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What to Do When the Dow Hits 7,500

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Talk about ironic ... I originally submitted this article to my editor on Aug. 29, after the Dow had fallen "all the way" to 11,500 -- but it never got published.

The plan was to take you back to 1996 -- when the Dow crossed the 6,000 mark for the first time ever -- to a Charlie Rose roundtable that included Jim Cramer and Motley Fool co-founders David and Tom Gardner.

Another crazy call by Cramer
Back then, Cramer argued that the Dow would soar all the way to 7,500 -- despite the fact that it had already more than doubled in just over five years, and that even shares of behemoths like American Express (NYSE: AXP  ) and Alcoa (NYSE: AA  ) had risen more than 100% from their 1991 lows.

Meanwhile, David and Tom took a much different approach, telling viewers, "We don't care where the market is headed." They explained that they were focused on finding the best eight or nine stocks to grow your wealth over the long haul. Basically, they searched for stocks that:

  • Were underfollowed on Wall Street
  • Had a net profit margin of at least 10%
  • Had earnings and sales growth greater than 25%
  • Had insider holdings of 15% or more

I went on to show how, early on, this approach led them to America Online (NYSE: TWX  ) and, among others -- not to mention that it landed them on the covers of magazines from Fortune to Newsweek. But I also thought it fair to point out that it was hard not to get rich in that market.

After all, Cramer had been right on the money. The Dow soared to well over 9,000 in 1998 and reached a whopping 11,500 less than two years after that -- which is exactly where it stood on Aug. 29, 2008, when I submitted my article.

Could my timing be any worse?
Sure, we were in the middle of a fierce bear market -- but I pointed out that of the 24 stocks David and Tom recommended to their Stock Advisor subscribers during the last bear market:

  • 23 were (or were sold) in positive territory
  • Eleven had more than doubled
  • Five were up more than 400%

I even added, "I bring this up merely to illustrate that despite what all the talking heads on TV are telling you, you absolutely should be buying great companies right now -- while they are still selling at massive discounts."

I'd almost jokingly insinuated that the Dow could drop to 7,500 ... and then, within six weeks, we were a mere 200 points from seeing it do just that.

And here we are now
In the process, I watched nice double-digit gains in stocks like Caterpillar (NYSE: CAT  ) and Intuitive Surgical (Nasdaq: ISRG  ) dissolve into gut-wrenching double-digit losses as the panic officially set in.

Now I am left with the same questions that you probably have:

After being so thoroughly humbled by this market, I won't go so far as to suggest that you follow Buffett's lead to be greedy when others are fearful. And I won't even preach what my fellow Fools and I are practicing.

Instead, I'll simply share the advice that Tom Gardner recently gave us at our company-wide "huddle" ...

How you can turn losses into a huge win
Tom pointed out that when things are going well, most of us spend all of our time high-fiving and celebrating, whereas when things go sour, we turn to sulking, worrying, and even panicking.

Meanwhile, when the going gets tough for the toughest, smartest, and most successful people out there, they do something drastically different ... they learn from it. And that's what sets them apart.

Take Benjamin Graham, for example ...
He went bankrupt three separate times as an investor. But each time, he documented and studied his failures, and he was eventually able to impart this investment wisdom to countless others -- including Warren Buffett, who in turn learned from his own mistakes and failures.

Early in Buffett's career, he mistakenly believed he could save a failing textile mill. After being forced to liquidate its textile operations, Buffett learned to pay up for quality and turned that company into a $140 billion legend.

Another great example is Pixar's John Lasseter. After he graduated from college, Disney hired him to captain its Jungle Cruise ride at Disneyland. Later, the company gave him a shot at being an animator, and he quickly recognized the ability of new computer technologies to revolutionize animation.

But Disney was so unimpressed with his first feature that they fired him on the spot. So Lasseter literally went back to the drawing board. After fine-tuning his process, he moved on to the company that would become Pixar, where he's won two Academy Awards and churned out a string of blockbuster hits that included Toy Story, A Bug's Life, and Cars.

Oh, and let's not forget -- he and Steve Jobs later sold Pixar to Disney for a cool $7.4 billion.

Now it's your turn
At the end of August, I never would have imagined that we would see the Dow hit 7,500. But now I know that anything is possible. And if the unthinkable does happen, the best thing we can do is learn from our mistakes so we can make better investments going forward.

I've already learned that companies like Clearwire -- who bleed cash quarter after quarter and are years away from profitability -- may not be the best places for my money, no matter how intriguing their stories are.

