What to Do When the Dow Hits 11,500 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, a year and a half later, hoping the Dow will climb "all the way" back to 11,500 ...

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 everything from Microsoft (Nasdaq: MSFT  ) to Bank of America (NYSE: BAC  ) to Pfizer (NYSE: PFE  ) had all more than tripled from their 1990-1991 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 (among others), while landing 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 ...

  • 23 were (or had been sold) in positive territory.
  • 11 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."

But little did I know that within six months, we’d be watching the DOW plunge towards 6,500.

How quickly we forget
Over the past year, we have seen one of the most historic rebounds in market history, and witnessed shares of everything from General Growth Properties (NYSE: GGP  ) to Office Depot (NYSE: ODP  ) to UAL (Nasdaq: UAUA  ) 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 he's in charge of Disney's entire animation studio -- and of developing attractions at the same Disney parks where he once worked.

Now it's your turn
When I originally submitted this article, I never would have imagined that we'd see the DOW almost hit 6,500. Similarly, last March, I never would have imagined we'd be moving back towards 11,500 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 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 financials like Goldman Sachs (NYSE: GS  ) 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 – including their two top picks for new money --  I invite you to take a free 30-day trial of their Motley Fool Stock Advisor service.

Considering their average pick is outperforming the S&P500 by more than 57%, it might just prove to be worth your while. There is no risk, nor obligation to subscribe. To learn more simply click here.

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 doesn’t own shares of any of the companies mentioned. He also can’t believe Jim Cramer has been so bald for so long. eBay, Amazon.com, and Disney are Stock Advisor picks. Disney is also an Inside Value recommendation, along with Microsoft and Pfizer. Motley Fool Options has recommended diagonal calls on Microsoft and bull call spreads on eBay .The Motley Fool has a disclosure policy.


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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 March 30, 2010, at 10:47 AM, MyDonkey wrote:

    I nominate this article for the Beat-A-Dead-Horse award.

    Its original incarnation appeared on 27 Oct 2008 (along with 105 comments) here:

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

    The article has since been resurrected 15 (fifteen) times for additional whippings, usually with the Dow number set to 7,500.

    How about giving the article a decent burial and letting it rest in peace?

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