The Next Black Monday

Three of the five best days the Dow Jones Industrial Average has ever experienced occurred in one 10-day stretch in 1987: Oct. 20 (up 5.88%), Oct. 21 (up 10.15%), and Oct. 29 (up 4.96%).

But that was not a great week for investors. It came in the wake of Black Monday -- Oct. 19, 1987, the single worst day in the Dow's history -- when, by 4 p.m. ET, the market became $500 billion less valuable. The Dow dropped 22.61% that day, and followed it up a week later with an 8% drop -- the second-largest single-day drop in history.

When the dust settled, the biggest of big names had taken a bath. American Express (NYSE: AXP  ) , Wyeth (NYSE: WYE  ) , and Alcoa (NYSE: AA  ) each lost 18% or more of their value that month.

We bring this up because the investing landscape that preceded the current "correction" was strikingly reminiscent of those days. The term bubble was omnipresent. Corrections were predicted, followed by opposing bullish predictions driven by fundamentals.

Now recession is the word du jour. And stocks? Well, depending on your source, it's either the greatest time to buy or the greatest time to sell that anyone can remember.

Bring on Black Monday?
So, what's it all mean? Full disclosure: We're not sure it's possible to make much sense out of conflicting short-term signals.

But whether next Monday will be another "black" trading day or one of the best in history, only three things matter when it comes to investing successfully:

  1. The quality of the companies you buy.
  2. The price you pay for them.
  3. The length of time you own them.

For those reasons, patient long-term investors should be eagerly awaiting the next Black Monday, even more so than the next Google or whatever comes along.

Say what?
Let's face facts: There will be but a handful of the next great growth stocks, and the odds of picking one are ... not good. But when the next Black Monday truly hits, hundreds of quality companies will suddenly become available at prices that virtually ensure success for long-term-minded investors.

That's what history has taught us. As Wharton professor Jeremy Siegel wrote, there is one reason Standard Oil was a better investment than IBM, despite IBM's superior growth: "valuation, the price you pay for the earnings and dividends you receive."

The most expensive book ever written
The Internet bubble was another painful reminder of that lesson. Our research showed that if you took a stake in every stock highlighted in Greg Kyle's 100 Best Internet Stocks to Own when it was published in the spring of 2000, and you held those stakes through October 2007, you'd have lost 62% of your capital.

For a book that cost about $15, that hurts. While Amazon.com, AXENT (which merged with Symantec (Nasdaq: SYMC  ) ), and 11 other companies simply earned a positive return, 18 names went entirely bankrupt.

The culprits? Quality and valuation. Many of these were poorly run and profitless companies, nonetheless selling at stratospheric levels. Consider that even well-run technology firms such as SanDisk (Nasdaq: SNDK  ) , Oracle (Nasdaq: ORCL  ) , and Marvell Technology (Nasdaq: MRVL  ) disappointed shareholders, because they were simply priced too aggressively. (We should note that neither SanDisk, Oracle, nor Marvell were included in Kyle's book.)

And that's the irony of the chase: You're far more likely to find the next big bust than the next big thing.

But that was eight years ago, at the height of the "tech bubble." It's got nothing to do with today. Right?

Right?!
Look at a 50-year chart, and you'll see that the Dow and S&P 500 are near all-time highs, despite the recent market sell-off. Regardless of the market environment, remember, three things matter for a successful investment plan:

  1. The quality of the companies you buy.
  2. The price you pay for them.
  3. The length of time you own them.

If you insist on buying quality companies at good prices for the long term, it's tough to overpay, even in a bubble.

Easy-peasy
We're not trying to make successful investing sound easy. It's not. But it is possible for anyone willing to devote some time, effort, and resources to building a brighter financial future.

At Motley Fool Stock Advisor, Fool co-founders David and Tom Gardner have a stellar track record of recommending quality businesses at good prices. Their stock recommendations are beating the market by more than 41 percentage points on average since 2002.

You can see their five favorite stocks for new money now, as well as all past stock ideas and research, free with a 30-day guest pass. There is no obligation to subscribe, but we're confident that the service can help make you a better investor.

This article was first published Oct. 19, 2007. It has been updated.

Neither Tim Hanson nor Brian Richards owns shares of any companies mentioned. Both Tim and Brian wear plaid on the outside, 'cause plaid is how they feel on the inside. Amazon is a Stock Advisor recommendation. Google is a Rule Breakers selection. American Express is an Inside Value pick. The Motley Fool owns shares of American Express. Symantec is a former Inside Value recommendation. The Fool's disclosure policy is writing checks its body can't cash.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 710093, ~/Articles/ArticleHandler.aspx, 4/20/2014 8:12:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement