When you make a mistake in this business you can do one of two things: You can cut your losses and move on or you can stand your ground while rethinking where it went wrong. I am on the fence about which one is better, but it’s easy to see why the first approach — aligned with the idea that “your first loss is your best loss” — makes more sense than the latter, more cerebral tact. That’s because cerebral in this business is often nothing more than a crutch leaned on out of fear. The fear is of ultimately being right, but no longer being involved. This dilemma comes up quite a bit these days when Director of Portfolio Analysis Jeff Marks and I debate positions in the office before we talk to you. So, I devoted this Sunday’s missive to the dichotomy of loss-cutting versus what I call battling, which is shorthand for, “We aren’t going to be shaken out of a position so quickly.” Let’s start with the “first loss/best loss” philosophy. This is the view I was taught back in the 1980s when I traded with my former wife and good friend Karen Cramer. She had been No. 2 on a great trading desk and then No.1 on a not-so-hot trading desk before she worked with me at Cramer & Co. We, of course, ran a hedge fund, so we had no one to answer to when it came to individual stock picking but had everyone to answer to when it came to performance. We did as we pleased, and we worked hard not to lose money. Our philosophy was always to let our good stocks run and to sell our bad stocks as soon as possible, believing that we could always buy them back. Given that we compounded at 24% after fees for 14 years versus 8% for the S & P 500, you can’t quibble with anything that enabled us to generate that return. That’s why “first loss/best loss” was so treasured. Given that Karen subjected me to pure torture daily in the form of “the rundown,” it was easy to see how you would agree to this principle. Here’s how it worked in reality. Three times a day we would gather “off the desk,” and I would have to defend every stock we owned. She would read them down, and I would explain my rationale while she would ask questions based on what she was “seeing” from her myriad trading sources. The first rundown would be around 8:30 a.m. She would ask me if there was anything new about each position. That chat was mostly related to any new research on each position. At about 10:30 a.m., we would go through them again with an eye toward how poorly something was trading. Do we add? Do we shrink? The afternoon was the most painful because it was mostly about what we were losing on and why I badly wanted to stick with it. This third session simply was about her desire to get rid of what she deemed to be “bad” positions not worth owning. If I didn’t offer a compelling defense of a stock, she would just kick it out. Her rationale was that it should be very difficult for a stock to stay in the portfolio — or “to stay on the sheets,” to use the inside baseball phrase. She was self-taught, but only later did we instill a vision brought to us by the late Max Palevsky, a founder of Intel and a tremendous art collector who insisted on selling a painting if he wanted a new painting. That discipline, borrowed from the art world, brought some stability and uniformity to the chaos of the third Q & A that she performed every afternoon. It worked well even as it was brutal beyond all reason. And you wonder why I eventually quit being a hedge-fund manager after 14 years. That level of intensity can make the process of making money very unpleasant. If you read my book “Confessions of a Street Addict,” you can see why I quit even as I made a lot of money for others and myself. Sometimes people ask me if I would go back to the hedge-fund world one day, and I have to say that the way I did it would be too intense and not enjoyable compared with how much time there might be to spend the “winnings.” Suffice it to say that the rigor with which we approached things continues with the Charitable Trust, as does the philosophy of making it hard to “stay on the sheets.” We are doing many of the things that we did with Cramer & Co., but we are not traders and we are not running a hedge fund like the people you see on financial television. Our goal is to teach, not to trade. If I wanted to go back to trading, I could. But if the issue is trading versus teaching, I am going with the latter. You might ask, “Given the money you could make, why would you ever choose teaching?” My answer is that I like teaching more than trading. It’s simply a life choice. Managing a public portfolio, as mortifying as it can be, is more satisfying. Lessons from the Club This brings me back to the tension between “first loss/best loss” and battling, with real-life positions showing the hazards of choice that the dichotomy breeds. Let’s deal with the most intractable of cases before we get to the biggest battle, Starbucks . First, there’s the obvious mistakes that we have made: Bausch Health and Foot Locker . Both of these mistakes came from “Mad Money” interviews where I had tremendous faith and a history with the CEOs themselves. Joseph Papa, who has since moved on from Bausch Health, came in when the company was called Valeant Pharmaceuticals, a disgusting trap of a firm that had the good, the bad and the ugly. The good was the Bausch eye-care franchise. The bad was the Xifaxan franchise, which served as a gigantic money maker but was simply too much of the company. The ugly was its balance sheet. (It’s incredible how often that Clint Eastwood movie surfaces in investing, isn’t it?) Papa came on air when he took over and promised to fix the company. He told me he would offer a plan that would solve all the investigations, cut