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Rule No. 16: Never Subsidize Losers With Winners

Editor's note: Jim Cramer's new book, Real Money: Sane Investing in an Insane World, is available in selected bookstores now. As a special bonus to RealMoney readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here. Today, we present Cramer's sixteenth rule of investing. Read more about his rules:

  1. Pigs Get Slaughtered
  2. It's OK to Pay the Taxes
  3. Don't Buy All at Once
  4. Buy Damaged Stocks
  5. Diversify to Control Risk
  6. Do Your Homework
  7. Don't Panic
  8. Buy Best-of-Breed
  9. Defend Some Stocks
  10. Don't Bet on Bad Stocks
  11. Don't Own Too Many Names
  12. Cash Is for Winners
  13. No Woulda, Shoulda, Couldas
  14. Expect Corrections
  15. Watch Bonds


Professionals and amateurs alike hate selling their dogs. They keep hoping, keep assuming, that a sinking stock is wrong in its direction. They rationalize that the weakness or lack of interest they see is and will be fleeting, and that people soon will recognize the value that the holder sees in the stock.

That's all well and good, until you need money.

Most fund managers have fabulous marketing teams that are able to hype their funds regardless of performance. Despite that and despite the shameless way this industry supports just about anyone who runs money if the money-runner is willing to kick back to the sources of funds, managers do get cash calls. They periodically have to redeem shares they own for cash to send back to unlucky investors.

When they do, that tendency to keep the dogs develops a sinister side: Good stocks get sold to subsidize the losers. You then get a self-fulfilling spiral as the bad stocks stay bad. They usually keep going down. And the fund, without the good stocks, keeps sinking. They never learn my rule:

Never subsidize losers with winners.

Individuals do the same thing. They have only a finite amount of capital to invest. Rather than take the medicine -- the loss -- they hold on to the losers and sell their winners.

My advice to anyone who is stuck in this position is quite simple: Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
7. Don't Panic 8. Buy Best-of-Breed
9. Defend Some Stocks 10. Don't Bet on Bad Stocks
11. Own Fewer Names 12. Cash Is for Winners
13. No Regrets 14. Expect Corrections
15. Know Bonds 16. Don't Subsidize Losers
Check back for more of Cramer's Rules

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict."

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