Editor's note: Jim Cramer's book, Real Money: Sane Investing in an Insane World, includes Cramer's "Ten Commandments of Trading", which we've reprinted below. For more about the new book and to order it, click here. To learn his "Twenty-Five Rules of Investing", click here.
Take Your Losses
Commandment 3
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 - news - Cramer's Take) because it once traded at $30. We could keep our positions in Nortel (NT - news - Cramer's Take) and JDS Uniphase (JDSU - news - Cramer's Take) 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 - news - Cramer's Take) if you are stuck in EMC (EMC - news - Cramer's Take) waiting for it to come back. You can't do the homework needed to learn Ultra Petroleum (UPL - news - Cramer's Take) if you are keeping up with the Verizon (VZ - news - Cramer's Take) and BellSouth (BLS - news - Cramer's Take) 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 - news - Cramer's Take) that's been hanging there all these years because you bought it much higher. Sell the Delta (DAL - news - Cramer's Take) 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.
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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