Cramer on the Business of Not Losing Money

I'm in the loss avoidance business; always have been; always will be. I know that if I can avoid hefty losses the gains will come on their own accord. I will do enough homework, keep my eyes open enough and sit through enough conference calls to generate wins.

The most important rule a trader lives by? "Never let your gains turn into losses."

Sure, you can ride things down if you play at home. You don't report to anybody. You have your day job. Me? I get paid only if I make my partners money. That's why if I think a stock I have owned for days, months or years may be about to go down, and go down big, I sell it.

For the last 16 years, 16 glorious, wonderful years, that's been just okay advice. We have had an incredibly long stretch of good fortune. I don't foresee it ending this year. But that doesn't mean that we should close our eyes to losses. That doesn't mean we should just buy stocks and forget about them, regardless of the near-term fundamentals.

I can't, as a hedge fund manager, willfully and knowingly get blown out of the water short-term for the sake of long-term investing. That's no way to run a business. I can't let a Seagate, which I rode up for five years, go back to where it was two years ago and not run the risk of having the money taken away. I can't let the oil drillers, my biggest winners in 1996 and much of 1997, go against me. So I set up structures -- stopouts, puts, puts on indices -- that make it so I never ever consciously try to give up those gains.

That means, at various times, I will leave stocks that I love. I love Cisco, but late last year I sold it, and then bought it back 20 points later. Luck? Stupidity? Greed? How about "business as usual"? The stock got ahead of itself and I did not want to give back that gain.

Yes, I know, taxes. But I would rather pay taxes then generate losses, realized or unrealized, and I think the last few years have been a bit unrealistic on the gains side. I would rather book a gain than see it go to a loss.

Not all of you out there are in my shoes. In fact very few of you are. But I can't lie to you. I have to tell you what I do. I can't be a dishonest reporter. I will be wrong at times. I will make snap judgments. But I will limit my losses and reap my gains. That's called hedge fund management. It's what I do for a living. I make no apologies for it, or for the decisions I make in the name of performance.

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