When deciding to sell (or buy more) shares, the original cost to you doesn’t matter. Jim Cramer, cofounder of TheStreet.com author of Jim Cramer’s Real Money, explains that owning a stock is a bet on the future, not the past.
People ask me every day what a stock they own is worth. They almost always say, “I bought TheStreet.com at ten dollars and it is now at four dollars. What should I do with it?” I tell them immediately, I don’t care where a stock traded, I don’t care about the past, I don’t care where you bought the stock, the only thing I care about with a stock is what’s going to happen next. I must say those words a dozen times a week on my radio show because most people don’t grasp this simple concept that determines just about everything you need in order to know whether a stock is going to go up or down: the future.
People are constantly trying to bring up the irrelevant when they talk stocks. Maybe you bought the stock well, maybe you bought it badly. It shouldn’t influence your decision. They want to mention what went through their minds when they bought it and why they bought. I don’t care about that either, because it obviously didn’t turn out right or you wouldn’t be referring to where you bought it and mentioning how you are down on it.
I’m driven so crazy by this web of meaningless alibis that the only time I take individual questions about individual stocks on my radio show is on Fridays when we play “The Lightning Round.” I forbid callers to say anything but the name of the stock and I take it from there, telling them up or down, buy or sell, based strictly on what I think is going to happen in the future. That’s because owning stock is a bet on the future, not the past. You must buy into that notion or you mustn’t buy stocks yourself.
I didn’t always feel this way. At one point, no doubt like you now, I was completely caught up in the notion of my “basis,” the technical term, both on Wall Street and with the IRS, for the price I paid for a stock. If my basis for Maytag, say, was $34, and the stock was $28, I would let that unrealized loss get in the way of the decision-making process, because, I, like you, hate to take a loss. Of course, the situation is already in “loss mode” as I like to call it, a loss to anyone but you because you hold out hope that should play no role in the process.
In fact, I would let this basis factor so mar my judgment about the future of Maytag that I wouldn’t be able to think clearly about whether I should give up on the position or buy more. I would say, “Maytag, I’m down six, maybe I have to buy more. Maybe I should be bigger, ’cause I’m down.” Or, obviously, “Maybe if I buy more I can make it right even if I’m wrong now!” Lots of that kind of logic swarmed in my head when I was starting out.
This pigheadedness about my basis — in the face of obvious facts about how bright or poor the future of Maytag would be — made my wife go ballistic. The Trading Goddess knew that the future was all that mattered, and she knew I was being blinded to it because I was down six bucks when I reviewed the piece of merchandise on which I was “long,” or owned. In those grand old days of trading together at 56 Beaver Street in downtown Manhattan, a floor above the steak joint, Delmonico’s, a downtown fixture, she would insist we get off the desk multiple times a day and go to a bare office located right above the kitchen of the restaurant. There, with steak fumes wafting in and threatening to embed themselves in our clothes and our nostrils, she would go over each position slowly and methodically, reciting each name from our position sheets. After each stock she would ask me what I thought and how I would rank it on a scale of one to five, a one being a stock I wanted to buy more of right now and a five being one I needed to sell pronto.
These sessions were extremely painful because there would be a dripping tone of sarcasm when a stock had obviously gone awry. She was always exacting in her methods; these weren’t lovey-dovey klatches between husband and wife, believe me. They were discipline camps. I would try to think clearly about each position she would enunciate, but invariably I would be blinded by my basis. I just couldn’t get past the decline from where I bought the darned thing. My judgment was stymied by the stigma of unrealized loss that each negative position carried.
Then one day, we got off the desk and went to the steak room, as I called it, and she handed out the sheets as always but the basis, the price I had paid, was whited out. That’s right, she had grabbed a bottle of Wite-Out and painted over every price that I had originally paid for the stocks. “There,” she said, “now you can think clearly.”
Of course, when we got down to the Maytag position, I was able, at last, to measure Maytag for what mattered, the future, not what I was letting matter, the past, the 6 points I was down on the position. When not faced with the tether of history, I immediately admitted that Whirlpool and GE were kicking Maytag’s butt and that we ought to just face the darned music and dump the stock.
From then on, she routinely whited out all the bases of every stock from our position sheets. And our performance increased dramatically. Lesson number one: When it comes to buying or selling a stock, don’t tell me where you bought it, tell me where it’s going. That’s all that matters when it comes to buying or selling a stock.
ABOUT THE AUTHOR
James J. Cramer, author Jim Cramer’s Real Money: Sane Investing in an Insane World (Copyright © 2005 by J. J. Cramer & Co.), is the cofounder of TheStreet.com, host of CNBC’s Mad Money, and “Bottom Line” columnist for New York magazine.
MORE ARTICLES BY THE AUTHOR
- The Basics of Building a Portfolio
- The Importance of Stock Price in Building a Diversified Portfolio
- Spotting Bottoms in the Stock Market
- Why You Should Ignore the Three Golden Rules of Investing
LEARN MORE
Loading ...
