Monday was clean up day.
I hope everybody out there in Fooldom went outside or did something to enjoy themselves this weekend rather than obsess over the action over the last week. If the media is to be believed, we the individual investing community at large looked at the opening of the market on Monday with some sense of dread and foreboding. To which I say, "Hogwash!"
I've been pretty appalled at the media circus surrounding the market activity from last week. The world did not end. We are not having to go out and sell pencils on the street corners to make ends meet. America is still in the midst of an absolutely enormous expansion of wealth. We've seen some pretty heady words bandied about. "Bloodbath." "Horror." "Mauling." Insert your breathless prose here, and juxtapose it with a picture of a distraught looking floor trader at the New York Stock Exchange. If I didn't know better I'd say the news media was irresponsibly talking this sell off up. Actually, I do know better. At one news organization reporters were actively cheering the stock market sell off on Friday so they'd have something besides the World Bank protests and Elian Gonzalez to cover. Hmmmm.
I mean, last week was bad and all, but let's have a little perspective. Even at the end of the day, we only lost four months' worth of gains. That is a blink of an eye for most investors, and should not be a substantial period of time for Foolish investors to concern themselves about. Still, it wasn't much fun, and after seeing our portfolios skyrocket, especially those laden with technology, Internet, and telecommunications companies, over the last two years or so. The Rule Breaker portfolio has been rocked to the tune of $250,000 in the last five weeks, my personal equity holdings have taken a beating, and so, in all likelihood, have yours. Anyone who glosses over this point is being emotionally dishonest.
So say it with me now: "Last week really hurt." OK, now get over it. Emotionally speaking, if you are investing, you must be capable to withstand sudden downturns, and their evil cousins, the long water-torture style drifts downward. Because investing is, at some levels, a war of attrition. The Motley Fool is very fond of pointing out that the average return of the S&P 500 has been 11% per year, and that this should be your baseline. But the S&P is not an annuity -- it does not go up 11% year in and year out. In fact, only once in the last 80 years has the S&P returned 11%, in 1968. Instead, the S&P has had years with losses in excess of 25% (last one being in 1973, which followed a 14% drop in '72), and it has gained in excess of 35% (1995) as well. Weeks, months, or even several years of steady losses are not uncommon in the stock market. Do you have the resolve for this?
There is an old Arabian Proverb that translates roughly: "Trust in Allah, but tie your camel." We have a similar precept, that of chance favoring the prepared mind. All too often, particularly in the last two years, investing has been for many an act of faith. "I believe that Cisco (Nasdaq: CSCO) will go up. Therefore I will buy it." Or, "Amazon.com (Nasdaq: AMZN) will eventually be profitable." These statements, or worse, trusting statements like this made by others (on message boards, from financial advisors, friends, the Rule Breaker Report, wherever) is the length to which some people research the companies they own. And you know what? Particularly with these two and some other gold-plated technology names, thus far by and large they have been correct.
But the Foolish investor has more than faith to go on with his or her holdings. And not just some of their holdings, but each and every one of them. So do this now. Look at your portfolio, and answer honestly to yourself whether you know what each company does and if you have an idea of how the company makes (or will make) money. Oh, and regurgitating the company's press releases language does not count. Anyone can be a "vertically integrated provider of innovative e-commerce solutions" or some fool thing like that. But if you own Celera (NYSE: CRA), Echelon (Nasdaq: ELON), and Network Appliance (Nasdaq: NTAP), for example, then go through the exercise of telling yourself, your spouse, your dog, the mailman, whomever, how each company is the best place in the world for your money. Use examples. Even sift through the numbers. Face it, your spouse, the dog, and maybe even the mailman will love the attention, whether they know what you are saying or not.
And what happens if you find that multiple readings of a company's materials still have you scratching your head about what they do? Maybe you should go back and think about why you bought the company in the first place. For, as we saw this past week, there was no one left behind to hold our hands when the bottom fell out on the values of companies with the highest ratios. Some of the big winners from 1999 have thus far turned out to be big losers in 2000. And some of those losers really lost a huge portion of their values last week. Remember, 25% loss was the average, some lost much, much, more. Did they lose this much for silly momentum reasons, or is there reason now to be much more skeptical of these companies?
So many times it is easy to go along with the flow during the good times and say "great company" in response to hearing the name of a high-flyer, or "dog" when one comes crashing to earth. The key to superior long-term performance in equities is being able to say "great company" when everyone else is saying "dog," or to know WHY a company that is valued highly is still one of the best investments available.
For smaller companies, The Motley Fool has provided you a roadmap called the Rule Breaker criteria. It is by no means foolproof, but it is an excellent set of data points to help you smoke those first movers in important growing industries out of the list of thousands of other companies out there. Believe me, your spouse, dog, and mailman will thank you in the long run.
Bill Mann, TMFOtter on the Fool discussion boards
Monday was clean up day.