Cramer Rewrites 'Follow These Five Tenets Toward a Fortune'
By James J. Cramer
1/21/00 11:17 PM ET
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Sometimes the simplest pieces are the best pieces. People loved this little piece, so I want to spend some more time talking about it. It captures the essence of the struggle going on right now between those people who think that the market is just plain ridiculous and those who think that it makes all the sense in the world. I know we struggle with it every day at my shop.
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Most of the time, I try to share with you in this column the tricks of the professional trade. But I have been struck since we started this journal by how much I have learned from you. You know, I believe the individuals have it all over the professionals when they bear down and focus.
(This has been a constant, constant theme with me. Individuals don't have to report their quarterly earnings. Individuals don't have money coming in incessantly. They don't have to market themselves. Individuals don't have to have their results in the paper every day. They don't worry about getting fired if they underperform. And they can control their own taxes. Individuals have identical access to most of the information that I have. And, most important, they can own stocks that institutions can't because those stocks are too small or too illiquid or too overvalued in traditional matrices that may turn out to be silly a few years from now.
(It's the latter that is at the heart of this piece. Individuals don't have to go before a committee and answer "What's the price-to-earnings multiple and the price-to-book and relative P/E?" If you asked these questions last year, you underperformed the market. Wow, let me say that again -- if you ran your fund on traditional matrices, you could not beat the market. Period.)
So I want to take a moment on Personal Finance Friday to put into words some of the basic tenets individuals have taught me. While they may not always work, they would, if melded to our strategy at Cramer Berkowitz, produce even better returns.
(A bunch of wiseacres emailed me and said, "Well, what do you use?" To which, collectively, I say, there are more than 2,000 articles in the archives about what I use and what I do. If there were ever a portfolio manager in history who had as many articles written about what she does, I don't know of her. There is an ample record of how I pick stocks and how I work.)
Let your winners run. Don't sell them. The public does this better than any professional. When I write that I am angry with myself that I sold my Broadcom (BRCM:Nasdaq - news), I am inundated with successful individuals' emails reminding me of this cardinal tenet: Winners win.
(I couldn't believe the outpouring of comment I got about the Broadcom piece, the one about how I sold the stock too soon. Many of you live by one rule alone, which is as long as Broadcom is doing well, why sell it? Others among you live by a different creed: As long as the stock of Broadcom is doing well, why sell it?
(That's the technical view. I can't get into the latter, but the former makes all the sense in the world. The idea is that there is no price that is too expensive as long as Broadcom is executing. My problem, where I get stuck, is I think to myself, OK, well, Broadcom is, in the end, a semiconductor company, and semiconductor companies have tended to retreat from astronomical multiples when they got there. I'm worried that Broadcom has to fall because, like the Enterprise, it is going boldly where nobody else has gone before.
(The reason my logic could be false is that it's historical in nature. If you go back and read Security Analysis by Graham and Dodd, you'll find it now reads somewhat anachronistically. It doesn't give you a methodology that can make you money.
(Just Friday I got a call from some Forbes researcher. He was trying to fact-check a piece on me by David Dreman. A little while ago, I wrote that maybe the value players should quit their bellyaching and get with the program. I wrote about how at Cramer Berkowitz my method of finding undervalued savings and loans and waiting for lightening to hit was simply failing us in 1998.
(We had always been competitive managers. We always made the playoffs, so to speak. But our methods, which included a bifurcated portfolio, some of which never traded but represented compelling "value," kept us out of the playoffs in 1998. At the tail end of that year, we told our investors we were going to have to bite the bullet and blow out of a substantial number of illiquid value plays because we realized that the market had changed and it was not coming back to value as we knew it.
(Dreman apparently takes issue with that -- we will know more when we see the article next week. But the simple truth is that the notion of value changed, and it became more important to go with companies that were executing the best, irrespective of their prices. This concept is very hard for me. I thought that I'd lose my shirt whenever I owned a semiconductor company that sold at more than twice or, at the very most, three times the market's multiple to earnings. Last year proved that to be wrong. In fact, had we cared more about execution and less about traditional value parameters, we would have done even better. Anyway, look for an odd riposte from old-guarder Dreman against me next week.)
Own the best of breed. If you simply buy the best company in the business instead of the turnaround play or the one that is on the come, you will always do great. We are all drawn to trying to find the next Microsoft (MSFT:Nasdaq - news), but sometimes Microsoft will do just fine.