I've also learned that I should avoid investing in companies whose business models are a bit too complex for me to fully understand. That's why I recently sold my shares of NYSE Euronext and Goldman Sachs and why I probably won't be buying shares of Bank of America (NYSE: BAC  ) or AIG (NYSE: AIG  ) anytime soon -- no matter how cheap they get.

Now, I challenge you to use the comment function below to tell all of us what you've learned and how you will use that information to make yourself a better investor.

And if you're interested in what longtime investors like Tom and David Gardner have learned, you can always take a free 30-day trial of their Motley Fool Stock Advisor service -- where you'll get in-depth analysis of every stock they've recommended, including their two top stocks for new money now.

Click here for more information. There is no obligation to subscribe.

This article was first published Oct. 27, 2008. It has been updated.

Austin Edwards owns shares of Clearwire, Caterpillar, and Intuitive Surgical. Amazon is a Motley Fool Stock Advisor recommendation. Intuitive Surgical is a Motley Fool Rule Breakers selection. and Disney are Stock Advisor picks. Disney and American Express are Inside Value recommendations. The Motley Fool owns shares of American Express. Bank of America is a former Income Investor choice. The Motley Fool has a disclosure policy.

Read/Post Comments (25) | Recommend This Article (55)

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.

  • Report this Comment On February 02, 2009, at 11:55 AM, LifeForceDancr wrote:

    What I have learned is that buy and hold does not work and you do not invest in a company based on its reputation. The technical investors who follow charts are the few who have any chance of being objective. The traders on trenchrat's message board called "It Is What It Is" at Motley are some of only few that have the chance to be objective and give some guidance during this market. I stopped trading my two hundred stocks on "CAPS" at the Fool and have watched it decrease into oblivion. These were all highly rated companies originally. I plan to let this portfolio stand for ten years or more to demonstrate that buy and hold does not work unless you invest in mutual funds. Long term buy and hold works with mutual funds because you do nothing while the mutual fund managers churn the portfolio a hundred percent to three hundred percent per year. You see, MUTUAL FUND MANAGERS DO NOT BELIEVE IN BUY AND HOLD EITHER.

  • Report this Comment On February 02, 2009, at 12:04 PM, catoismymotor wrote:

    I am a newbie. For the first time I got into the market this past July. As you can imagine I got to see more bubbles burst at once than I care to reflect on. The first of my dollars in went to companies like UNT, DRQ, SLW and POT. Yea, my butt still stings. The up side is that I have learned a valuable lesson early: No matter how much I study, read, ask questions and run theoretical numbers I should not be allowed around commodities. I get hives now when I go to the grocery store! Are any of the above bad companies? No. My problem was I bought in at the exact worse time.

    I have since grown much wiser about where and when I should place my money. I have read on The Motley Fool about St. Buffet not putting money into companies that conduct business in a field he does not understand. That hit home with me. I have also learned through books and the internet how to screen for stocks that look to be excellent candidates for purchase. I have also adopted the buy and hold mentality. At the moment I am building a portfolio of stocks that I will hold from 10 to 15 years. I also am forcing myself to use the dollar cost averaging system to make the purchases. It helps me to stick to a budget.

    The last thing I will list here that I have learned this year is that The Motley Fool is my most cherished resource for advice and support. I know that many of you are angry with counsel received from those that put together the advisor services. I would be cross as well at losing 30%-70% of my portfolios value. Please remember that these people also have taken a beating. They have money on the line. Their retirement, kid’s college tuitions and standard of living have been effected as well. All of us are in this mess together. It is only through teamwork and patience that we can come out of this better people, better investors.

  • Report this Comment On February 02, 2009, at 12:49 PM, hansjuergen wrote:

    I learned that the stock market is not for me. I learned this during the 2000-02 downturn. It has become crystal clear to me that, contrary to the recommendations of the financial advice community, stocks are not for everyone. A good financial advisor would do well to challenge clients to realistically examine their tolerance for watching their investment balances go down month after month for a prolonged period of time. Those who do not have the stomach for this should not be invested in the market. I am one such person. I have most of my retirement funds in CD's at banks and credit unions. I also have some I-bonds and a couple of low-cost fixed annuities. My investments went up in 2008. I sleep comfortably.

  • Report this Comment On February 02, 2009, at 1:05 PM, Rasbold wrote:

    What have I learned? Oh, God, the hard way!!

    The most important...never buy into a rally. After having been burned hard in 2001...yes I was buying any technology out there. Lucent, Qwest, Telect, WorldCom, Cisco, Alcatel, Sprint, even AT& obscene prices. Like I threw my surfboard onto the high watermark and rode that wave straight in to the ground. I learned that no sector is safe, not even my damned job. I lost everything, my holdings, my career, almost my home. But I learned.

