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 McDonald's (NYSE: MCD  ) , General Electric (NYSE: GE  ) , and Procter & Gamble (NYSE: PG  ) had all 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, Amazon.com, and eBay (Nasdaq: EBAY  ) 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 have been 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 Genworth Financial (NYSE: GNW  ) to Las Vegas Sands (NYSE: LVS  ) to Rite Aid (NYSE: RAD  ) 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
When I originally submitted this article, I never would have imagined that we would really see the Dow hit 7,500 -- much less almost hit 6,500. Similarly, last 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 comments box 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. eBay, Amazon.com, and Disney are Stock Advisor picks. Disney is also an Inside Value recommendation. Procter & Gamble is an Income Investor pick, and a Fool holding. Motley Fool Options recommends diagonal calls on eBay. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (9)

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 February 23, 2010, at 4:14 PM, kief75 wrote:

    Nice repost of an old article....

  • Report this Comment On February 23, 2010, at 10:54 PM, stocktrader007 wrote:

    When the money supply deflates, it is not possible to sustain current prices and salaries. Debt is the problem and we have more of it now. As debt defaults, money supply does deflate. Money can dissapear into thin air just like the way it was created:

    http://www.tradingstocks.net/html/banks_create_money.html

    This is a deflationary crash. People should be very careful with stocks now. Only the best of the best will survive. Broad market indexes can decline 90%.

    We have not seen the bottom in March. Here is why:

    http://www.tradingstocks.net/html/near_bottom.html

    Dividends are all time low. Earnings are terrible and will get worse.

    Current calm is due to the borrowed stimulus. Watch our for your 401ks. Be very specific in your stock purchases. Market timing is needed. These are dangerous waters. Cash will be the king for a year or two. US dollar rally is real. In order to pay debt people need US dollars. They will sell everything to pay debt, otherwise their creditors will. March lows will not hold.

  • Report this Comment On February 24, 2010, at 10:17 AM, MyDonkey wrote:

    Two suggestions for TMF:

    1. Put the notification "This article was originally published on <date>... " at the top of the article instead of the bottom.

    2. Include a link to the original article in the notification mentioned above.

    In this case, the original article (along with its 105 comments) is here:

    http://www.fool.com/investing/general/2008/10/27/what-to-do-...

  • Report this Comment On February 24, 2010, at 1:22 PM, TepperJason wrote:

    I'm currently 75% short and willing to wait it out. I'm not going to sit out until 7500, though. Once we get to 9700 I'll cover, but I'm confident there's a 7% drop over the next two months.

  • Report this Comment On February 24, 2010, at 1:34 PM, mikecart1 wrote:

    March 2010 will put the fear back into the investor. Expect a drop to the $8000's as a minimum.

  • Report this Comment On February 26, 2010, at 7:43 AM, fwperkins wrote:

    What I've learned from my ventures and inevitable losses in the stock market is that amateur stock investing is a fool's game. It is simply not possible to compete with the thousands of very smart, dedicated professionals who are trying hard to pick my pocket. Better to learn from the fable above about John Lasseter. Invest in yourself and your own unique skills, become your best, and let others pay for your skills.

  • Report this Comment On March 02, 2010, at 2:54 PM, Hpick wrote:

    I am an individual that invests on gut/like/business.....whatever. I am up 86% for a year - not too shabby.

    Do you want a true winner? NENG - a rising star - snooze and lose

  • Report this Comment On March 06, 2010, at 4:25 PM, wonteach wrote:

    I've learned that when the market is on its way down, it's on its way down. When the market went through 11,000 after having briefly gone over 14,000, people were talking rapturously what a great buying opportunity it was. After all, we had just experienced a more than a 20% drop. But anyone who followed that advice is still waiting to break even.

    It's true that if you wait until the market turns around before buying, you'll miss the first big upsurge. But the only people who get to experience that ride upward are those who kept losing money on the way down.

    I've followed a very simple rule, and it has consistently kept me ahead of the market as a whole. Every weekend, I look at total trailing returns over the last month, the last three months, and the last year. If two (or three) of those three numbers are negative, I'm out. If at least two of those numbers are positive, I'm in. Obviously, that indicator isn't always right. And it's too simple-minded to appeal to the sophisticates. So I'll just keep on banking my profits, thank you.

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