You want some rules for trading? You want to know the essence of what my wife learned when she was thrown on a desk and told to sink or swim?
What the heck, as my wife is visiting the trading desk as a way station to her pending surgery, I thought I would jot down a few hard-knocks rules for you, rules that we have lived by since the last time she lorded over that desk.
Discipline is more important than conviction
. My wife's trading was all about fallibility. She knew that a lot of her ideas would be stinkers, even if she believed in them. So she had ironclad rules. Don't let emotions get in the way. Don't ride things down. Don't get smitten. No idea is more powerful than a stock that's headed lower. She captured all of these in a hand-written Post-It that remains posted on my
machine, in large block letters:
Discipline Is More Important Than Conviction.
Bulls and bears live on but pigs get slaughtered
. I have been relying on this rule much more of late as we get to ever-higher prices on the
. So many people write me about how
has made them millions -- I mean it, I have the testimonials -- to which I always respond with my wife's words and a harsh suggestion that I will disavow any knowledge of them if they don't
take some profits off the table because pigs do get slaughtered
There is nothing wrong with looking at the chart before buying or selling
. My wife insisted that no major action be taken on a stock until she saw a picture of it. She wanted to know where the 200-day moving average was and whether the stock was too spiked to play.
Gary B. Smith
and my wife would be best friends if she were still in the saddle.
If you feel like a position of yours is going to drown you in your own pool of losses, please the trading gods and throw a maiden into the volcano
. A week ago when
was at 53, we convened a volcano meeting and sold some of the stock to relieve some of our own mental pressure and relieve the trading gods. We just did a small portion. That allowed us to breathe easier. Funny thing, it marked the bottom. Unless a stock is a real stinker -- and no maidens can salvage it -- this loss-taking clears your head and allows you to play again.
Never turn a trade into an investment
. We put the letter T next to a stock in our review meetings because we don't want to start justifying it as an investment. When I first started working with my wife, I would buy some
for a meeting. The meeting would occur and nothing would happen with the stock. When we reviewed the positions, which we did incessantly, she would say "Why is the Heinz still on the sheets?" I would mumble something about while I may have bought it for a meeting, it turned out to he a pretty darned good story. Next time I would go to the fridge for a Diet Coke she would sell it. She made it clear that nothing bought for one reason could ever be kept on for another. That's how losses occur.
Your first loss is your best lost
. You buy something for a reason. The reason turns out not to be true. The stock is going down. Just take the darn loss. Don't be afraid of losses.
Never subsidize winners with losers
. My wife hated it when we would sell good winning stocks while we waited for the losers to turn around. She always sold the losers and kept the winners.
Trust no one
. My wife hated tips. She would make me know them better than the tipper. My wife never trusted brokers. If they burned her she screamed. If they burned her again she fired them. My wife never trusted hotlines or gurus or people on TV because, "They are just pumping their positions." Skepticism is a virtue in this business.
Don't stick around. Declare victory
blew up recently and went down to 50, some of the people I know who were short it stayed short. My wife thought that was sheer idiocy. It is important after a big win like that to move on, she would say. Take your victories when you have them.
Buy them when you can, not when you have to
was down 35 points yesterday, my office didn't need me to know this rule. I have pounded it into everybody's heads. There are no ideal entry points. But there are moments, excruciating moments, when people are frozen as a stock falls. That's when the ice water in my wife's veins -- hmm, better tell the wrist surgeon not to be surprised! -- paid off in spades. She always bought these moments. And she made out like a bandit.
She'll be up any minute. Gotta go get ready to take her in for the operation. I will let you know how things work out.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Lycos and Brocade. 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