock galloping to some level and you have to get on that horse in midcantor.
I have discussed this phenomenon dozens of times with my wife, Karen, the Trading Goddess, since the Net environment ramped. She even came to work for several days to see it in action. It didn't take her long to see that a new discipline had to be developed, one that wasn't as geared to hard and fast price limits. She is still kicking it around, but she thinks that if a story is good, it seems never to be discounted by this market. I bought @Home when Jeff called because no matter how much it was already up, if there is incremental good news, you can still buy it when you hear it, even if the stock is already running.
The tape, she says, controls what discipline stands for. And right now the hardest discipline is to fight the urge to take profits. Until the market turns sour again as it did last September, that will be my watchword.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At time of publication, his fund was long @Home, 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.