My friend swears he's learned his lesson.
Back in July 1995, this friend -- let's call him Charlie -- bought Microsoft (Nasdaq: MSFT ) at what turned out to be the highest price it would reach 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 450% 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. In a decade in which the market lost about 15%, these companies turned in some truly life-changing gains.
|
Company
|
10-Year Gain
|
Largest Drop
|
|
Chesapeake Energy (NYSE: CHK )
|
903%
|
82%
|
|
Gilead Sciences (Nasdaq: GILD )
|
943%
|
32%
|
|
Frontline (NYSE: FRO )
|
308%
|
77%
|
|
Hudson City Bancorp (Nasdaq: HCBK )
|
470%
|
55%
|
|
New York Community Bancorp (NYSE: NYB )
|
218%
|
78%
|
|
Nike (NYSE: NKE )
|
356%
|
42%
|
Data provided by Capital IQ.
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. (Shudder.)
Lesson learned
We've all learned some things throughout the years. But if, like 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 seven years since Stock Advisor was launched, the Gardners' recommendations are beating the S&P 500 by an average of 51 percentage points each. Interested in 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. Chesapeake Energy and Microsoft are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Chesapeake Energy. The Motley Fool has a disclosure policy.
RSS Headlines
Fool UK