    I learned to be patient. And my patience will pay. I am investing now heavier than I have ever even though of before.

    We are not at the bottom yet, but it is in sight. DCA may pay off well, and you WILL be buying at the bottom, rock bottom. You can say, hell yes, I bought Alcoa at 8 bucks a share! Hell, yes, I bought Dow Chemical at 11 dollars!

    Like a good fishing story....

    And my Dow will never Jones!

  • Report this Comment On February 02, 2009, at 2:26 PM, xbreed3 wrote:

    I have learned that fundamental analysis works for some but not for me. I've moved to technical analysis. It's a lot of hard work to learn and practice but when combined with good money management skills you can make money in up or down markets. Perhaps I've gone from investor to trader but I've never been more successful and I had a phenomenal year last year.

    I do still direct people who ask me about investing here because I still believe it's the best source/community of its kind.

  • Report this Comment On February 02, 2009, at 3:43 PM, venkytalks wrote:

    I have learned that it is easy to sell near the summit of a bull market, when stock prices look ridiculously high.

    It is very difficult to judge when we have reached a bottom on a market crash. Having successfully market timed, sitting on cash, you keep wondering - should I buy now? Is it a fantastic opportunity? What if the plunge drops and a rise starts?

    But each time you trickle in some money and watch the markets crush it to half the purchase price, you start back in fear - am I getting in too early? Am I going to destroy all the benefits of a successful market timing? Is the market going to swoon for three years and go to half the present value, which would be the real time to buy? Is a future market fall worth waiting for? How long should I wait?

    I have no answers to these questions.

    I have only learned that I have much to learn.

  • Report this Comment On February 02, 2009, at 7:18 PM, Adambaudelaire wrote:

    Also a newbie, though I did buy in slightly after the tech bubble burst and caught a couple of local Australian stocks on the dead cat bounce. It was not a time that online trading was available and I really had no time to do this properly.

    I think my chief lessons are patience and growing balls like watermelons.

    I made a ton of money day trading in December but now hold a portfolio of excellent companies (ISGR, YGE, SI, APWR, AAPL, and HTE) that have all tanked a bit, in some cases, like si over $20. My technical analysis is worth shite, but I have faith that these companies will pull through. I believe that provided you have access to enough cash to ride out the downturn (feeding the CFD monster), the upside is still too good to miss. I strongly believe also that things, when they do turn around, are going to be dramatic. So I am treating my (LEVERAGED) 80k in stock as a no-touchy bank account. Like a super fund that I can only have once it starts doing well. SO, it might not be dramatic for a few weeks, or months, perhaps for a year or so, but when it turns, I have stocks that I bought REALLY well, and I believe that I will do really well in the medium term. what do you guys believe?

  • Report this Comment On February 02, 2009, at 11:51 PM, ditdog wrote:

    I have learned that buy and hold does not work for me.

    I have learned that there are forces capable of destroying a company's value (and my share of it), which can remain deviously hidden until it is too late.

    I have learned not to underestimate greed.

    I have learned to buy what I use and understand, and not to discount my instincts.

    I have learned that despite all the fancy financial analysis and jargon, "the market" really is just a herd of millions and billions of people and their collective psyches, trying to decide whether to buy or sell something (this is strangely comforting to me).

    Most importantly, I have learned not to depend on so-called financial advisors. No one will care about my money more than I do.

  • Report this Comment On February 03, 2009, at 2:08 AM, goldenpiggy wrote:

    I've been investing since 13 thanks to my mom. It has taken 25 years and countless mistakes to hammer some very basic things (actually common sense) into my thick skull:

    1) If it's too good to be true, it is. Case in point: DRYS and NT (NTRLQ.PK now). DON'T MESS WITH P.O.S companies. You have 10,000 better ones to choose from. REAL companies.

    2) Never buy into a rally. I don't know how many times I've been burned this way. Be patient and wait for the right time. Buy low, sell high. Not the other way around.

    3) Valuation is everything. I was one of the bust casualties. Lost everything. It has taken 8 years to recover. Yeap, I was out of the market for 8 years repaying debt and missed the biggest bull market of all time. All because I ignored "P/E ratio"

    4) Diversify! You have to diversify your portfolio between different sectors. Yeah you can make a killing by betting the farm on one horse, but chances are more often that that horse is going to kill your first.

    5) Study the company, industry, and financial statements as if your final exam. I can't stress this enough. Reading blogs and newsgroup postings is fine, but you have to do your own due diligence first. Facts don't lie (well, sometimes I wonder...) Other people's opinions are just that -- opinions.

    6) Greed will kill you. This is so difficult for investors. For your short term holdings, if you've met your goals, take the profit and run.

