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Commandment No. 3: Take Your Losses

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 "Ten Commandments of Trading." For more about the new book and to order it, click here . To learn his "Twenty-Five Rules of Investing," click here . To read Cramer's first commandment, click here . To read Cramer's second commandment, click here . Today, we present Cramer's third commandment.


It's OK to take a loss when you already have one.

So many investors who call me on my radio or television shows have big losses on stocks. They stay in, though, because they genuinely believe that they don't have a loss until they take it.

That, of course, is ridiculous. It's another flaw of human nature, another flaw that hurts long-term performance.

If we played with unlimited capital, it wouldn't matter that we're hanging on to Applied Materials (AMAT - Get Report) because it once traded at $30. We could keep our positions in Nortel (NT) and JDS Uniphase (JDSU - Get Report) because, what the heck, they aren't that much capital.

But the investing process takes time, inclination and capital that most people don't have. You can't find the next Sears Holdings (SHLD) if you are stuck in EMC (EMC) waiting for it to come back. You can't do the homework needed to learn Ultra Petroleum (UPL) if you are keeping up with the Verizon (VZ - Get Report) and BellSouth (BLS) spending plans that could revitalize or trash JDS Uniphase.

That's why I always tell people that it's OK to take the loss, especially if you already have it. The opportunity cost of staying with losers is always either misunderstood or chronically underestimated by investors.

Go through your portfolio. Kick out that AMR (AMR) that's been hanging there all these years because you bought it much higher. Sell the Delta (DAL) you picked up at $11 because you thought the asset too valuable to sell.

And start learning new stories. That's the way to make bigger money than you are now.

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. ET 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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