Watching the stock market can be a hair-raising pastime these days. If you're like me, you've seen the prices of many of your favorite stocks fall, sometimes on the most short-term concerns imaginable. When the sentiment gets really ugly, it's hard to resist the nagging doubts. "Maybe this stock's a loser," you think to yourself. "Maybe the bears are right; maybe I should sell."
Resist the urge to be negative, dear Fool. Consider instead the notion of loyalty investing, a concept Tom Gardner described in the March 2006 issue of Motley Fool Stock Advisor. "This style of investing -- loyalty investing -- requires finding companies with the will to win, supported by excellent financial characteristics and run by authentic leaders," Tom wrote.
In these days, where it's so easy to feel insecure -- and make the mistake of selling shares in great companies at terrible prices -- loyalty investing is key.
Stand by your stocks
Peter Lynch, one of the most successful and well-known investors to date, once said, "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
Good point, Mr. Lynch. Market downturns happen, and often, the stocks of quality companies get nailed in the short term just as often (and as severely) as companies with fundamental problems. You don't get five-, 10-, or 25-baggers by constantly reacting to temporary ups and downs. Your dollar, carefully placed in the stock market, appreciates through patience, diligence, and, yes, loyalty. Of course, given the market's vagaries and the power of negative sentiment, being loyal is sometimes easier said than done.
Tom and his brother David constantly remind Stock Advisor members that a great way to invest is to seek out the companies in which you'd be more likely to add money in tough times than to run screaming for the exits. An example of one such company where Tom applied his loyalty principle was Silicon Labs (NASDAQ:SLAB), which is a three-time Stock Advisor recommendation for exactly that reason.
Through good times and bad
Contemplating the theory on loyalty investing, I believe I have a similar situation with Urban Outfitters (NASDAQ:URBN). It's a stock I've owned since last winter (and followed for a lot longer), and I've watched as its stock price has been cut in half after a lot of negative noise coming from analysts, investors, and media over the past several months. However, as I wrote in this recent commentary, the current issues are short-term, and I still like the company's management, potential for growth, and competitive advantage. I'm a loyalist, and I feel that the long-term view is still bright for this company, even though at times it's seemed as though many investors gave this stock up for dead.
Shares of Starbucks (NASDAQ:SBUX), another stock I happen to own and a recent Stock Advisor recommendation, got creamed after the company's most recent earnings report. Investors found its July same-store sales increase disappointing and punished it quite harshly. When you think about the big picture, it seems a little ludicrous that anybody would make a run for it because they were disappointed in one month's suboptimal metric (and, of course, what they read into it). But apparently that's exactly what many investors did. Many of us found that reaction ill-advised when we considered this company's long-term outlook.
Then there's Whole Foods Market (NASDAQ:WFMI), another Stock Advisor selection that recently took a hit because one element of its earnings outlook bummed out investors. However, I've always thought there were many things to like about this business, and this latest quarter is no different. Not only does Whole Foods have a lot of growth left, but it offers shareholder-friendly data in its financial reports. Furthermore, that data illustrates that it squeezes a high level of growth even out of its older stores. From a shareholder's perspective, this is a real long-term advantage. I'd wager recent pessimism will be something many investors will regret in the future.
Where does your loyalty lie?
Of course, this is not to say any of us should be blindly loyal. Tom Gardner said the stocks that should command shareholder loyalty are the ones with excellent businesses. He also outlined three logical justifications for ditching loyalty, which I've bulleted here for brevity's sake:
- Selfish management
- Competitive disadvantages
- An unstable financial model
Suffice it to say, investors get hurt by sticking with companies that possess those characteristics. Due diligence (and sometimes striking up conversation with other folks, like those in Fool.com's active discussion board community) can help us avoid the pitfalls of blind loyalty in investing.
Tom's long-term loyalty to quality companies has proved to be a solid philosophy. Motley Fool Stock Advisor has been around since April 2002 (in the midst of a market downturn, if you'll recall), and if you merely look at his first year of recommendations on the scorecard, they now all display double- or triple-digit percentage gains. Furthermore, over the entire lifetime of the service, Tom's picks have increased 69% versus 19% for the S&P 500.
If you're looking for some ideas of where to find stocks that deserve the commitment of long-term loyalty, consider taking a 30-day free trial to Stock Advisor. Month in and month out, David and Tom seek out world-class businesses with the promise of great gains for long-term investors. Remember that when times get tough, if you've invested in solid, quality companies, it pays to stand by your stocks.
The September issue of Stock Advisor -- with two brand-new stock recommendations -- released at noon EDT today. A free trial gives you access to the entire service (including David and Tom's "Best Recommendations for New Money Now"). Click here for more information.
Alyce Lomax owns shares of Starbucks and Urban Outfitters. Starbucks and Whole Foods are Stock Advisor picks. The Fool has a disclosure policy.
