Bad news causes investors to sell stock. That's the knee-jerk reaction that has prompted so much interest in stop-loss orders since 2001.

But there's no reason to sell immediately based on bad news. Unless you spend your day watching the business wire, chances are by the time you read about the bad news, the stock price already reflects it.


News (Date)

Stock opened

Merck (NYSE:MRK)

Vioxx withdrawn (Sept. 30, 2004)

26% lower


Disappointing second quarter revenue (Aug. 11, 2005)

7% lower

Apollo Group (NASDAQ:APOL)

CEO resigns (Jan. 11, 2006)

7% lower

Eastman Kodak (NYSE:EK)

Dividend cut (Sept. 25, 2003)

10% lower

Electronic Data Systems (NYSE:EDS)

Missed earnings (Sept. 18, 2002)

40% lower


Earnings warning (June 12, 2003)

8% lower


Revised earnings guidance (June 22, 2005)

29% lower

It's unlikely that a quick trade would have saved you from a loss in any of these situations. In other words, when you hear bad news, you have the time to analyze.

Don't sell at the bottom
The secret to earning awful returns is to sell stocks for far less than you bought them. Don't be that guy (or gal). While market drops can test your will, it's always best to keep a level head.

Merck is one stock that has tested Motley Fool Income Investor subscribers. The trouble began when the FDA announced the company was withdrawing Vioxx from the market because of safety concerns. Since then, lawsuits have been filed, fought, won and lost; former CEO Raymond Gilmartin has resigned; and Merck's risk profile has changed dramatically. And the market responded to all of these developments in kind.

Now Merck has a new CEO who is trimming costs, accelerating drug development, and committed to fighting every one of the nearly 10,000 Vioxx cases. Since October the stock has risen from $26 all the way up to $34 -- a 30% gain.

Amid all of this chaos, one of Merck's most important characteristics has remained strong: its cash position. Back when Vioxx was withdrawn, Merck had $7 billion in cash. Today, it has $14 billion. That's more than enough to deal with the Vioxx issue, keep the business on track, and maintain its $1.52 per share annual dividend. Shares purchased before the Vioxx announcement are still in the red, but shareholders are earning a nice return in dividends while they wait for the market to throw some capital gains their way. And those payments are the silver lining -- a reward for being patient when the stock market drops a dividend payer -- one that non-dividend-paying companies like Dell, Apollo Group, and Trex can't offer.

The Foolish bottom line
Fool dividend guru Mathew Emmert tries to combine capital gains and dividends for Income Investor subscribers by identifying undervalued companies like Merck with strong cash flows and greater than 3% dividend yields. Whether they go up, down, or nowhere (and they usually go up), income investors get paid to be patient.

Patient investing results in lower fees, lower stress, and higher returns. Mathew's Income Investor recommendations are beating the market by nearly three percentage points, and he's offering a special 30-day free trial to all of his research and analysis with no obligation to subscribe. Click here to get started.

Tim Hanson owns shares of Apollo Group. Dell is a Motley Fool Stock Advisor pick. No Fool is too cool for disclosure . and Tim's pretty darn cool.