view transcript

Rule 2: It's OK to Pay the Taxes

No one ever likes to pay taxes.

As long as there have been taxes, people have hated paying them.

But the aversion to paying taxes on stock gains borders on the pathological.

That's why my second bedrock tenet for my 25 rules of investing is:

It's OK to pay the taxes.

So many times people will have gigantic gains and they simply refuse to take any profits because they don't want to incur taxes that cut into their winnings.

But Wall Street is littered with the broken hearts of people who feel like this.

A couple of years ago, for example,
I went to a presentation from a prominent hedge fund manager who recommended buying the stock of Macy's because of its real estate value.

The stock had already run a great deal and it was ripe for some profit-taking. But I know people who had owned it for years and had hefty profits and didn't want to take them because they would have to write a check to Uncle Sam.

Next thing you know, the stock of Macy's was cut in half and it wasn't a two- for- one split.

The mall had hit a tipping point courtesy of Amazon and that was all she wrote.

So those who didn't want to share the profit with Uncle Sam got no profit at all.
I had ZERO sympathy for the people who held on to the stock.  

I have made my peace with the tax man -- long ago.

I know that some gains were and are simply unsustainable.

But so many people thoguht that if you bought and HELD -- you always ended up with more than if you bought and SOLD,

So my discussion fell on deaf ears,

Like an audience like the character in The Lord of the Rings, Gollum, who says,

"I'm not listening, I'm not listening."

It's important to remember that gains, any gains, can be ephemeral.

It is better to stop worrying about the tax man and take the gains --
Especially when those gains appear unsustainable 'Äì

Its much better than riding things back to a loss.

Stop fearing the tax man;
start fearing the loss man.

You won't regret it.

No one likes to pay taxes, says Jim Cramer, as he explains in his Investing Rule #2.

"But I have long ago made my peace with the tax man," says Cramer.

Cramer has made mistakes and learned from them over his 30+ years of investing. And 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.

Rule 2: It's OK to Pay the Taxes

Too many investors sit on gains because they don't want to take profits and owe taxes.  But you can only push your luck for so long and he uses Macy's (M - Get Report) as an example in the video above.

Folks held onto the stock for too long, trying to avoid the tax hit, only to watch the stock crumble and their gains disappear.

So don't be afraid to pay capital gains tax.  It just means you made money!

But watch the Rule #2 above for more on why you should "stop fearing the tax man; start fearing the loss man."

We'll roll one-rule-a-day for the next 25 days!

Sign up and watch Jim Cramer's 25 Rules For Investing here!