The first rule of money management is never to have to say you are sorry. That’s why money managers never tell you in real time what their holdings are. It’s why they don’t hold monthly meetings. It’s why they don’t take questions. To which I say this: We run a club. We are open about what we do. How can you learn if you can’t even admit your mistakes? With our “Monthly Meeting” for December now in the books, here’s a look at how we misstepped in 2022 — and what we learned along the way. What we learned 1. Market cap matters. Some of our best stocks got out of hand. At one point Nvidia (NVDA), a very good company, was worth more than $820 billion, or more than 29 times sales. It didn’t matter that Nvidia is one of the finest, most innovative companies around. Just like there is a buy price for pretty much everything there is a sell price, too. When you have a very high price-to-sales ratio, you must ask yourself if there’s too much enthusiasm and not enough that can still take it higher? You must scrutinize whether the company has something up its sleeve in the next 12 months, not the next 12 years, that backs up the premium. If you’re creating answers to justify a valuation that has become unjustifiable, then you have to exit the position — as we should have done with Nvidia. 2. It’s key that a company be communicative with shareholders. Or does it dodge you and treat you unfairly? That’s been our experience with Bausch Health (BHC). No matter what we do they will not talk to us. They will not call us back. They won’t validate the thesis they laid out on “Mad Money.” So we are frozen, we don’t know what to do. This belligerence is unacceptable and puts us in limbo, a terrible place to be. 3. Don’t fall for the grand tour, or the grand lunch for that matter. You have no idea how many executives I go out with each week. Of course, each has a good story. Same with the executives who come on “Mad Money.” It’s always sunny. That’s why meeting with an executive can be fatal. CEOs are salespeople for their institution. They are incredibly effective. You have to be skeptical and resist the sirens. 4. Beware of stories based on the total addressable market size. So often when you go hear a company it tells you that the opportunity is so huge you have to get in on it. You must always be skeptical of some of these ludicrous forecasts. Here’s an example. SmileDirectClub (SDC), the braces company, which told us that the worldwide total demand for its products was $500 billion. That may have been true when the stock was at $15 a share two years ago. But it also may be true at 53 cents a share, where it is now. Remember these more pertinent words: show me the money. 5. Don’t fight the Federal Reserve. No matter how rock solid your story might be, no matter how much the earnings could ramp up, if the Fed is trying to knock down inflation, it will knock down your stock, too. A hawkish Fed is your enemy. When we forgot this, we lost a lot of money. In a bear market, capital preservation trumps all. And, now… What we got right 1. Make things and do stuff. Last November, we made a determination that we were going to buy stocks of companies that ‘make things and do stuff’ at a profit. This one phrase saved us hundreds of thousands of dollars because the world changed from being in love with companies that may, one day, make stuff, but certainly not at a profit. Those all turned out to be losers. 2. And don’t be expensive. As the Fed grew more vociferous we had to add a new corollary to our favorite statement: the company had to make things and do stuff profitably, and not be expensive. The Fed’s actions shrunk the multiples of stocks that grew sales and earnings but the price to earnings was just too high to own. The more we sold of these kinds of stocks the more money we saved. 3. We never fell for fads. The market went gaga for all sorts of themes this past year that we felt had little validity — everything from charging stations to green hydrogen and electric vehicles and car parts. We never took the bait. We never trusted the street. We knew not to buy what Wall Street was selling. 4. Boring is good. As the year went on, we found ourselves being drawn more and more to companies that simply weren’t interesting. They were just cheap relative to their peers in ways that made no real sense, so we held them and their values came out over time. They paid out dividends every quarter and reduced their share counts through steady repurchases, thereby increasing our ownership. They were consistent and dependable with their earnings. The job of a money manager is to make as much money as possible with the least amount of risk. Boring reduces risk and volatility, but also increases reward. 5. Don’t panic. If you’ve done your homework and are confident that the story of a company is a good one, don’t panic even if the market says you’re wrong. Some of the best buys we had this year — buys like that of Estee Lauder (EL), Devon (DVN) or Honeywell (HON) — were opportunities because we knew the story and would not let the market shake us out of them. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The first rule of money management is never to have to say you are sorry. That’s why money managers never tell you in real time what their holdings are. It’s why they don’t hold monthly meetings. It’s why they don’t take questions.