What to Do When the Dow Hits 7,500 Again

Talk about ironic. I originally submitted this article to my editor well over a year ago, after the Dow had fallen "all the way" to 11,500 -- but it didn't get published. And now, here we are, happy to be "all the way" back to 10,500 ...

My original plan was to take you back to 1996 -- when the Dow surpassed 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 five years and shares of behemoths like Merck (NYSE: MRK  ) and Boeing (NYSE: BA  ) 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.

My article went on to show how, early on, this approach led them to AOL, Amgen (Nasdaq: AMGN  ) and Starbucks (Nasdaq: SBUX  ) , among others; not to mention, landed them on the covers of everything 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 was right on the money. The Dow soared to far more than 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 that David and Tom recommended to their Motley Fool Stock Advisor subscribers during the last bear market ...

  • Twenty-three were (or had been 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.

How quickly we forget
Since March, we have seen one of the most historic rebounds in market history, and witnessed shares of everything from Apple (Nasdaq: AAPL  ) to Cell Therapeutics (Nasdaq: CTIC  ) to Advanced Micro Devices (NYSE: AMD  ) soar along an almost unprecedented trajectory.

Now -- just like back in 1996 -- most investors are spending their time debating whether the next thousand-point move will be up or down.

While that's certainly an interesting topic of conversation, I'm going to suggest that you instead think about some advice that Tom Gardner recently gave us at a companywide "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. 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 learn from it. And that's what sets them apart.

Case in point: Benjamin Graham
Graham went bankrupt three 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. He turned that failing 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 it fired him on the spot. So Lasseter 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 last August, I never would have imagined that we would really see the Dow hit 7,500 -- much less almost hit 6,500. Similarly, in March, I never would have imagined we'd be back above 10,000 so quickly.

But now I know that anything is possible. And I think that rather than celebrating the market's recent run-up, or trying to guess where it's going next, the best thing we can do is focus on learning from our past mistakes, so that we can make better investments going forward.

I've already learned that companies like wireless broadband provider Clearwire -- which 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 with business models that are a bit too complex for me to fully understand. That's why I probably won't be buying shares of any financials anytime soon -- no matter how intriguing they look.

Now, I challenge you to use the comment function below to tell all of us what you've learned over the past year, and how you will use that information to make yourself a better investor. Feel free to chime in with stocks you think we should take a look at -- or avoid altogether -- as well.

And if you're interested in discovering which stocks longtime investors like Tom and David Gardner are recommending, you can always take a free 30-day trial of their Motley Fool Stock Advisor service.

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.

Already a Stock Advisor member? Log in at the top of this page.

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

Austin Edwards owns shares of Apple and Clearwire. Apple, Starbucks, and Disney are Stock Advisor picks. Disney is also an Inside Value recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (13)

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 7:58 AM, pondee619 wrote:

    "They explained that they were focused on finding the best eight or nine stocks to grow your wealth over the long haul" "but I pointed out that of the 24 stocks that David and Tom recommended to their Motley Fool Stock Advisor subscribers "

    24 Stocks? What happened to 8 or nine of the best?

    Subscribe to the fool services and get 8 or 9 "best" stocks PER MONTH. Pay $1,500 for the honor.

    "This article was first published Oct. 27, 2008" And repeated each and every month thereafter.

  • Report this Comment On December 29, 2009, at 8:42 AM, wuff3t wrote:

    pondee619 - your comment about repetition might have some merit if it weren't for the fact that you pop up several times every day and make the same, tiresomely negative remarks. If you hold so little regard for TMF why oh why do you waste so much of your time reading these articles and upsetting yourself?

  • Report this Comment On December 29, 2009, at 9:12 AM, praizinplace wrote:

    wuff3t, it likely he is as baffled by the TMF bull hockey that is peddled here everyday about the same stocks they bash and promote as everyone else. There's no research to it really, save the $1500 from these fools and just do the opposite of what they say, you'll be fine. These air bags have yet to publish anything worth following, it's comic relief if nothing else. In a time where real advice is desperately needed for the everyman, these braniacs are leading many many investors on a wall street goose chase.

    Now I suppose it's your turn in the gutter...game on.

  • Report this Comment On December 29, 2009, at 9:45 AM, pondee619 wrote:

    wuff3t:

    Are you satisfied with the "stuff" you get on these pages? I do like your comment that my comment on repetition has merit but for its repetition. However, this comment must be restated, as the fool has yet to change its ways.

    However, this comment was based more on the contradictory statements that the fool looks for the 8 or 9 best stocks and claims success when 24 are hyped. Read the fool long enough, and you'll end up buying everything on the market. How many letters at 2 picks per month, how many stocks "poised to pop", how many "buy this before your neighbor", how many stocks are mentioned in each reincarnation of each story repated each and every month for years on end? People may be taking this stuff seriously, ending with portfolios of dozens of stocks. You can't keep track of that many effectively.

