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Cramer's Lesson In Good Investing

Thursday, 9 Jun 2011 | 7:32 PM ET

Good investing is not just about finding stocks that might go higher, Cramer said Thursday. Half the battle is knowing when to pull the trigger and lock in some gains.

"The most excruciating thing in this game is watching a healthy gain evaporate until you’re only breaking even, or, worse, it turns into a loss," Cramer noted. "But you don’t have to take that pain if you’re careful."

Cramer Calls Market's Bluff
Mad Money host Jim Cramer helps you decide when is the best time to sell your stocks.

When it comes to investing, Cramer said discipline always trumps conviction. No matter how much you might like a stock, there's always a point at which you should sell it, he explained.

To illustrate his point, Cramer called attention to Pharmasset . Cramer first recommended this speculative drug company on October 12 when it was trading at $31.73. It's currently trading at roughly $124 a share for an 288 percent run in just eight months. A biotech company, Pharmasset is working on a new treatment for Hepatitis C. Cramer thinks it's an attractive takeover target for any large pharma wanting to expand its Hepatitus C business segment. After all, Bristol-Myers Squibb bought ZymoGenetics for that very reason in September.

Nevertheless, Cramer recommends selling VRUS. Why?

"Because discipline trumps conviction. No matter how much you like Pharmasset, it’s simply up too much and you need to take something off the table," Cramer explained. "Sell most of your position and let the house’s money run if you still want to play the upside."

Not only has the stock run up too much for Cramer's liking, he thinks people are all too positive on the company. Pharma stocks live and die by clinical trial data, he continued. Regulators have the say in whether its treatments will go to market.

Also, too many analysts have put a 'buy' rating on this stock, Cramer said. He doesn't think the bullish analysts have it wrong. He just thinks investors must be aware of the risks, especially after this huge run.

"Pharmasset’s nearly quadrupled since I got behind it about eight months ago, but it’s still a classic speculative biotech outfit with no drugs on the market, no profits, no sales. They’re burning money and everything is still experimental," Cramer said. "They don’t even have anything in phase 3 development yet—that’s the last stage of clinical trials needed before the FDA will even consider approving a drug."

Bottom line: Pharmasset was a teriffic speculative stock at $31, but is now a different story at $123. Discipline has to trump conviction, Cramer said, or you will find up letting gains evaporate.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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