the debt load and bring about a successful turn. Considering he executed a successful turnaround at health-care firm Perrigo, I said if he could do all of those things for Valeant its stock would go from hated to worth being in the portfolio. I like teaching more than trading. It’s simply a life choice. Managing a public portfolio, as mortifying as it can be, is more satisfying. Jim Cramer He got the regulatory hurdle solved and actually made Valeant into a better-run company very quickly. To signify the changes, he renamed it Bausch Health in 2018, after the eye-care company Valeant bought for $8.7 billion five years earlier. Papa proceeded to offer what I thought was a smart plan to spin off Bausch + Lomb to raise capital for a big refinancing and to solve the balance sheet once and for all. It made so much sense I bought into it. I had come to respect Papa despite the opprobrium that had been heaped on him for successfully fending off Mylan’s hostile takeover bid for Perrigo , thereby making millions for himself while doing so. Papa spun off Bausch + Lomb and kept behind enough ownership in the standalone company so that when the spinoff stock appreciated, he could sell shares over time. The money raised from the sales would help Papa get rid of all the Bausch Health debt that would mature early while chipping away at the rest in good fashion. But by May 2022, the initial public offering market had fallen apart and the Bausch + Lomb spinoff — expected to be priced between $21 and $24 per share — couldn’t do better than $18. It was viewed as a bust that couldn’t raise enough money to make a difference. That sunk the parent, as did a surprising verdict by a federal judge that left the patent protection of Xifaxan, its principal drug, in doubt. Next thing you know, seemingly in a matter of weeks, the stock had been cut by almost two-thirds. It was a breathless decline made even more difficult by Bausch Health losing the ability to divest any other products, including those of Solta Medical, a very good skin-care division that was, unfortunately, too dependent on China. Almost immediately we were sunk. If we were a hedge fund and Karen Cramer were in charge, it would have been sold almost immediately. We thought the IPO market would come back, and Bausch Health would win the lawsuit and all would be back on track. But at this point Papa left — he now runs the disgraced Emergent BioSolutions — and the new team went silent. We were trapped. Our battle has failed, demonstrated by how Bausch Health recently won the case against patent challenger Norwich Pharmaceuticals, causing the stock to jump up to where we sold some at a loss in February . Now it is time to admit that there isn’t much to save here, and we need the slot to buy something better and just accept defeat. Foot Locker, a smaller position, had a similar genesis. Mary Dillon, a star at Ulta Beauty , took over Foot Locker and offered an excellent plan for a couple-of-year turnaround. She fleshed it out on “Mad Money” and accompanied it with a huge buy of stock in the open market, usually viewed by the market as a bullish sign of confidence . I knew Foot Locker was challenged, but it didn’t seem to be more challenged than Ulta. In reality, it was. We got caught early on. There was not one but two instances where the stock cratered. It all happened so fast — from May to August of 2023 — that we were in disbelief that she couldn’t do more immediately to right the ship. At my hedge fund, it would have been booted at $25, down from $41, and forgotten about. For the Trust, we held on, thinking that it couldn’t be this bad. It was. Dillon put forward a smart plan to get out of losing stores as fast as possible while keeping the winning locations then remodeling them. After the stock traded in the high teens for weeks between August and October, it began a climber higher. It seemed, at first, like we were home free. But when it got to the $30s per share, she told Wall Street that the sneaker retailer was now on track to reach its operating profit target in 2028 , two years later than planned. That left us aghast. Nothing has worked since then, and we are debating moving on. Once again, it’s the spot we need to bring in a new name. What keeps us in these troubled two stocks? Former Club holdings Emerson Electric and Qualcomm . We bought Emerson after meeting with management and deciding that it was the best way to play the improvement of the electric grid — an investment theme we like because of data center growth and an influx of government infrastructure spending. Emerson quickly missed two quarters and then did the unthinkable: It gave us a hostile takeover. My experience with hostile takeovers is extremely negative, and Emerson’s bid for National Instrument, a test and measurement company, seemed completely wrongheaded. Two misses plus a hostile made it imperative that we leave. We did so in early December 2023 , around the time we were building a position in Eaton Corp., a much better alternative. That said, we watched Emerson get a quarter right after winning the hostile, and the stock shot up $15 higher without us. I grew furious and started the second-guessing act — the woulda, shoulda, coulda that Karen Cramer banned us from indulging in. Then there was Qualcomm. CEO Cristiano Amon told us a great story of diversifying away from cellphones and toward autos. But that never happened, and he had two misses so we bolted in May 2023 . A few months later, we bought a different chipmaker in Broadcom , which has been a terrific stock. But Qualcomm dismissed us with a rocket-like charge that caused a sickening taste. It amazed me. How could Qualcomm turn without any