Wondering whether to take profits on Nvidia? Jim Cramer offers advice

The rapid growth of Nvidia’s stock since 2015 raises important questions about when long-term investors should take profits, even in highly successful companies they strongly believe in.

The investment context: A retail investor’s 2015 purchase of Nvidia shares has grown to 5,000 shares through stock splits, representing a remarkable return on investment driven by the company’s dominance in AI chips.

• The investor’s original purchase was based on Jim Cramer’s recommendation of Nvidia as a speculative stock
• Multiple stock splits in 2021 and 2024 have increased the original 125-share position to 5,000 shares
• The investor’s stated plan is to hold until the stock reaches $400 per share

Key investment principles: Two fundamental rules from Jim Cramer’s investment philosophy come into play when managing highly profitable positions.

• The first rule emphasizes that “discipline trumps conviction” when managing investments
• The second principle warns that “bulls and bears make money, while pigs get slaughtered”
• The traditional approach suggests taking out the initial investment once a stock doubles, letting the remaining “house money” ride

Success factors: The investor’s remarkable returns can be attributed to several key elements in their approach.

• Focus on multi-year business fundamentals rather than daily price fluctuations
• Strong belief in CEO Jensen Huang’s vision for Nvidia beyond gaming
• Willingness to hold through significant market volatility and drawdowns

Risk considerations: Despite Nvidia’s strong position, several potential headwinds warrant attention.

• AI is increasingly viewed as a national security issue, placing semiconductor companies at the center of US-China tensions
• Potential supply chain disruptions, particularly related to Taiwan, could impact operations
• The exceptional nature of Nvidia’s success makes it an outlier rather than a typical investment case

Balance and diversification: The importance of managing risk remains paramount even with highly successful investments.

• A diversified portfolio helps protect against single-stock risks
• Taking periodic profits can help guard against potential downside
• Tax implications should be considered but shouldn’t be the primary factor in profit-taking decisions

Looking ahead: While Nvidia continues to demonstrate strong potential for future growth, the principles of disciplined investing suggest taking some profits while maintaining a core position.

• Current market conditions and Nvidia’s recent earnings remain positive
• Investment decisions should consider individual financial circumstances and goals
• The company’s technological leadership position supports a long-term “own it, don’t trade it” approach

Strategic implications: This case demonstrates that while exceptional returns can come from maintaining high-conviction positions, implementing disciplined profit-taking strategies helps ensure long-term investment success. The challenge lies in finding the right balance between capturing gains and maintaining exposure to continued growth potential.