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
readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it,
. Today, we present Cramer's sixteenth rule of investing. Read more about his rules:
Pigs Get Slaughtered
It's OK to Pay the Taxes
Don't Buy All at Once
Buy Damaged Stocks
Diversify to Control Risk
Do Your Homework
Defend Some Stocks
Don't Bet on Bad Stocks
Don't Own Too Many Names
Cash Is for Winners
No Woulda, Shoulda, Couldas
Professionals and amateurs alike hate selling their dogs. They keep hoping, keep assuming, that a sinking stock is wrong in its direction. They rationalize that the weakness or lack of interest they see is and will be fleeting, and that people soon will recognize the value that the holder sees in the stock.
That's all well and good, until you need money.
Most fund managers have fabulous marketing teams that are able to hype their funds regardless of performance. Despite that and despite the shameless way this industry supports just about anyone who runs money if the money-runner is willing to kick back to the sources of funds, managers do get cash calls. They periodically have to redeem shares they own for cash to send back to unlucky investors.
When they do, that tendency to keep the dogs develops a sinister side: Good stocks get sold to subsidize the losers. You then get a self-fulfilling spiral as the bad stocks stay bad. They usually keep going down. And the fund, without the good stocks, keeps sinking. They never learn my rule:
Never subsidize losers with winners.
Individuals do the same thing. They have only a finite amount of capital to invest. Rather than take the medicine -- the loss -- they hold on to the losers and sell their winners.
My advice to anyone who is stuck in this position is quite simple: Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.