Jim Cramer's Guide to Investing: Principles to help you manage your portfolio

Published Tue, Sep 6 20226:00 AM EDTUpdated Thu, Sep 8 20221:22 PM EDT

At the CNBC Investing Club, we strive to help members manage their own portfolios by showing them how we do it. Over decades of Wall Street experience managing money at Goldman Sachs and my own hedge fund as well as through financial journalism and education, I've put together a Guide to Investing. It consists of 25 principles we follow in managing the stocks in my Charitable Trust, the portfolio we use for the Club. They've worked for me over my career in bull and bear markets, and I hope you find them useful in your investment journey. We've broken up the principles into groupings of five for easy navigation. Principles 1-5 Principles 6-10 Principles 11-15 Principles 16-20 Principles 21-25 1. Bulls and bears make money; pigs get slaughtered This has got to be one of my most favorite mantras when it comes to investing and one I share constantly when people ask what to do with a big winner. We are as upfront as we can be with our mistakes and one prime example to explain this rule can be pulled from our own actions in recent months on Nvidia (NVDA). We love this chipmaker — and over the long term, we think its best days are ahead. However, we must acknowledge that we were pigs here and it has hurt us. In fact, when asked at the beginning of December 2021 why we didn’t trim the stock along with our position in Advanced Micro Devices (AMD), we admitted to being piggish “because this may be a $10 trillion stock” on day. It may still be a $10 trillion stock in the future, but the moment we acknowledged our piggishness, we should have sold some. Why? Because had we listened to that discipline, we would have realized a price of $320 per share and been in an even better position to repurchase shares as they proceeded to take a greater than 30% hit over the following few months. We were bulls that became pigs and it cost us. Of course, it is never good to be a pig, but it is even more dangerous to be a piggish bear than a piggish bull. A piggish bull can in an extreme instance lose 100% of their investment in a position, but a piggish bear can lose a whole lot more. Consider the poor saps that pressed the bet against GameStop (GME) at a pre-stock-split $4 during the Covid pandemic. Here, you have a group of investors that were short a $4 stock, playing for bankruptcy. Not only did they get short, in some instances they threw leveraged instruments on top, upping the risk in hopes of upping the reward. Rather than take the win, they had to see it crushed, they wanted to see it go to zero. Well, that piggishness cost them not only their money but their reputation. A group of retail investors banded together, bought up the shares, and forced a legendary short squeeze that saw shares explode from about $4 to $483 at the high (again, that was before GME's 4-for-1 stock split in July ). The bottom line: In any other walk of life outside of investing, there comes a price for something we are not willing to pay and where we would instead look to sell. When it comes to stocks, investors often lose that sensitivity to price and it is a recipe for disaster. So know what you own, what you are willing to pay, and at what price it makes more sense to be a seller than a buyer. 2. It’s okay to pay the taxes Unless your wish is to die with the stock and leave that money to someone else hoping for a stepped up basis (a policy that could change at any point before your eventual demise), we have got some news for you: Those taxes are getting paid eventually. Unless you turn that win into a loss, then congrats (I guess?), no taxes for you. Whether it’s long-term or short-term taxes, you are not going to get every dollar out of the trade. The government wants their cut (so badly that some of those in power are even looking into taxing unrealized gains). Every dollar you make, the government is going to take a piece. But every dollar higher does mean more money in your pocket, it may be 60 cents more or 80 cents more but every dollar higher that you can sell means more money in your pocket at the end of the day. In other words, don’t let a tax hit prevent you from realizing as much as possible. The reality is, you want to buy stocks that you believe will go higher, and sell those you believe will go lower. That’s not to say you shouldn’t take advantage of methods to avoid (not evade, that’s illegal) taxes. Things like tax-deferred accounts or figuring out how to hedge and take advantage of lower rates. But these are asset location issues (IRAs, 401Ks, and so on) and advanced hedging strategies (like netting out the position to move the sale from a short-term hold to a long-term one) that do not change that fact that when it’s time to sell, it’s time to sell regardless of the tax implications. 3. Don’t buy all at once; arrogance is a sin Accept that you will never be correct 100% of the time and use that knowledge to your advantage. If you think you can pick the bottom consistently, without luck, well you are wrong and arrogant. I used to be arrogant. As I told readers in my book “Real Money,” I thought I had to buy once and go big to show everyone just how right I was. “Put me up on 50,000 CAT!,” eager to show everyone how right I would be on the stock of Caterpillar (CAT). I’ve learned since then that getting the best price — and thereby maximizing my returns and limiting my losses — is a whole lot more r