Losses Are Part of the Game

The trader's goal is to let his gains run, and cut his losses as fast as possible.
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If you are a trader, taking losses should be part of your game. I take them every day. Let me give you a sample of my loss-generating capabilities.

On Thursday, when the market opened down,

Telmex

(TMX)

traded up off of a strong brokerage push. I am always looking for strength on weak days, something that would tell me where real buying is when everything else is cascading. It makes me salivate.

That Telmex was up a buck in a terrible tape was a sign of Herculean strength. When the market was down about one hundred points, Telmex slipped back to being up a half.

At that point I moved. I bid for 15,000 shares and got hit. (Newbies -- I bought 15,000 shares as someone smacked my bid.) I owned the stock at $81 and change.

Every hour we get off the desk at

Cramer Berkowitz

and we review, painstakingly, everything we have done. This oral exercise is something my wife, the

Trading Goddess

, started when she ran the trading desk. She would make me say the position out loud, why I liked it, what I had done that day on it, and how I could defend that action.

(You want brutal? Try explaining every hour what you have bought to a wife who didn't like the tape unless it was a lock to the upside.)

We no longer have the defend and cross examination remonstration period, but we do find there is tremendous value to reciting the stock and why you like it and what new homework you have done. It forces you to declare whether you bought something for a trade (a T on our sheets) or an investment, so the two don't cross. If you agree that something is a trade, then you can't let it bury you. In fact, you can't even keep it if it doesn't work.

Lawyers among you will understand this concept: There is a much higher burden of proof to an investment than a trade. We allow trading all day, but we don't let it cross into the investment pile, which requires far more rigor.

TMX immediately became a T; it was done because if the market turned around, we thought we could sell it up a couple of bucks because brokers would come back to TMX and push the name.

Twice during our read through, I said why I bought Telmex and what my objective was. By the third time, the market was down 200 and we had to call an audible. We came to realize that while the

NDX

was fit to rally, the listed stocks weren't going anywhere. We booted out 10,000 shares down a half and offered the remaining 5,000.

We never got taken on the 5,000 and I ended up riding that down two points. I wasn't disciplined enough to take off the last 5,000, which cost me $10,000 unrealized vs. the $2,500 realized loss that was available to me. I should have taken it at the end of the day, but I held it back hoping for a stronger opening Friday.

I thought this was a good example because had I ridden the whole position down, I would be down $35,000 on something I did to make $25,000. That's inexcusable. As it is, that 5,000 shares of TMX I am still long sticks out like the sore thumb of hope, when hope should never be part of your equation.

Understand that for me this is business as usual. I am running $250 million. My goal is to let my gains run and cut my losses as fast as possible.

No good trader ever does it any other way.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Telmex. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.