Three of the five best days the Dow Jones Industrial Average has ever experienced occurred within a single 10-day stretch: Oct. 20, 1987 (up 5.88%), Oct. 21, 1987 (up 10.15%), and Oct. 29, 1987 (up 4.96%).
But that was not a great week for investors. It came in the wake of Black Monday (Oct. 19, 1987) -- the single worst day in the Dow's history -- when, by 4:00 p.m. ET, the market overall became $500 billion less valuable. The Dow dropped 22.61% that day, and followed it up a week later with an 8% drop -- the second-largest single-day drop in history.
When the dust settled, the very bluest of blue chips had taken a bath. General Motors (NYSE:GM), United Technologies (NYSE:UTX), and Honeywell (NYSE:HON) each lost 20% or more of their value in October 1987.
We bring this up not only because we just passed the 20th anniversary of Black Monday, but also because the current investing landscape is strikingly reminiscent of that day. The term bubble is omnipresent. Corrections are predicted to be forthcoming, followed by opposing bullish predictions driven by fundamentals.
Bring on Black Monday?
So what's it all mean? Full disclosure: We're not sure it's possible to make much sense out of these conflicting short-term signals.
But whether next Monday is going to be another "black" trading day or one of the best in history, we try to remember that there are only three things that matter when it comes to investing successfully:
- The quality of the companies you buy.
- The price at which you buy them.
- The length of time you own them.
For those reasons, patient long-term investors should be eagerly awaiting the next Black Monday even more so than the next Microsoft or whatever.
Say what?
Let's face facts: There will be but a handful of the next great growth stocks, and the odds of picking just one are ... not good. But when the next Black Monday hits, hundreds of quality companies will suddenly become available at prices that all but assure success for long-term-minded investors.
That's what history has taught us. As Wharton professor Jeremy Siegel wrote, there is one reason why Standard Oil was a better investment than IBM despite IBM's superior growth: "Valuation, the price you pay for the earnings and dividends you receive."
The most expensive book ever written
The Internet bubble was another painful reminder of that lesson. Our research showed that if you took a stake in each of the stocks highlighted in Greg Kyle's 100 Best Internet Stocks to Own when it was published in the spring of 2000, you lost 62% of your capital.
For a book that cost about $15, that hurts. While Amazon.com, eBay (NASDAQ:EBAY), and 11 other companies simply earned a positive return, 18 names went entirely bankrupt.
The culprits? Quality and valuation. Many of these were poorly run and profitless companies that were nonetheless selling at stratospheric levels. Consider that even well-run technology firms such as Cisco Systems (NASDAQ:CSCO), Oracle, and Qualcomm (NASDAQ:QCOM) disappointed shareholders because they were simply priced too aggressively. (We should note that neither Cisco, Oracle, nor Qualcomm were included in Kyle's book.)
And that's the irony of the chase: You're far more likely to find the next big bust than the next big thing.
But that was seven years ago at the height of the "Tech Bubble." It's got nothing to do with today. Right?
Right?!
Look at a long-term chart and you'll see that the Dow and S&P 500 are near all-time highs, despite the recent market volatility. We're seeing the media report on bubbles in China, India, and even in the tech sector again. But remember, just three things matter for a successful investment plan:
- The quality of the companies you buy.
- The price at which you buy them.
- The length of time you own them.
If you insist on buying quality companies at good prices for the long term, it's tough to overpay even in a bubble.
Easy-peasy
We're not trying to make successful investing sound easy. It's not. It takes time, effort, and resources.
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This article was first published Oct. 19, 2007. It has been updated.
Tim Hanson does not own shares of any company mentioned in this article. Brian Richards owns shares of Microsoft. Both Tim and Brian wear plaid on the outside 'cause plaid is how they feel on the inside. Amazon.com and eBay are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick. The Motley Fool's disclosure policy is writing checks its body can't cash.