    It really does not take much time to to read the same articles over and over again. Sort of like reading a mantra or, same s**t, different day. Writing here does not upset me. ( Don't know how you would know my personal state without a face to face meeting, but, perhaps, you have that ability). Kinda relaxing...Perhaps, someday, rewarding if ever the fool decides to lives up to its motto. (they already have amuse down)

    Why do I do it? A vain effort to get the fool to write up to their self proclaimed ability. A general disregard for the lazy. If nothing else, everyone else has been advised that this is dreck, reheated and re-served, and should be treated as such.

    Are you satisfied with the "stuff" you read here?

  • Report this Comment On December 29, 2009, at 10:05 AM, wuff3t wrote:

    praizinplace - I'm not looking for a gutter-fight, it just seemed to me pondee619 seemed very negative every time I read his comments, so I wondered why. There is plenty of research behind TMF newsletter picks, but I guess not the space to repeat it all for each stock mentioned in every article.

    pondee619 - I am, on the whole, pretty satisfied with my membership of TMF (Stock Advisor). I've always assumed the free articles (and indeed the subscription-only ones) were an invitation to start your own research if you find the content intriguing enough (something TMF are clear to point out - the articles are only somewhere to begin). Not every article is of interest to me, and not every stock I research is. But I appreciate TMF offering starting-points. As you remark there are a lot of stocks out there, and without TMF I'd find it a lot more difficult to find many of those "starting points".

    Using TMF my portfolio is in the black by a reasonable amount after a horribly difficult couple of years (some picks of my own, some suggested by TMF). I think they're doing a good job. As to the repetition of articles, I really don't mind that. Even the best practise what they do repeatedly; similarly it never hurts to re-read valuable information (kind of like revising for an exam).

    As to knowing your personal state, I didn't mean to sound rude (though I probably did). A lot of your comments seem quite negative about TMF so I was basing my reading of your state of mind on that.

    Anyway guys, I appreciate the reasoned tone of your responses. I'm not trying to start a war!

  • Report this Comment On December 29, 2009, at 10:06 AM, OutofFavor wrote:

    I just looked back at the Hidden Gems recommendations from 3/27/08. If you bought an equally weighted portfolio of those 10 stocks, you would be up 7% right now, vs down 15% with the S&P. Some clunkers in there, but some gainers too.

    I am not a subscriber, I just had a 30 day trial and saved the report.

    Just pointing out that they may not just be peddling "bull hockey" with their services. They could have gotten lucky as well. Still a short time frame of 20 months.

  • Report this Comment On December 29, 2009, at 10:11 AM, pondee619 wrote:

    wuff3t:

    How many picks do you get with Stock Advisor?

  • Report this Comment On December 29, 2009, at 10:17 AM, wuff3t wrote:

    pondee619 - you get two per month. I take your point about how many positions you'd have to buy if you subscribed to all the newsletters. Two picks a month is about right for me, any more than that would be a real stretch financially. So I guess you have to decide on your preferred investment style and then subscribe to as many newsletters as works for you.

  • Report this Comment On December 29, 2009, at 10:59 AM, myfoolsaccount wrote:

    @OutofFavor: How did the "Hidden Gems" recommendation do against the overall Vanguard Total Stock Market Index and against the FTSE All-World Index or Vanguard Total International Index ?

    I think it's fair to compare your portfolio against indices other than S&P500 since we all know the opportunities to invest in good quality companies are also available outside of S&P500.

  • Report this Comment On December 29, 2009, at 11:36 AM, jolaz wrote:

    An investing strategy that worked for me last year was to just do what Goldman did. I checked their holdings on sec.gov and bought into the sectors and companies that interested me. In October, I really thought the rally was over. I took up defensive positions at first and then went full-blown short with the likes of FAZ. What can I say? The defensive positions worked okay, but my FAZ position took a beating. With the Feds upping the ante with renewed stimulus spending, I feel like round two of the market rally will start shaping up in January.

  • Report this Comment On December 29, 2009, at 11:53 AM, pondee619 wrote:

    wuff3t:

    "you get two per month" That's 24 per year, 48 over the course of two years. A reasonable long term holding period is five years or 120 total positions. How do (can)you keep track of all those positions? Reading just the year end reports would be a full time job. You do read the reports, right?

    24 positions per year for one newsletter. Seven newsletters= 168 new postions per year. $1,500.00 and 168 new picks per year. Help, I'm drowning!

    But you don't buy all of the letters, right?

