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Rule 16: Never Subsidize Losers With Winners

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 can 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 am almost certain you never will.

Action Alerts Plus portfolio manager and TheStreet's founder Jim Cramer has learned a lot over his 30+ years of investing. So he created a list of 25 Rules for Investing that can help you avoid the novice pitfalls that even he fell into on occasion.

And one of them is not selling a loser because you think it will come back.

Rule 16: Never Subsidize Losers With Winners

"Investors 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...[when then need to generate cash]," says Cramer.

Mainly because they think their darling stock will come back and they don't want to be proven wrong. 

But Cramer's 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."

Watch Rule #16 above for more.

And don't forget, we are rolling out one-rule-a-day until we get all 25 rules out! So stay tuned!

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