(I mixed two concepts here and made it too hard to understand. First, what I'm arguing is that we too often are drawn to the down-and-out play. When I take calls on television shows, people want to know about the Rite Aids (RAD:NYSE - news) and the Revlons (REV:NYSE - news), trashed pieces of merchandise run by managers who didn't do a good job. They want to find bargains. Successful individual investors couldn't give a hoot about bargains. They don't want to speculate that a bad company is turning good again. They aren't drawn to a Xerox (XRX:NYSE - news). They want a Cisco (CSCO:Nasdaq - news).
(Second, there is a tremendous propensity among lower-performing individuals to want to jump off the Sun Micros (SUNW:Nasdaq - news) and the Nortels (NT:NYSE - news) for the next new hot stock. But those who have traditionally done well know that switching horses like that doesn't work. Sure, some stocks will get overlooked that shouldn't, while others might momentarily get too expensive. But it's much easier to invest bird-in-the-hand style than two-in-the-bush style.)
Don't be afraid of owning new technologies. The best of you individuals out there are experimenters, looking for a dominant company in a soon-to-be-dominant industry. Many individuals I know spotted Sun Micro long before other professionals because they saw that Sun machines would dominate the New Economy.
(Microsoft is the best example of this. Many, many software companies existed before Microsoft became dominant. What I find interesting is that if you owned five of them and one of them was Microsoft, you made out fabulously. If you were an early buyer of Net stocks, you did great. If you were an early buyer of optical stocks, you did well. Periodically, you can do incredibly well in biotechs.
(You cannot be afraid of new technologies. I think that this tenet passed Warren Buffett by. As he is the greatest investor of all time, I think it's important to recognize that if he were not afraid of product cycles and obsolescence, he would have made much more these last few years than he did. Now I know we shouldn't criticize someone of his unbelievable prowess, but we must also recognize that it was wrong, just wrong, not to include technology stocks in the portfolio. Wireless plays such as Qualcomm (QCOM:Nasdaq - news) and optical plays such as JDS Uniphase (JDSU:Nasdaq - news), which stands for Just Don't Sell Us, are simply creating too much wealth to ignore.)
Leadership at the top is the most important criterion for finding the best stocks. Investing with Chambers at Cisco or Grove and Barrett at Intel (INTC:Nasdaq - news) or McNealy at Sun or Pittman at AOL (AOL:NYSE - news) or Koogle at Yahoo! (YHOO:Nasdaq - news) has been dead right. A strong hand up top makes all of the difference.
(We tend to hate judging subjectives as professional managers. We want to stack up figures vs. figures, and we want to look at apples to apples. That's stupid. Common sense dictates that numbers are not created equally. Here's a painful observation: The people who used to run Coca-Cola (KO:NYSE - news) are better than the people who ran it after them.
(We think leadership matters a great deal in politics and in sports. Why should we not put a value on the top man that supercedes that of the company itself? If John Chambers were to leave Cisco, don't you think I would be nervous? But if Chambers can demonstrate that he has an orderly procedure for succession, I will sleep easier. Craig Barrett has done a fabulous job at Intel. I think Ballmer will do great at Microsoft. But if I didn't, I would sell the stock.)
Blow out the losers. Every single successful investor knows to cut losses. They don't wait for them to come back. They act swiftly and harshly on the losers and redeploy the capital to the best-of-breed winners with great leaders that will soon dominate important industries.
(A bad stock wastes capital. In 1998, we blew out 40% of what we owned in the fourth quarter because they were losers. Everything we sold is substantially lower now than then. The stuff we bought, the technological winners, were the difference in some serious outperformance in 1999.)
There. I don't want to complicate things. Five rules that will indeed make you a fortune if you follow them and will certainly make it hard for you financially if you avoid them.
(A lot of people printed these out. I like that. I like having an impact. I hate it when we get all caught up in the minutiae and can't see the big picture, and I'm just as guilty of it as everyone else. I learn a great deal from these pages and from your comments, and you know I read every one of them. It isn't like the old days where I respond to every one of them, though. Those days are past. But I still like to zing a response back now and then if you have something to say in a pleasant, not polemical, fashion. Oh heck, I don't mind the polemics either, as long as they're not too personal.) |