    Which to choose. Isn't the idea to have a diversified, balanced portfolio ? ( value, small caps, international, income, speculation, gotta plan for retirement, right? don't leave out the fool's flag ship letter) How many times have you passed on a monthly pick only to see that one be the one that soars and makes the letter's magic number? You know, the one they publish?

    We now have my problem with the Fool. They claim to help the small investor. But, 24 new positions per year per letter? How much money and how much TIME is a fool to put into this? And the free site, that one would hope could tie this all together, is just a litany of past stories.

    It's a craps shoot. Pick a letter, pick a pick and hope. And they have a problem with Cramer.

  • Report this Comment On December 29, 2009, at 12:31 PM, wuff3t wrote:

    pondee619,

    I don't think anyone is proposing that you buy every recommendation (occasionally they are re-recommendations by the way, rather than an entirely new rec); there is also a "Best Buy" list featuring 10 previous recommendations that the team thinks are particularly good choices that month.

    You have to be selective, which is where doing your own due diligence and choosing the stocks that suit you comes in. TMF are quite up-front about the fact that subscribers really ought to be doing their own analysis - based on the recs - and buying the stocks that suit their own tastes, needs at the time etc.

    Far too many people down the years have bought stocks based solely on a stockbroker's advice, only to lose their money, then blame the broker afterwards. That's a weak approach, and TMF is most definitely not advocating such a strategy, which is why it's a lot cheaper to subscribe to TMF than use a professional broker who will not only tell you what you should buy, but also deduct a large commission from every stock you buy through them.

    No, I don't subscribe to all of the newsletters. You're right, trying to buy every recommendation would lead to a portfolio too large and unwieldy, and you'd be sacrificing the very thing TMF recommend you develop - a knowledge of, and control over, your own portfolio (how would you ever keep track?). But it's perfectly possible, with a little time and application, to use the recommendations from Stock Advisor to construct a diversified portfolio. And as you learn to do so you develop the confidence to start looking further afield, for non-TMF stocks.

    You can really take as much, or as little, as you want from TMF. If people want to take no responsibility and just buy whatever is recommended every month then they will end up with a huge and unmanageable portfolio. I find that an odd attitude though, given the amount of free education on this site that can be used to learn to control your own destiny. TMF is far more than just a "litany of past stories". Check out the Wiki, for instance.

    You won't find a full-fee broker trying to help you learn how to control your own financial destiny - that would be professional suicide for them. I think you're failing to give TMF credit on that point.

    Have I ever passed on a monthly pick only to see it soar? Yes! And I've done the opposite too - bought one that plummeted. But which stocks I buy and sell are my choice - using the recommendations as a starting point, yes, but then doing my own research and making my own mind up. And even the ones that have fallen I haven't yet held for five years, so it's still too early to be sure they're long-term losers.

    All in all, there's no way I'd simply buy every recommendation just because TMF suggests I should. I'm just not prepared to relinquish responsibility for my own financial future in that way. I pick and choose the ones I want, but I do find Stock Advisor gives really good service in the recommendations it makes. And will every one be a winner? No. But I never expected they would. Even Buffet hasn't managed a 100% record. But they do publish their record versus the broader market, and it suggests that their recommendations are indeed a good starting point.

    Anyway, while I'm happy with the service, you don't seem to be. Why not (if you don't mind sharing)? I mean which services have you used and found to be disappointing etc? Have you used a "buy every recommendation" strategy, used multiple newsletters etc? I'm just curious.

  • Report this Comment On December 29, 2009, at 2:24 PM, OutofFavor wrote:

    @myfoolsaccount - all the funds you mentioned performed similarly to the S&P 500. They lost between 12% and 18% in that time frame of 3/28/08 to current. You made me do a lot of work for nothing!

  • Report this Comment On December 29, 2009, at 3:03 PM, pondee619 wrote:

    wuff3t:

    "I don't think anyone is proposing that you buy every recommendation" Okay, on what do you base your decision not to buy a recommendation? They all sound equally good when written up in the letter. If they weren't as good as the others, would they be recommendations?

    "No, I don't subscribe to all of the newsletters" Okay, on what do you base your decision not to buy a newsletter? They each cover an important segment of the market. A good, balanced and diversified portfolio should have some from all. No?

    "And will every one be a winner? No" But they advertise thier results using all their picks. You, or I, can't buy all. Can you, please, tell me which recommendation I should buy, which I should ignore and if I am to ignore it, why is it a recommendation?

    Seven letters. Two recommendations per month from each. What kind of guidance is that? Here are 168 stocks, this year, that we think are great. It is up to you, Dear Fool, to pick the winners therefrom. Next year, there will be 168 more to choose from. For this, you get to pay your subscription fee. What do you get for that fee? A starting point, or a stock that is a recommended buy? I can get starting points from the daily paper, TV, the news boy, my barber/bartender. I cetainly don't need to spend several hundred dollars for a starting point.

