Mad Money

Cramer: The single biggest investment mistake ever

Cramer can’t stand this type of investor

In more than three decades of investing, Jim Cramer has learned some valuable lessons. Sometimes the hard way, and sometimes just from having common sense. He has now decided to open up his lesson book to share his most effective lessons with investors, too.

One of his rules is that it is OK to pay taxes. Some investors despise having to pay "the man." However, Cramer has learned that sometimes the least of your worries is related to taxes. So never, ever allow the abhorrence of taxes to transcend good judgment.

Many investors choose to hold a stock for more than a year, because they are then subject to paying a more favorable long-term capital gains tax. If the position is sold in less than a year, then they are frequently required to pay short-term capital gains tax that can be a higher tax rate. However, Cramer says taxes are never a good reason to hang on to a position.

For instance, in March 2000, when the Nasdaq was at its high, he told investors at his hedge fund that he was going to sell out of his common stocks to buy bonds. People were startled as he had never made a call like that before.

Not wanting to pay taxes is the single investment mistake that Cramer has seen in his generation
Peter Dazeley | Getty Images

Cramer was alarmed by the fact that stocks had just jumped 20 percent in a number of weeks, and the insiders were bailing in record numbers and were selling all over the place. Many investors were angry with his decision, because they would have to pay a tremendous amount of tax on those gains.

"I felt so intensely about my view at the time…that I wrote back to each person individually saying that if you don't take profits, you won't have profits—that the least of your worries is the tax man," Cramer said.

In this case, Cramer said that investors could have saved at least 40 to 57 percent of capital if they had listened to him and sold. And sure, they could have ridden out the market as some suggested to do. But unfortunately Cramer saw too many investors abandon the market near the bottom, when it was too late.

With this in mind, Cramer said to never consider taxes as a reason to hold a stock. Especially if that stock has become too fat and run up too fast. That means it can come back down hard, just as what happened in 2000.

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"Never hold on to something not worth holding on to, or something that has gotten dangerously overvalued, simply so you can wait until the gain goes long term and the rates come down," Cramer added.

Not wanting to pay taxes is the single biggest investment mistake that Cramer has seen in his generation. In the end, taxes do not trump fundamentals. Stocks can be just as dangerous, whether they are owned long term or short term, if the companies underneath the stock falter. (Tweet This)

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