Maxim and Counter-Maxim

Another of Cramer's principles that sticks in my craw is the one that says your money is gone, really gone, if your stock goes down, but if it goes up, your gain doesn't exist unless you sell your shares.

Any fifth grader can see a violation of parity, here. If your stock moves, up or down, then the money is either there or it's not, and the direction of the move shouldn't have anything to do with it. Goose and Gander.

But that's an academic objection. In the real world, anybody who rode JDSU into the ground knows what Cramer's maxim means. It means, the money is gone and it's not coming back.

I call that Post-Bubble Wisdom. A cautionary principle. But it's not very true. Most stocks that go down come back up again. And many stocks go up and come down and then go up again, higher than before. Over time, stocks in general go up.

So I was pleased to read a post on Real Money, last week, pointing out that a stock's price is only what some fool is willing to pay for it, at the moment. Everybody knows that, but saying it brings a little common sense into the situation. Sitting on a loss is not such a bad thing when you look at it that way. I always found it edifying.

If I believe in my investment choices, and they are not invalidated by the day's news, then I will benignly neglect them, confident that they will find their true level by the time that I need the money.

This applies to all stocks except old Just-Didn't-Stay-Up.