Dr. Strangelove's Stock Tips

As a former Russian major, one of my all-time favorite movies has got to be the 1964 black comedy Dr. Strangelove, Or: How I Learned to Stop Worrying and Love the Bomb. It's the story of the plan of a lone general ("who went a little funny in the head") to start a war with the Soviet Union, a frantic effort to halt the plot, and the world's ultimate decimation by nuclear fallout.

The moral of the story: Hey, we're all doomed anyway, so quit worrying about it (and let's get to work closing our mineshaft gap with the Commies).

And yes, I said it was a comedy.

And that's got what, exactly, to do with investing?
I'm getting to that. You see, if you invest in the stock market, no matter how good a stock-picker you might be, you're doomed.

Sort of.

No matter what company you invest in, it's going to have bad days. Just like people, companies make mistakes. And even when they don't, the "professionals" on Wall Street will create mistakes for it by setting overly optimistic earnings targets, then punishing the stock because the analyst guessed wrong. Whether the mistake is the company's or the analyst's fault, the consequence is the same: your stock gets walloped.

Catch-22
Even if, against all odds, your company both performs magnificently in its own right and beats the analyst estimates, it can still get walloped when stocks completely unrelated to it get caught in a downdraft. We saw that happen this week when soon-to-be-biggest-auto-manufacturer-in-the-world Toyota (NYSE:TM) got caught up in a marketwide sell-off over in Japan, brought about when some two-bit Internet auctioneer named Livedoor was nabbed cooking its books. What does Toyota have to do with selling widgets over the Internet? Not a dang thing, but that didn't stop Mr. Market from giving the carmaker a spanking.

2005: A volatile year
Closer to home, we see high-quality companies suffer severe stock-price declines all the time, for reasons ranging from missed estimates to tax-related effects to plain old market corrections. In 2005, as is their wont, stocks zigged and zagged all year long while the underlying businesses often performed just fine, making sales, earning profits, and rewarding their owners. Which isn't to say that there weren't some frightening moments. Look at some of the sudden declines last April, for instance:

2005: The year when nothing happened
And yet, in the grander scheme of things, 2005 was a year in which the markets hardly budged for 12 months running. From Jan. 1 through Dec. 31, the S&P 500 rose in value by a mere 3%. The Nasdaq grew less than 2%. The Dow actually dropped by less than 1%.

And the five stocks named above? Each and every one of them went on to gain back all of their April losses and more:

Lessons learned
Those of us who lived, and invested, through the Great Bubble of 1999, the Great Burst of 2000, and the So-Much-Greater Revival of 2003 know that even great stocks go down as well as up.

It's heartbreaking to watch your "green" stock turn to "red." I know. I've been there. In the first half of 2005, I saw my own investment in cell phone maker Nokia (NYSE:NOK) rise 15% through July. I then watched in horror when the stock proceeded to plunge 16% in four days, after "missing estimates" by a penny. Having survived the Bubble Burst, though, I knew better than to panic and sell at the bottom. I sat tight, hoped and prayed that Mr. Market would eventually realize his mistake, and since then, Nokia has made up the loss and proceeded to march higher.

Knowledge applied
The secret, I think, is to resign yourself to the inevitable, stop worrying, and learn to love your portfolio.

Disaster will strike, for reasons good or bad, and all you can do is research your stocks thoroughly before you invest. Be confident in your decision, knowing full well that at some point, the market is going to disagree with you.

Once you've made your decision, be steadfast. Resist the urge to trade into and out of stocks based on the color of their daily ticker. If necessary, refuse to look at your portfolio for months at a time. Because it takes time for Mr. Market to realize that he's goofed after dumping your stock. It takes time for him to admit that he was wrong and you were right all along.

Misery loves company -- and so does victory
We all know this is sound advice. But some of us -- including yours truly -- still find it hard to follow. That's why I devote the bulk of my portfolio to stocks recommended by people I know to be smarter than I am -- the good folks at The Motley Fool, and in particular, the two who research and manage the Motley Fool Stock Advisor portfolio: David and Tom Gardner.

That way, if my stocks fall, I can ask myself who's smarter: the suits up on Wall Street or David and Tom, whose combined Stock Advisor portfolio has crushed the market by a 64% to 22% margin since April 2002? If David and Tom say "sell," I'll give the idea serious consideration. But until then, I'm sticking with the winners. And speaking of winners, at noon EST today, David and Tom released their February picks. You can see them both just by signing up for a free trial.

Fool contributor Rich Smith still owns shares of Nokia. eBay is a Stock Advisor recommendation. And the Motley Fool loves disclosure.