Editor's note: This is a special excerpt from Jim Cramer's book, Jim Cramer's Mad Money: Watch TV, Get Rich. To order your copy and read all the rules, click here.
Sneak Preview: Streaks Cloud Judgment
7. Past performance is not an indicator of future success. If you make a lot of money in a sector or an industry, it's only natural for you to feel like stocks in that industry will keep making you money. Your instinct is to keep pushing it, to keep trying to find new ways to play the same trend that's already made you big profits. I know because I have this instinct too.
Investing based on your past success in a sector is wrong; worse than that, it's expensive. When you make money in a stock, don't ever let that make you overconfident. Don't let it influence one bit your judgment about similar stocks in the same industry. Every trade, every investment is different.
I don't like to use a gambling analogy, but it will help bring the point home. When you're playing cards and you hit two blackjacks in a row, does that increase or decrease your chances of winning the next hand? You know it does nothing. The cards have no memory, especially when shuffled. The same is true with stocks.
We all want to believe in streaks, we want to be streak hitters, and so we look for stocks that fit into our streaks. But even though it feels right, that kind of investing is a surefire way to lose money. When you invest, and you get a stock right, I know it feels to you as though that should have something to do with other stocks. ... It's just how we're programmed, but the programming is wrong. You have to beat your instincts here and not let your past successes poison your ability to judge stocks.
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At the time of publication of this excerpt, Cramer had no positions in any of the stocks mentioned in this excerpt.
Jim 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. Watch Cramer on Mad Money at 6 p.m. & 11p.m. ET weeknights on CNBC. Click here to order any of Jim Cramer’s books including his latest endeavor Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.
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