    7) Take a loss when you have to. Capital preservation is the key. If you've made a bad buy, you need an exit. Don't let emotion get in the way. It is only money and you can make back the loss. But if you lose all your principle, game over.

    8) Last but not least: Your family comes first. You must alway think what would happen if you lost it all. Where will your family live? How are you going to feed the kids? With that in mind, you will realize that (1) you can only invest what you can afford to lose; (2) you can't do crazy things like use credit card cash advances or margin the account to the max; (3) you cannot make risky investment decisions for the hope of a jackpot. Fine, if you're on your own and you lose everything, well it's only you. But if you have a family depending on you, you just can't do that sort of thing because the odds are against you.

    Good luck to all and God bless.

  • Report this Comment On February 03, 2009, at 2:34 AM, OldEnglish wrote:

    "Buy buy buy!" "Offer ends today!"

    If you actually believe the economy will begin to rebound in later 2009, as the paid pumpers on CNBC are saying, you're deluding yourself. There are no bright spots in this economy.

    "But Buffet says..." Who cares what Buffet says if you can't get the same buying conditions as he can? As mentioned above, he has some fantastic guarantees, especially if he can get chumps to pump up Goldman Sacks. Buffet's portfolio would be a disaster if he had to buy stocks under the same conditions the rest of us do.

    Go ahead pump up GS in this "once in a lifetime" opportunity.

  • Report this Comment On February 03, 2009, at 9:08 AM, dsk315 wrote:

    Celebrate! We may not grow in value with the DOW @ 7,500, but we grab a lot of shares at a low price.

    I've been in a 'Defined Risk Strategy' for over a decade and when the market tanks, like 2008, we still win! We actually grew in value all 3 years of the 2000-2002 bear market.

    We carry LEAPs that act like insurance on our core investment. We did suffer a loss last year 1.7%, but we gained 40% more shares. So, I ended the year with 98% of the dollars I started with, but have a lot more shares. Now, I have new LEAPs in place to proctect me again.

    The common mis-perception is that this kind of approach costs a lot of money. We have learned, the truth is just the opposite. We entered this strategy in 1997 and have averaged better than 11% per year. The original investment has grown over 240%

  • Report this Comment On February 03, 2009, at 3:05 PM, kwill10 wrote:

    I've learned the value of starting to invest early and dollar cost averaging. My investment horizon is long, with retirement over 20 years away,and I have a monthly paycheck withdrawal for my primary investments. Every month that the stock market stays down means another month with more shares than I was getting for my money at this time last year. Long-term investing focus helps to dilute the psychological impact of a raging bear market like this one.

  • Report this Comment On February 04, 2009, at 2:54 AM, maxundmoritz wrote:

    I've learned that it's much easier to find the right time to buy than the right time to sell.

  • Report this Comment On February 06, 2009, at 12:42 PM, jettrey wrote:

    I learned that I'm not comfortable with those Asset Allocation Fund of Funds during major market swings. If the fund has a 40% bond target then it appears the fund manager starts siphoning cash out of bonds into equities when the market drops. Since this was in a 401K where I'm making biweekly contributions, I would have left the bond & money market reserves alone while continuing to contribute to each asset type. I'm doing my own asset allocation allocation now.

  • Report this Comment On February 06, 2009, at 4:45 PM, tiafolla wrote:

    Use fundamentals to decide on the companies to invest in, and technical analysis to plot your entries and exits. Nothing fancy, just a couple of straight lines on a candle chart to show support and resistance, and a couple of indicators to show money flow, trends, and overbought/oversold conditions.

    Lots of people make their living simply buying at support and selling at resistance. But even for longer term investors, using S & R can improve your returns significantly.

  • Report this Comment On February 06, 2009, at 9:41 PM, jus330 wrote:

    I learned to be successful in a good or bad market you must understand why you are buying a company and what is your expectation. I have 75% of my money in investments that I want to hold. tehy are down but better than the market, the other 25% is used for opportunist purchases. When I execute a purchase like this I write down why I am doing it, what I expect to get out of it and under what circumstance I will get out. I spend a lot of time looking for companies that ae being collectively punished or deemed guilty by association. In this market, the leading loser on one day is frequently the leading gainer on the next day. However I am very picky about the ones I select, I have found some diamonds in the rubble. I carefully watch them to see when the luster is wearing off so I don't stick too long with them. If I can't explain the reason for the trade to my wife, I won't make it. it has to make sense, my gut feel is terrible for me (pretty good for the guy on the other side of the trade).

