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Commandment No. 3: Take Your Losses

Jim Cramer

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 Quote) because it once traded at $30. We could keep our positions in Nortel(NT Quote) and JDS Uniphase(JDSU Quote) 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 Quote) if you are stuck in EMC(EMC Quote) waiting for it to come back. You can't do the homework needed to learn Ultra Petroleum(UPL Quote) if you are keeping up with the Verizon(VZ Quote) and BellSouth(BLS Quote) 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 Quote) that's been hanging there all these years because you bought it much higher. Sell the Delta(DAL Quote) 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.