Mad Money

Long-term investing: The big mistake

Demystifying concept of long-term investing
Demystifying concept of long-term investing

When people talk about stocks, they often kick around the term investing for the long-term.

But the concept of long-term can be somewhat murky and Jim Cramer worries the confusion could result in losses, especially for individual investors who are somewhat new to Wall Street and its jargon.

"Long-term investing has to do with your time horizon," said the "Mad Money" host. That's it. To Cramer long-term investing involves putting money behind a theme that you think will take a year or more to play out.

"However, it's not the same as simply owning stocks for a long time," Cramer said. "It doesn't mean buy and hold or purchase your stocks and wait for gains."

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You must never do that.

Cramer believes it's critically important to become actively involved with your investments, monitoring earnings reports, government documents and newspaper reports - something he calls homework.

Then, what's an example of a long-term investment?

"Buying Facebook as a bet that the company will dominate mobile in the years ahead is an example of a long-term investment," Cramer said. But you must always revisit the long-term thesis and makes sure it remains in tact. If it doesn't or if the thesis has been fulfilled, it's then time to sell and put that money to work elsewhere.

And that can happen in less than a year.

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Cramer fears too many individuals make the mistake of not regularly visiting their long-term investments. "They all have expiration dates," he said.

"You have to go into a long-term investment with an exit strategy," Cramer added. And although you may have expected the thesis to hold for a year or more, it may not.

Once it's been fulfilled, whether a year has passed or only a few days, it's time to move on.

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