This is part three of five on alleged “25 rules of investing” that Jim Cramer has listed on his site, TheStreet.com, plus my own commentary. The first five were basically cute little catch phrases on some common-sense rules. Rules six through ten were a little more insightful, speaking to more subtle ideas such as not buying a crappy stock because you think it’ll be acquired (because it probably won’t). Well, let’s take a look at the next five…
Rule 11 – Don’t Own Too Many Names 
Straight-forward advice every mutual fund manager should follow, don’t put money in a lot of positions. One of the reasons why so many mutual funds perform worse than index funds is because they trade so much and their earnings are eaten away by charges (that and they can’t predict the future). No matter how good you think you are, you don’t need to own a whole bunch of positions, show some discipline and only go after a few.
Rule 12 – Cash is for Winners 
Don’t be afraid to pull out of stock and just leaving it in cash. Jim Cramer cites the reason for this aversion started when Fidelity Magellan underperformed (ten years ago) because it held too much cash and the manager was canned. Apparently, picking bad stocks can’t get you fired but not picking at all sure can. Another nugget in here that you might not pick up on is a corollary to this rule which is: Don’t be afraid of not getting enough exposure (ie. money in the market). As Warren Buffett once said, you only need a few good decisions in your investing lifetime to become very rich. You can afford to let some of them pass you by.
Rule 13 – No Woulda, Shoulda, Couldas 
This is pretty good advice and extends to a lot of things in life. Yeah you could’ve bought in earlier, you should’ve sold it earlier, you would’ve bought it if you had the time… ahhh that stuff doesn’t matter. As I mentioned in my commentary on Rule 12, you can let a few pass you buy and still become very rich. Jim talks more about psychology but in the end, it doesn’t matter if it passed you by, there will be many more to come.
Rule 14 – Expect Corrections 
What goes up, must come down, don’t be afraid of it but do be prepared for it. Sometimes when you take money off the table, you look like a genius because the security corrects. Sometimes it keeps going and you feel like a dope. On a personal note, I just did that recently with my holdings in AirTran. It peaked, fell, I didn’t rebuy in, it rose again. But it happens… sometimes it falls and I miss taking the money too. I think this is a smart rule and something everyone should consider. Don’t be greedy! (Recently it fell so I bought back in)
Rule 15 – Don’t Forget About Bonds 
This rule isn’t that you should buy bonds or add them to your portfolio; it means you should understand what bonds mean. He makes a great analogy using basketball (or any sport really) – if “stocks” is the guy with the ball, bonds are guys without it. They might drive the action, or they might react to the action, but ultimately you have to understand how they work in order to succeed. I think this is solid advice I never really thought of before.
Looks like 11 through 15 start hitting more non-obvious rules/ideas for the more seasoned investor. The first ten, honestly, sucked. They were the cupcake rules that most people know. I personally like 15 the most because it gives a very good reason for someone like me (inexperienced in stock market investing, even less experienced with bonds) to read up about bonds. I know that when interest rates fall, bond rates go up… but that’s about it. Only ten more rules left… I hope they’re following the trend of increasing novelty.