  • Report this Comment On February 07, 2009, at 5:47 PM, OkiCow wrote:

    I've only been playing for about a year now. I started out 8 months of that year playing on the crazy train known as AAPL and learned not to play rallies, especially when you don't see the rest of the train tracks in front of you. I am not sure if this strategy is a good one, but I continued to lower the cost of my expensive APPL shares by buying on days when the market has slumped.

    I've learned patience. After I do my homework and decide what I want to buy and for how much.

    On of the biggest gotchas I think I learned is to not allow the little greedy monstor take control. Most of the time I will set a fair price I am willing to sell the stock for and let it go; be happy with the sale, even if the rally continues. Hey its better to have some money than no money at all, right?

    Oh yeah, the last thing I learned about this game is the fact that I SUCK!!

  • Report this Comment On February 07, 2009, at 6:34 PM, HarryCaraysGhost wrote:

    I learned to stop buying Ge and all the other speculative stocks.

    I also learned that you should go with your first instinct (Buy- Bud at $42 instead of buying Ge @ $30)

    If I sound bitter it's because I am. Jeff Immelt flat out lied to me.

    luckily I made the money back, so don't cry for me Argentina.

  • Report this Comment On February 08, 2009, at 12:52 PM, buckyh wrote:

    I have learned (again) that stop loss is your friend, especially when adjusted regularly.

  • Report this Comment On February 08, 2009, at 1:26 PM, gwaynef wrote:

    Most of all, I have confirmed that we have a lack of moral leadership in our country and they cannot be trusted to save your future. You have to guard your assets yourself. The incredible gaul of the people that have stolen money from the taxpayers confirms the suspicions I had in early March of 08 when I removed most of my assets from the market. We now have a government that is unfriendly to the true wealth engine in our economy. Buyer Beware. You have to guard your assets for yourself. No one is your Daddy O.

  • Report this Comment On February 08, 2009, at 5:05 PM, mccabe05 wrote:

    What I've learned is to add to my positions after a dramatic loss.This allows me to recover my loss in 1/2 the time instead of holding on to the same number of shares trying to break even, I now have twice the number of shares working to grow back to break even point with much less risk.

  • Report this Comment On February 10, 2009, at 10:51 PM, fungtrs wrote:

    The main thing I have learned in the difficult market is the vast majority of people are still learning. Many pro's are doing no better, and often times worse, than the average independent investor. Look how many professionally managed funds are down 40% or more in the past 12 months.

    There are many strategies, so pick the one that you are most comfortable with.

    Do follow you instincts and not your emotions. When you gut is telling you to buy or sell, you should consider listening.

    You can't perfectly time the market, but we do need to learn how to leverage these huge swings.

    If you are going to trade, as others have mentioned, set your target, take your profit, don't be greedy.

    Just becasue a stock is "cheap" doesn't mean it won't get a lot cheaper, and soon (like the day after you buy it).

    Finally, take your own advice. I could kick myself a thousand times for not following the same advice I often provide to others.

  • Report this Comment On February 11, 2009, at 9:30 AM, tinwhistle80 wrote:

    You can gamble but you can't invest.

    In fact, you can go ahead and strike 'invest' from your vocabulary or at the very least flag it as an archaic term. The concept of 'investing' has disappearred and will be nevermore.

    While 'fundamentals' have always wrestled with 'market emotion' to determine price movement, the mix of these two basic variables has changed dramatically over time.

    Patience, consistency, loyalty and 'building a strong foundation for the long haul' are no longer drivers of society. These concepts have been replaced by: get in-get out, hit a quick score and on to the next one. This is true for both individuals and business.

    Add in the political state, where contract law is all but meaningless and this is not an environment that fosters long term equity investing.

    The world places a premium on instant gratification and 'investing' should be no exception. The GEs and GMs of the world actually made sense at one point.

    Some people will still make $ in the market but not with buy and hold.

    Limit capital exposure, take profits, use stop losses.

  • Report this Comment On February 11, 2009, at 3:19 PM, NWfarmgal wrote:

    I've been at this long enough that I should have learned several things. Invest in what you know. Never be afraid to take money off the table. Use stop losses. Never trust you're full service broker to give you good advise, especially when to sell. Find a good online broker so you're not afraid to buy or sell because of high commissions.This last item has kept me from selling when I should have or using stop losses to my advantage. Education is sometimes really expensive.

  • Report this Comment On February 11, 2009, at 11:25 PM, nietschele wrote:

    I have learned that nothing in investing is sacred, no matter how great the company, its management, or balance sheet. Therefore, if you have large gains, protect them -- at least by using mental stop losses -- and this is especially important if the economy is worsening. That way you at least get to keep a good part of your profits.

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