visible sign of earnings power given that it was linked to the declining area of cellphones? Didn’t matter. People lapped it up, and the stock soared without us. Understand these two have caused me to second-guess our second-chance rule. It was too forgiving to have had a place at my old hedge fund. But for a non-hedge fund, it seemed realistic and even helpful, as it left behind the first loss/best loss doctrine. Starbucks quandary Now along comes Starbucks, long a favorite investment of mine, with a new CEO, Laxman Narasimhan, who was handpicked by the coffee chain’s longtime leader Howard Schultz. Narasimhan was named incoming CEO shortly after we started our Starbucks position in August 2022. I liked Narasimhan. He had been incredibly successful at Reckitt Benckiser and seemed like he could work magic at Starbucks, which had fallen behind under former CEO Kevin Johnson and then turned to Schultz as chief executive for a third time until a better one could be found. Hailing from the world of tech, Johnson oddly failed to address key tech questions involving throughput, cold brew and afternoon rushes, as well as mobile order and pay. Plus, he had not seen serious challenges to Starbucks’ business in China, such as Luckin Coffee and others, that appeared out of nowhere. Narasimhan addressed these issues head on, or so it seemed, after officially taking over in March 2023. But lately, it’s been one guidance cut after another, and the stock has had a sickening decline. I understood the problems in the fall, when pro-Palestine protests — which at times featured violence — targeted the company amid claims that Starbucks was a Jewish company despite having no ties to Israel. Now keep in mind that Starbucks is a worldwide company with almost 39,000 stores, with slightly less than half in the U.S. I couldn’t argue with what seemed like a natural disaster and wasn’t able to assess the real damage. I accepted it and thought that this too shall pass even as I resented the subtle downgrade leaked via different brokers. What I didn’t know was the guide downs — in the $100s to high $90s per share — were just the tip of the iceberg. Now, again, first-loss thinking would have caused me to bail. But Emerson and Qualcomm made me think twice. After all, Starbucks is an incredibly resilient brand that has been repeatedly tested and succeeded. How could it not this time? The stock continued to slide, and I had no idea what was going on. We didn’t buy any when it traded in the mid-$80s per share, and I was critical of myself for that when the stock jumped to $89. We had no new ammo for battle, so I just accepted that we were not going to have a better cost basis for what I thought was the inevitable climb back. That all ended with the quarter Starbucks reported last week. I had hoped it would get at least somewhat better, but the conference call was disastrous. It was otherworldly how bad it really was. I can count so many obvious failures, such as partially blaming the weather for weak same-store sales when rivals “across the street” had positive same-store sales, or the positive service answers and the promises that seemed so empty. All played out and more in my interview the next day with Narasimhan, which was, quite simply, a total debacle. So, here we are again with another Bausch or Foot Locker. Or is it? Isn’t this still a brand name with a good balance sheet, unlike those two? Isn’t this a resilient company? Should we buy more? We are restricted, but right now this is a nearly $83 billion company — one that could be bought by a PepsiCo or a Nestle , or one that could have an activist join quite quickly, with Elliott Management being the obvious contender. A third path: Perhaps Schultz could be brought back in to advise, although that would be difficult because he has resigned from the board. But the board lacks operators so I don’t know what else they can do. No matter what — takeover, activist or Schultz stepping in to advise — the stock would go higher. However, unless something happens, I think it would go lower. I doubt improvement is in the cards anytime soon because I believe the “triple shot” reinvention plan is so superficial and lacking in rigor or accountability that I can see the stock shrinking to the $60s if nothing is done. This all leaves me to think that the odds the board does nothing seem slim, especially after that interview. Any sign the board is moved to act will be viewed incredibly positively. Any sign of an activist, and you can expect a much different Starbucks. Right now, we are standing pat. I think this one is more like Qualcomm and Emerson than Foot Locker and Bausch. I know that is a thin reed to cling to, but it is all I know to do. That’s where we are — waiting, watching and hopeful. (Jim Cramer’s Charitable Trust is long SBUX, BHC and FL. See here for a full list of the stocks.) 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 . 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A Starbucks store is seen in Jinan, East China’s Shandong province, March 28, 2023.
CFOTO | Future Publishing | Getty Images
When you make a mistake in this business you can do one of two things: You can cut your losses and move on or you can stand your ground while rethinking where it went wrong.
I am on the fence about which one is better, but it’s easy to see why the first approach — aligned with the idea that “your first loss is your best loss” — makes more sense than the latter, more cerebral tact. That’s because cerebral in this business is often nothing more than a crutch leaned on out of fear. The fear is of ultimately being right, but no longer being involved.
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