It sure was nice, wasn't it?
The recent highs in the market, I mean. When the S&P 500 peaked at 1,540.56 on June 1, your stocks were probably up and you probably felt pretty good.
But the market has fallen back since then. And while times like this can feel a little bit worse than all-time highs (though it could well get worse from here), it's precisely these times -- the down times -- when you can make the most money.
Oh, the horror!
What's your plan for a prolonged market downturn? Don't say it won't happen. No one, not even the best investors, can follow Will Rogers' advice and only invest in stocks that go up.
So what's your plan? If you don't have one, allow me to suggest one: Get greedy.
Vegetables give you strength
When your portfolio turns red with losses, you don't have to think of it as bloodshed. Instead, consider it V-8 -- the 100% vegetable juice drink that contains antioxidants, calcium, potassium, and vitamins A, C, and E. A few swigs and you're a healthier person for the long run.
Similarly, building out your positions in a few choice stocks when they're down will make your portfolio healthier for the long run.
Sound crazy to send good money after bad? Hear me out ...
Something's rotten in Finland
Finnish cell phone maker Nokia (NYSE:NOK) announced that sales were below expectations in early April 2004 -- the company seemingly having missed out on the clamshell-style phone trend. The stock got pummeled over the next four months, falling a total of 50%.
It wasn't until April 2006 that the stock returned to its previous levels. That's a tough two years for an investor who simply held the stock. Even with the stock currently trading at $28, Nokia has returned just 7.8% annually since before the 2004 drop.
The investor who bought Nokia near the bottom, however, has done much better. She's up 130%. After all, Nokia was an efficient operator with a ton of cash and a history of innovation in a notoriously cyclical industry. It was a definite candidate for recovery.
Uncertain gains
The same could be said of Merck (NYSE:MRK) in September 2004 after the drug manufacturer announced it was removing Vioxx from the market. Shares fell more than 25% in a week and were down 40% within two months.
However, Vioxx was not Merck's only source of revenue; the company's pipeline was reasonable and it had the money and grounds to contest each lawsuit individually. While there was uncertainty surrounding the stock, the company wasn't worth 40% less.
And while the stock has been a dog for folks who have just held the shares, it has nearly doubled for those who bought in near the bottom. Assuming equal amounts bought at the two different times (one high and one low), the combined return has been as much as 68%.
It happens again and again
Believe it or not, no company goes through life without a major drop in its share price. Peter Lynch highlighted this when he noted that for most stocks, there is as much as a 50% swing between its high and low for the year.
Exhibit A: Apple (NASDAQ:AAPL), which saw a 42% drop in 2006, likely beginning with concern about Steve Jobs staying with Apple, continuing with flat computer sales, and ending with suspicions about stock options backdating. By the time the low was reached in July, investors knew that Jobs was staying put, sales were picking up, and the company could handle its options problems.
Exhibit B: Boeing (NYSE:BA), which dropped 50% between 2002 and early 2003 from a decline in deliveries as airlines scaled back after 9/11. An investor back then could believe that pent-up demand would win out, as airlines had to start replacing their fleets.
Exhibit C: Nike (NYSE:NKE), which declined 35% over six months in 2002, thanks mostly to slowing sales. However, the company was entering new markets and showing early success. Later that year, sales turned up again.
Investors who took advantage of these declines really juiced their returns -- to the tune of 136%, 275%, and 140%, respectively. Of course, not all companies make such nice recoveries -- just enough of them for the savvy, well-informed investor to do really well.
Here's an idea
Focus on finding great companies you can buy for the long term -- and look to double down when temporary market panic strikes.
That's the strategy Fool co-founders David and Tom Gardner take in Motley Fool Stock Advisor, and it's working. They're beating the market by more than 37 percentage points since 2002, with 72% average returns. You can take a look at all of their research and current picks for new money now free for 30 days. Click here for more information.
Fool contributor Jim Mueller took advantage of that situation with Nokia, but he chickened out when it came to Merck. Right now, he does not own any shares in the companies mentioned. The Fool's disclosure policy grows strong and healthy because it drinks its vegetables.
