A Refresher on Two of Our Key Portfolio Management Disciplines

Scott Mlyn | CNBC

(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)

After this brutal start of the year for many tech stocks and the large drawdown from the highs in so many different names, we can't help but remind the Investing Club of two portfolio management disciplines that we use for the Charitable Trust.

Pigs get slaughtered

Our first discipline is a simple one, and it's a line that we repeat in our trade alerts:  Bulls make money, bears make money, and pigs get slaughtered. You'll see us put this discipline into action when a stock rallies 5%-10% in a single day off of zero news (like Nucor yesterday) or after a stock goes on a run for the ages.

For example, did we want to trim Marvell Tech (MRVL), one of our favorite companies, this past December at $92? This was a hard sale to make because Marvell Tech is a multiyear story and has so much going for it in the cloud, 5G, and auto.  However, MRVL had rallied nearly 30% over three trading sessions, and our discipline compelled us to take profits or else we would have risked being greedy. What about AMD (AMD)? 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, but the stock climbed 50% from the start of October to the end of November, compelling us to take some stock off the table. And most recently, we locked in gains in a slew of stocks including AbbVie (ABBV)Linde (LIN), and Estee Lauder (EL) because their names were on the 52-week high list day after day.

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'll always be the first to tell you that. We have admittedly been pigs in Nvidia (NVDA), and we didn't take off any 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, 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. You can't constantly trim the AbbVies and Lindes and exit the Estee Lauders because then you will be left with the Wynn Resorts (WYNN) and PayPals (PYPL).

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, we have not been shy about selling Walmart  (WMT) at higher and lower prices because we think there are better opportunities out there in the market. 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 and Honeywell).

After refreshing our two disciplines, next we want to provide you with where we stand in today's market.

Following this brutal start of the year for technology, of course, we are warming up to some stocks. These are some of the signs we are looking for. Microsoft (MSFT) is a key name to watch because it has real earnings and a big buyback. PayPal has been recommended a bunch of times by analysts this year, but before today it has been unable to hold its gains. Checks point to Nvidia having a strong quarter. And those semiconductors we sold into the enthusiasm? We have the flexibility to buy those into weakness because we sold at much higher prices. Marvell Tech is high up on our pecking order because it is the fastest-growing of them all and has real earnings.

We have not pulled the trigger on any tech stocks just yet, but we are taking a hard look at some stocks and monitoring the pricing action.

The CNBC Investing Club is now the official home to my Charitable Trust. It's the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

 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. See here for the investing disclaimer.

 (Jim Cramer's Charitable Trust is long MRVL, AMD, ABBV, LIN, NVDA, CRM, WYNN, PYPL, CVX, MS, BA, HON, MSFT.)

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