    I started out with Hidden Gems. Two /three years worth. More small cap stocks than anyone would care to look at. No reason to pick one over the other. Couldn't afford, in either time or money, to get them all. Found it very hard to believe that anyone trying to advise someone in investing could recommend two stocks each and every month. There had to be times when there wasn't anything worth while to buy. There had to be times when staying pat was the optimum plan. There had to be times when doing n othing was the correct thing to do. BUT, each and every month there were two more stocks recommended to buy. Maybe the fool felt pressured to give a rec because we were paying for it. that kind of leadership I can do without.

    And yes, a great deal of the stories on the headlines page are just reheated, rehashed and re-served year old stuff.

    The Fool has been a big disappointment. But people seem to like it. It could have been so much better. Perhpas I'm wrong in demanding better. ciao

    OutofFavor: Hidden Gems started well before 2008. How's it doing from it's onset?

    Is the fool still paying someone $.10 for each of these?

  • Report this Comment On December 29, 2009, at 6:34 PM, tkell31 wrote:

    Yeah, great story, read the first paragraph and stopped since I could probably recite it verbatim by now.

  • Report this Comment On December 30, 2009, at 3:29 AM, wuff3t wrote:

    pondee619,

    "Okay, on what do you base your decision not to buy a recommendation? They all sound equally good when written up in the letter."

    On my own research! They don't all sound equally good once you've put your own effort in. Some companies have higher cash reserves; others higher levels of debt; some are leaders in their field; others diversify their business across two or more commercial areas; some pay dividends while others don't; some operate in cyclical businesses while others don't. There are mutliple differentiating factors and it's up to you to decide which are the most important to you.

    "Okay, on what do you base your decision not to buy a newsletter? They each cover an important segment of the market."

    There's a good deal of overlap between some of the services. HG is clearly going to focus on small- and micro-caps, but I find Stock Advisor gives me a good enough range of small- to large-cap companies, as well as including some dividend-payers and value picks. It's difficult for me to comment on the other newsletters, but which you choose (or don't) depends on your tastes. If you've an appetite for risk then HG is probably for you; if you prefer a value-based approach then clearly Inside Value is better. But SA provides plenty of picks from most areas, so it suits my purposes.

    " "And will every one be a winner? No" But they advertise thier results using all their picks."

    The fact that they advertise their results using all their picks is hardly a valid criticism. Subscribe (and you can take a free trial, remember) and you'll see every pick and its performance, both standalone and relative to the market. They couldn't be more honest about their results!

    "You, or I, can't buy all. Can you, please, tell me which recommendation I should buy, which I should ignore and if I am to ignore it, why is it a recommendation?"

    Of course I can't. Come on, pondee, at some point you're going to have to accept that your financial success is your responsibility. You can accept advice, but expecting others to hand you money on a plate is unrealistic. TMF recommends stocks it believes will be winners. Sometimes they will be wrong. So will I and so will you. If you can't deal with that you shouldn't be investing, full-stop.

    "I can get starting points from the daily paper, TV, the news boy, my barber/bartender. I cetainly don't need to spend several hundred dollars for a starting point."

    No you can't (get starting points from those people). At least not ones with detailed (and transparent) research behind them. And not ones where the person who recommended them will publish the results of every pick they've ever made so you can see whether they're full of BS or not. If you don't need to spend several hundred dollars for a starting point then don't, and good luck to you. It just feels like you're wasting your own time criticising TMF so frequently when you could better apply it elsewhere.

    "There had to be times when there wasn't anything worth while to buy."

    There's always something worth buying, unless you believe that civilisation as we know it is coming to an end and demand for all products and services will disappear (or at least decline massively).

    It's a shame you're disappointed with TMF, and I'm sorry (sincerely) that you feel they've let you down. Perhaps you've just been really unlucky in the picks you did decide to buy. I've bought a few stinkers too, but apart from the ones where no-one was to blame (eg fraudulent accounting, which no-one can reasonably be expected to predict) I've accepted personal responsibility for all my losers. Either I just didn't know enough to assess the company properly, or I didn't put the effort in to learn - either way it's my own fault and all I can do is make sure I do better next time. All part of the process.

    Anyway, I'll sign off from this discussion for now, as I suspect we'll just go round in circles! You're upset with the Fool, I'm not. But good luck for next year anyway...

  • Report this Comment On December 30, 2009, at 8:10 AM, pondee619 wrote:

    wuff3t:

    Have a happy, safe and prosperous New Year.

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