After this volatile, action-packed start of the year for many portfolio stocks, including the outperformance of cyclical names and the large drawdown from the highs in so many technology names, we would like to comprehensively review our portfolio management disciplines that we try to practice for our portfolio. We learn these disciplines from the great investor Jim Cramer.

Pigs get slaughtered: 

"Bulls make money, bears make money, and pigs get slaughtered." However you make your money, don't be too greedy. You’ll see us put this discipline into action by trimming some when a stock rallies 5%-10% in a single day, or after a multi-day run that brings the stock up 20-30%.

For example, did we want to trim Advanced Micro Devices (AMD) as shares surged in November after an Investor Day event and partnership with Meta Platforms was announced? AMD’s outlook was as bright as it could be, everyone was talking about such rip on the news. However, we didn't want to be pigs, as the stock climbed 50% from the start of October to the end of November, compelling us to take some stock off the table in the 160$ area. Did that action prove to be correct? Ultimately yes, as shares came down to the 130s this week, off ~20% from that all-time high. If we hadn't sold, we'd be kicking ourselves. Since we sold, we're sitting here on our cash position, evaluating whether we should buy some back here. 

What you have to remember is that we buy and sell stocks, not companies, and sometimes the market gets too enthusiastic about stocks. Investors frequently talk about buying stocks where value has dislocated from a beaten-down price, but this same idea holds true when stocks rally. If you are willing to buy a high-quality company when it is down big for no reason, then you must be prepared to take some profits when the whole market is gushing over it.

Did we make every right sale ahead of the recent volatility? Of course not. We are not perfect and we don't even try to play one. We have admittedly been pigs in Salesforce (CRM) because we thought their last quarter was not as bad as what the market reaction suggested. But if we stay true to our discipline of bulls make money, bears make money, and pigs get slaughtered, we believe that more often than not we will have locked in plenty of big gains before the market turns, and then we can use the cash we raised to buy back that stock at lower price.

But you can’t limit your selling to stocks that you are up big on. What do you do about stocks that aren’t working in the market?

Can't just sell your winners:

This brings us to our second discipline. If you keep selling your winners and nothing else, your portfolio could get stuck with a bunch of losers. We can’t trim all the winners like Ford (F) and Nucor (LLY) because then we will be left with only the losers like Disney (DIS) and Salesforce (CRM). When a stock goes up, there is a need to evaluate whether the move was on strong merits. If it was not then you have permission to do some aggressive trimming, because you believe there are better prices ahead. If you agree with the merits, or if the move up is when your thesis has played out, you should stay strongly convicted. For example, Ford (F) was up big from 13$ to 17$ in October last year. If we didn't understand what was going on, we would have parted ways with the stock. Rather, we held on strong, bought more, and have enjoyed the ride up to the $24 area today.

To protect against selling winners to fund losers, every once in a while, you must be willing to part with a stock that you are less enthusiastic about. For example, into the rally of October-November last year, we did not shy from selling Roblox and Unity Software which we were up >10%. We simply saw the dislocation in prices, thought the prices were to hot, and believed those capitals could be spent elsewhere. But be selective about the new opportunities. You could end up with even more losers if you used your “winners” cash to buy the Teladocs, Docusigns, and Pelotons of the world at lower and lower prices. Fortunately for us, we have not been putting good money after the bad because we have been emphasizing companies that “make stuff and do things,” and those stocks have made it through the recent volatility unscathed. If you take a look at all of our buys since Thanksgiving, then you will see our focus has been mostly on healthcare and cyclicals like energy (Chevron), banks (Morgan Stanley), and industrials (Boeing).

Bottom Line: We are only a young group of investors, we're so far away from being perfect and we don't try to play one. We are learners. We learn from the great investors on Wall Street such as Mr. Jim Cramer, we make mistakes and we learn from our mistakes. What we are trying to do here for you is make sure you don't repeat the mistakes that we've made.