Get Ready for a 25% Drop

My friend swears he's learned his lesson.

Back in July 1995, this friend -- let's call him Charlie -- bought Microsoft at what turned out to be the highest price it would see that year. The stock was down 15% in no time, and Charlie was worried. He was smart enough to know the market is the best wealth-creating machine available to us regular folks, but stocks to him were sort of like husbands to Elizabeth Taylor. He liked them well enough, but he tended to give up when things got a little rocky.

In a matter of weeks his paper loss was approaching 25%, and he couldn't stand it anymore. He bailed out.

Needless to say, the next few years were even rougher on Charlie as he watched Mr. Softy march steadily higher. It achieved 10-bagger status at the height of the bull market in 2000, but even today it's more than 270% higher than when he sold.

Get ready for a 25% drop
As Tom and David Gardner tell their Motley Fool Stock Advisor members, you have to expect significant dips from some of your stocks, and you must remain firm if you've done your homework. Otherwise, you sort of screw up that legendary investing formula by buying high and selling low.

This table should really drive home the point for you. These are true all-star performers from the past decade, yet investors who bailed out on them missed out on some big gains.

Company

10-Year Gain

Largest Drop

Oracle (Nasdaq: ORCL  )

188%

81%

Capitol Federal Financial (Nasdaq: CFFN  )

577%

33%

Southern Copper (NYSE: PCU  )

1,363%

77%

ITT Educational Services (NYSE: ESI  )

534%

69%

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

374%

85%

Potash Corp. of Saskatchewan (NYSE: POT  )

878%

78%

Qualcomm (Nasdaq: QCOM  )

393%

85%

So, the lesson Charlie learned is that practically all of the great superstar stocks of the past decades have dropped at least 25% at one time or another. It will be very hard for you to find one that hasn't.

Hey, I'll be the first to admit that many stocks drop 25% and keep dropping. That can happen when a business that has no real competitive advantages to begin with gets the rug pulled out from under it. It happened to me several years ago, and like a shell-shocked boxer, I still duck when I hear the name CMGI.

Lesson learned
We've all learned some things throughout the years. But if, as Tom Gardner says, you can invest for decades, add money to your existing holdings steadily over time, and stay committed to focusing on truly great businesses, you stand to make a fortune.

For the six years since Stock Advisor was launched, the Gardners' recommendations are beating the S&P 500 by an average of 34% each. Interested in finding out which stocks to start with? Try a no-obligation 30-day free trial and you'll see Tom and David's five best buys for new money now. Here's more information.

This article was originally published on Jan. 8, 2007. It has been updated.

Rex Moore lathers and rinses, but never repeats. Of the companies mentioned in this article, he owns shares of Microsoft. Microsoft is an Inside Value recommendation. The Fool has a disclosure policy.


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  • Report this Comment On April 02, 2009, at 10:10 PM, farmnut1985 wrote:

    So are you saying we're going to see another 25% drop from where were at or are you saying to just hold on? This whole market is a roller coaster as the data for the economy has been bad but wall street has rallied.

  • Report this Comment On April 02, 2009, at 10:48 PM, parisaafshin wrote:

    the market is a little crazy but even so there are still companies that are breaking records like aznoe.com

  • Report this Comment On April 02, 2009, at 11:55 PM, BullMktAg wrote:

    Ahead of the new unemployment numbers coming tomorrow, I wouldn't rule out a near 25% drop - especially if the long-term forecast looks even worse. It's entirely possible we recently hit another false bottom.

  • Report this Comment On April 03, 2009, at 9:00 AM, dp23peace wrote:

    I can only hope we have another 25% drop so that I can buy more shares of my great companies! Bring it on, because I feel really confident that I have solid picks (with a little foolish help) for the future.

  • Report this Comment On April 05, 2009, at 12:12 PM, skepticinvestor wrote:

    I would have done exactly what Charlie had done. ALWAYS sell if your stock declines by your pre-set amount. Charlie's only mistake was not to buy back into the stock later! (I've sold many times, just to get into the stock later). One needs to protect oneself from the big losses.

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