You might say I got lucky.
See, I sold many of our stocks before last May, because my wife and I recently purchased our first home. It was bittersweet; I was excited to be a homeowner but sad to see my holdings go. Then, many of the stocks I'd held started dropping like rocks.
That's how I got lucky.
But it wasn't all luck. I sold as soon as I knew I would need that money, because -- even though I was confident in my long-term holdings -- I had no idea what to expect in the next month. The market is a fickle place, and even Warren Buffett's disciples admit that they have no idea what will happen tomorrow.
Volatility, thy name is stocks
From May through August, companies as diverse as UAL (NASDAQ:UAUA), Joy Global (NASDAQ:JOYG), Tele Norte Leste Participacoes (NYSE:TNE), Titanium Metals (NYSE:TIE), and XM Satellite Radio (NASDAQ:XMSR) all dropped more than 25%. In other words, the market was panicking and selling off stocks left and right.
That's crazy!
The easy way
But hey, it's an accepted fact that the market is crazy in the short term and that it was particularly spooked over the summer with inflation, rising energy costs, and war looming on the economic horizon.
That said, there are two things we know about stocks:
- They offer the best returns, and ...
- While earning those returns, stocks will drop precipitously along the way.
So how can you earn better returns? First, buy companies with superior management and wide market opportunities at good prices. Next, hold those companies for 10, 20, or even 30 years.
More free advice
I know that two-step plan sounds too good to be true, but it is a recipe for market-beating returns. There will, however, be hiccups along the way. That's why we advise members of our Motley Fool Stock Advisor investment service to follow these five maxims as well:
- Diversify broadly.
- Invest new money on a regular basis.
- Eliminate emotion from decision-making.
- Expect mistakes.
- Scale back any individual position, or your exposure to stocks, if you're fretting over volatility.
The Foolish bottom line
If you decide to heed these lessons (or join Stock Advisor), you're on your way to better returns. Remember, however, that they work only over long timelines. So don't go investing in stocks if you need money next month to, say, buy a house.
Fool co-founders David and Tom Gardner are beating the S&P 500 by more than 42 percentage points since 2003 with their stock picks in Motley Fool Stock Advisor. You can join the service free for 30 days.
This article was originally published May 15, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned. XM Satellite Radio is a former Rule Breakers recommendation. No Fool is too cool for disclosure.
