One of Cramer’s cardinal rules is to never turn a trade into an investment. If there is one thing he wants investors to take away from “Mad Money,” it is to never confuse these two concepts. That means understanding the purpose of why you are buying a stock.
Sometimes an investor will buy a stock for one reason, and then another reason happens. Then they decide to turn the trade into an investment and buy more as the stock goes down. Or perhaps the reason for the trade never happens, so they end up holding the stock.
“What’s the worst thing that can happen? The answer, of course, is plenty, and almost all of it bad,” Cramer said.
One silly mistake that some investors make is to say “if it weren’t for that darned buy of one stock, I could have been up big.”
It only takes one or two losers to wreck a portfolio. Cramer devotes significantly more time to analyzing the losers than the winners, because the winners tend to take care of themselves.
That is why he recommended that investors take the loss on a stock before it gets hideous.
“Don’t buy into the notion that you can’t sell until it comes back, and then you promise not to do it again. That is how losers think,” Cramer said.
The flipside is true, too. Gains won’t be realized until a stock is actually sold, and many investors are reluctant to sell because they don’t’ want to pay taxes. Gains not taken are losses that will be taken, Cramer said.