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:

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 Amazon.com 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.