Recently, Vanguard founder Jack Bogle -- whom Fortune magazine named one of the four investing giants of the 20th century -- visited Fool Global Headquarters to talk about the collapse of the stock market.
Bear markets, Mr. Bogle believes, separate the speculators from the true investors. Your average speculator is three times more interested in the price of a stock than the merits of underlying businesses -- and bear markets can shake these speculators out of stocks, sometimes forever.
The real investor, by contrast, obsesses over the long-term potential of a business, and tries to create true wealth over rolling 10-year periods.
Are you an investor, or are you a speculator?
According to Mr. Bogle, that single distinction makes all the difference in investment returns over a lifetime. True investors -- those who do not try to time the market -- take home most of the rewards of the market.
It's easy to accept that on the heels of the fastest stock market rally since the Great Depression. Just look at the rise from annual lows of these five truly great American companies:
Procter & Gamble
(NYSE:PG), up 32%
(NASDAQ:MSFT), up 78%
Johnson & Johnson
(NYSE:JNJ), up 32%
(NYSE:KO), up 48%
(NYSE:MCD), up 18%
Bogle's right. You're much more likely to participate in historic rallies like this one if you buy with the intention of holding for the long term, adding money periodically. And when you factor in frictional costs and short-term tax rates, it's extremely difficult for speculators to make long-term money by trying to time their way into and out of bull and bear markets.
These are companies with multidecade histories of success. They're five of the greatest businesses in American history. And yet in a matter of just months, their value has risen tremendously. And you don't have to dig to find other huge gains. Cisco
So is the stock market peaking? Is it time to sell?
The world's stock markets right now are riding a wave of optimism. And yet, on average, had you attempted to sell these stocks near their previous highs, to pay the commission costs, to pay the tax penalties, and then to try to time your way back into them, you'd almost certainly have failed. Jack Bogle has proven this over his 60 years of investment scholarship and application.
Investors, on the other hand, profit during bull markets, and let time and compounding work their magic. Just look back on history -- because master investors like Charlie Munger and Shelby Davis didn't try to time the market; they profited over decades en route to growing portfolios valued in the millions (or, rather, the hundreds of millions).
Your million-dollar portfolio
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Good luck in 2010 -- and Fool on!
This article was originally published on Dec. 30, 2008. It has been updated.
Tom Gardner is co-founder and CEO of The Motley Fool. Tom owns shares of Microsoft, Cisco, and Johnson & Johnson, but of no other companies mentioned in this article. Best Buy is a Motley Fool Stock Advisor recommendation. Best Buy, Coca-Cola, and Microsoft are Motley Fool Inside Value recommendations. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble and Best Buy. The Motley Fool is investors writing for investors.