A year ago, I wrote an article advising you to ignore a few market-timing bears that had crept out of the woods following a 12% rise in the S&P 500 in five months. A 12% rise, mind you, that was fresh on the heels of a 23% loss in 2002.
The Bear Scare column included a quote from University of Texas professor Henry T.C. Hu, who had told The Washington Post, "The kind of mystical belief in stocks that people had in the late 1990s through early 2000 really hasn't gone away... It's quite distressing to me that people still refuse to let go of this religion."
That statement is so unbelievable to me that I'll just assume we don't have the entire context behind it. But the rest of the Post article -- titled "Investors Decide to Run With the Bulls: With Economy Shaky, Some Analysts Whisper 'Irrational Exuberance'" -- highlighted similar opinions from others, including one near-guarantee that stocks weren't going to be able to sustain the rally, particularly the Nasdaq.
However, a year after the article appeared, the Dow and S&P 500 are up about 15%, and the Nasdaq is pushing a 25% gain.
So what?
I bring this up not to say "I told you so," because I didn't. As I explained then, I had no idea where the market was going in the near term, and neither did anyone else. Instead, I'm calling this to your attention to remind you of a basic Hidden Gems investing tenet: We buy companies with the intention of holding them for a very long time. Stories can change, of course, and we may very well sell after a short period. It happened with Talk America (NASDAQ:TALK), which Tom Gardner sold at an 18% loss after just eight months -- one of his few disappointments on the way to 55% average annual gains for all his Gems selections.
Over your investing lifetime, you'll have several losers and several marginal winners. If you've chosen well, however, you'll also have a small handful of massive, multiyear outperformers, and if you follow the "buy right, sit tight" strategy and hang on to those winners, your chances of significantly beating the market are greatly enhanced.
If you've sworn off individual stocks and invest only in an index fund, you have even more reason to ignore the pundits and gurus trying to scare you out of the market. As I said a year ago, it's perfectly valid to discuss the valuations of Intel (NASDAQ:INTC) and IBM (NYSE:IBM), Pfizer (NYSE:PFE) and Merck (NYSE:MRK), or Lucent (NYSE:LU) and Cisco (NASDAQ:CSCO). But the total market is a different issue entirely.
Take a look at this logarithmic chart of the Dow Jones Industrial Average from 1929 to present. It beautifully points out both the risks and rewards involved in stock investing. It's hard to pick a random point that does not see the chart higher 10 years later, and, of course, the entire 75-year period shows average returns of about 10% per year. Yet, nothing is risk-free, and those who first entered the market with a lump sum in 1929 had to endure many years before they earned back their principal.
And yet, as Benjamin Graham pointed out in his classic The Intelligent Investor, a person who began dollar-cost averaging into the market in 1929 would have earned more than 8% compounded annually by 1948 -- despite the fact the Dow's value fell from 300 to 177 during that period!
Invest through thick and thin, dear Fool. Don't bother timing the market.
Different paths to victory
Tom recently told his Hidden Gems members that he fully expects -- years down the road -- to meet some of them who hold as many as 40-50 different small-cap stocks that they found in the pages of the newsletter. Dollar-cost averaging. Consistently buying. Holding. Some may wind up like the legendary Shelby Davis, owning hundreds of stocks worth millions of dollars.
Don't let that scare you. Although a fine way to invest, that type of diversification isn't for everybody. Perhaps you'd rather own very few stocks at any one time -- similar to the Warren Buffett punch card strategy. That's valid also, especially for the more experienced.
But whatever your preference, we encourage you to start investing if you're not yet doing so and continue investing if you have. Years later, you'll be glad you did.
Need better stock ideas? Lock in your Hidden Gems membership at low charter rates before next week's price increase.
Rex Moore will write for food -- preferably donuts. He works with Tom Gardner digging for Gems, but owns no companies mentioned in this article. You can visit his profile and the Fool's disclosure policy online.
