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Jim Cramer’s 25 Rules of Investing (Rules 16 – 20)

This is part four of five on alleged “25 rules of investing” that Jim Cramer has listed on his site, TheStreet.com, plus my own commentary. The first five were basically cute little catch phrases on some common-sense rules. Rules six through ten were a little more insightful, speaking to more subtle ideas such as not buying a crappy stock because you think it’ll be acquired (because it probably won’t). The early to mid-teens touched on some rules for the more experienced investor or someone who just needs a little prodding to ensure they’re looking at everything objectively. Let’s see what the next five yield…

Rule No. 16 – Never Subsidize Losers With Winners [3]
You should read the explanation yourself but it’s a good thought – don’t sell a stock that has performed well so that you can pump it into one you thought was going to do well but instead has tanked.

Rule No. 17 – Check Hope At The Door [4]
This is another one those “kick you in the head” type rules – a rule you know, I know, everyone knows but because of human nature, we ignore it. Don’t hope a stock will go back up, don’t hope that it’ll split or get acquired, leave hope at the door because she can’t guess the market any better than million dollar mutual fund managers.

Rule No. 18 – Be Flexible [5]
Stocks don’t live in a vacuum and things change. Conditions that made your purchase a good decision (at least in your mind) may not exist anymore, so get out. Don’t buy and hold through turbulent times if the turbulance affects the very reasons why you purchased the stock.

Rule No. 19 – When the Chiefs Retreat, So Should You [6]
This isn’t a rule about insider trading – everyone can tell you that when an exec sells stock, you probably want to also. This is better: When a CEO quits for personal reasons, dump the stock. You should also read this article because it’s pretty funny. Here’s an excerpt:

CEOs don’t quit for personal reasons. CFOs don’t quit for personal reasons. These are fabulous jobs. You get them after giving up much of what people enjoy about life, such as family, friends and nights out.

Rule No. 20 – Giving Up on Value Is a Sin [7]
Buying low, selling high – and waiting after you do buy low. He details some examples of stocks at 52-week lows with tremendous value but no buyers. The reason, he claims, is because investors aren’t patient enough to buy into these “lows” and wait for the highs to rematerialize. He has good points but I don’t think most of us know if we’re looking at a valley or if we’re looking at cliff.

Only five left… look for them in the coming days.