How to Lose Money for 10 Years (Without Even Trying)

It's official. The First Decade of the Third Millennium was a disaster for U.S. investors. The worst decade ever.

Conducting its annual market autopsy at the end of 2009, The Wall Street Journal concluded that the Decade now known as the "'00s" actually produced returns below zero. While it was a good decade for certain stocks -- the New Millennial Gold Rush sent shares of Barrick Gold (NYSE: ABX  ) up more than 100%, for example; Peak Oil fears boosted shares of ExxonMobil (NYSE: XOM  ) ; and the i-Revolution returned seven-fold profits to Apple shareholders (Nasdaq: AAPL  ) -- such winners were few and far between. In fact, across the course of the "Aughts," stocks traded on the New York Stock Exchange racked up average annual profits of (drum roll, please): negative 0.5%.

A decade of losses
Let me illustrate the scale of this disaster for you. If you had invested $10,000 in a broad basket of U.S. stocks on January 1, 2000, left it there for 10 years, pulled a Rumpelstiltskin and woke up to read your account statement on January 1, 2010, you'd discover just $9511 remained in your account … if you were lucky, as your broker may have deducted a few hundred extra in fees.

Now, a lot of investors will say that's a crazy hypothesis. Nobody buys stocks and holds 'em for 10 years anymore, right? Wrong. I'd argue with that contention, but I don't have to. Someone else has already done it for me:

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

"If you don't feel comfortable owning something for 10 years then don't own it for 10 minutes."

Who penned these words? You guessed it: Uberinvestor Warren Buffett himself. So not only do we know of at least one person who buys and holds for 10 years -- but we know that the person who practices this method also happens to be the single greatest investor of all time.

We also know that investors who ignore Buffett's advice are guaranteed on aggregate to underperform the market. This bit of wisdom comes down to us from the granddaddy of buy-and-hold investing, Vanguard founder John Bogle. Once more, I'll let the source speak for himself:

Let's assume that each of the stocks in the S&P 500 -- all 500 stocks -- let's assume that half of each stock is owned by traders and half of each stock is owned by holders (long-term investors). So the long-term investors will capture the market return. They own half of the market, they don't trade and they capture, therefore, the entire market return, assuming maybe nominal indexing kinds of costs.

The other half are trading, but they are, of course, trading with each other because the long-term investors aren't trading with them. It follows as the night to the day that the traders will lose by the amount of money paid to the intermediaries, the croupiers in the middle.

It therefore follows logically and mathematically that buying and holding is a winner's game and buying and trading is a loser's game. Simple as that. No way around it.

10 years of profits
What you have here, folks, in the few lines of italicized text, is an idiotproof introduction to avoiding another 10 years of losing money. It boils down to two simple rules:

  1. Invest for the long haul. ("Buy ...")
  2. Don't trade into and out of stocks. ("... and hold")

Of course, in order to buy and hold, first you must buy. The last 10 years have taught us that just buying any ol' stock -- or even every stock listed on the S&P 500 -- won't guarantee you a profit; you have to buy the right stocks. But what are they?

Fortunately, we've got an answer to that one, too. In a recent issue of Stock Advisor, Fool co-founder and CEO Tom Gardner laid out four key elements of successful investing. Rules he has followed in picking A+ businesses for our portfolio. The path to achieving market-crushing profits.

In choosing winning stocks for the long haul, Tom tells us to begin by asking four essential questions. Here they are below, along with a few of my suggested answers:

Questions to Ask

Stocks That Fit
the Bill ...

... and Profit

Do the company's products delight customers each day?
(Nasdaq: AMZN  )

Up 69%

Does the company generate outsized, sustainable profits?

Johnson & Johnson

Up 67%

Is this a growing market with long-term potential?

(NYSE: BA  )

Up 61%

Is this a repeatable-purchase business with returning, loyal customers?

(NYSE: KO  )

Up 22%

Admittedly, some of these stocks could fit within multiple categories. For example, not only does Johnson & Johnson earn a superb 21% profit margin on its products, but these projects also generate repeat business ("We are stuck / on / Band-Aid brand / 'Cause Band-Aids stick on us!"). We're delighted by the fact that they do stick on us. And because a growing population of active kids means a growing number of boo-boos each year, you know this market will keep growing over the long term.

Foolish takeaway
But that's just the point -- J&J's stock ticks all four boxes, and out of the four stocks named above, each of which has crushed the market's returns over the course of a very rough decade, J&J has done quite well. And so I submit to you: The more boxes you can tick up above, the more likely you've found yourself a winning stock for 2010 and beyond.

At Motley Fool Stock Advisor, we're saying one (decade) down, and many more to go. Ready to join us in the hunt for the rest of this Century's winners? You can see our recommendations -- which are outperforming the market by 53 percentage points on average -- free for the next 30 days. Simply click here to start.

Fool contributor Rich Smith does not own shares of any company named above. Apple and are Motley Fool Stock Advisor selections. Coca-Cola is a Motley Fool Inside Value recommendation. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor selections. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (20)

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 December 29, 2009, at 12:50 PM, awdaniels wrote:

    I like this article and agree mostly but I have a suggestion. When you like a company and buy into a position, I would suggest if your ammunition can afford to buy 1000 shares and if or when it goes up 30% sell 800 shares and and keep 200 shares for the "velvet ride" and if you have the discipline to keep these 200 shares with the intention of passing them on to your heirs.

  • Report this Comment On December 29, 2009, at 5:24 PM, kedo76 wrote:

    10 years ago MO was worth $5.30. $10,000 in then would be worth $36,000 today, but with the dividends reinvested, who knows? Please calculate that for me. How is this the decade of losses?

    If you had split the $10,000 between 10 good 1999 stocks, you would have lost all your GM, but you would have $3,600 worth of just MO, $2300 of MRO, etc, etc, etc without reinvesting the dividends. I would do anything for 10 years worth of JNJ dividends.

    All I understand is the DOW is a dumb gauge for all this.

  • Report this Comment On December 29, 2009, at 7:04 PM, plange01 wrote:

    the best way to lose money for 10 years is to listen to the motley fool...

  • Report this Comment On December 29, 2009, at 8:28 PM, mochiman wrote:

    don't you mean pull a rip van winkle, not a rumplestiltskin?

  • Report this Comment On December 30, 2009, at 11:12 AM, KJMClark wrote:

    Is there any chance you could come up with a list of stocks like this that someone with a conscience could consider? Look at your list: Amazon makes money by cheating on taxes and ripping off state governments, Johnson & Johnson makes their money by being a large part of the US healthcare rip-off scheme, Coca-Cola makes their money duping people to buy their sugar water while becoming obese, while Boeing strongly contributes to climate change and doesn't have much of a future. Do you really think that peak oil is no longer an issue? If so, you don't begin to understand the concept.

    I really appreciate the concept of this article, but maybe you could add another category for stocks that fit the four criteria plus allow an ethical person to sleep at night.

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