Trading Gains, Not Investment Losses

Jim Cramer

 

 

Commandment 4

When you mark something as a trade, you should not expect to make as much money on it as you would as an investment. A trade, like buying something into a quarter, is not about trying to make money over a long period of time.

Let's take Apple Computer (AAPL - news - Cramer's Take). I think that Apple's a good trade into the quarter on Wednesday. I genuinely believe there is enough good news there that this $42 stock can ramp to $45.

But if there isn't?

I would be gone either way. I am not going to buy the stock for the quarter and then, if it doesn't work out, switch it into the investment file because I like the Tiger operating system's prospects for next quarter, or because the iPod Shuffle's a really cool gizmo.

And, most important, if it works and the stock goes up the next day, I am not going to say "You know what, this Apple's one good long-term story. I am going to stick it out."

I can't do that, because I had earmarked Apple for a trade before I started it. I can't tell you how many times I have bought something for a trade, had it go up and then held on to it only to lose the trading gain and come up with an investment loss. Hence my commandment:

Never turn a trading gain into an investment loss.

This year, in particular, I am talking to a lot of people who bought stocks for a trade and then ended up carrying them as a loss into the investment column. I recently spoke to one investor who had bought Valero (VLO - news - Cramer's Take) for a trade on gasoline prices, quickly picked up 7 points, and then rode it all the way back to where he bought it because he decided he "liked" Valero.

What does that mean?

You don't like Valero; you like the profit Valero generated. Never confuse the two.

Or you most certainly will give back the profit.