What to Do When the Dow Hits 7,500 Again

Talk about ironic. I originally submitted this article to my editor in August 2008, after the Dow had fallen "all the way" to 11,500 -- but it didn't get published right away. And now, here we are, happy to be "all the way" back above 10,000 ...

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 Coca-Cola (NYSE: KO  ) , Johnson & Johnson (NYSE: JNJ  ) , and ExxonMobil (NYSE: XOM  ) 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 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 and Amazon.com (NYSE: AMZN  ) 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 Ford (NYSE: F  ) to Sirius XM Radio (Nasdaq: SIRI  ) to Fifth Third Bancorp (Nasdaq: FITB  ) 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 Clearwire. Ford, Amazon.com, and Disney are Motley Fool Stock Advisor picks. Disney and Coca-Cola are Inside Value recommendations. Coca-Cola and Johnson & Johnson are Income Investor picks. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 28, 2010, at 12:22 PM, goinglong1 wrote:

    Great article, excellent post. Boy do I know what it is like to make a wrong pick but I think I got a good one here. I like little unkown gem named Digital Angel (DIGA on NASDAQ). They are due to pay off all of their term loan debt next week and will be left with only a small balance on their line of credit. They are involed in Aniaml ID and Food Safety. Mandates for traceability of livestock and food supply are coming from all over the world, recently Canada, New Zealand, U.K. and Brazil have implemented mandates and the U.S. is not far behind with the NAIS program. They also have nice revenues as the leader in pet microchips. Schering-Plough purchases their pet microchips and markets it under the brand name HomeAgain. DIGA is on the brink of finally truning a profit on $40 million in annual revenue with huge upside coming from worldwide mandates on Animal ID (GOOGLE it and see for yourself). Watch this gem soon get some attention in 2010 and 2011.

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