Editor's note: As a special bonus to TheStreet.com readers, we will be running an updated version of Jim Cramer's "Twenty-Five Rules of Investing," from his latest book, Real Money: Sane Investing in an Insane World. Here's Rule 18.
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
, say, and we don't want the facts to get in the way of the story. Or we decided in 2000 that
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.
Let me tell you a story of what happened to me a couple of years ago by way of illustration. I thought that
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. This is what happens if you are inflexible (see Rule No. 18), too, if you believe too much and don't shift when it's clear that management doesn't care.
Stay flexible and recognize the vicissitudes of the market and of individual businesses. Or, own bonds.
Your call, as always.
At the time of publication, Cramer held no positions in stocks mentioned. Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for
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