"Buy and hold" is supposed to be the way to long-term wealth. No less than investing legend Warren Buffett advocates this method of investing in a company's performance and profits, because it focuses on the reasonable -- and researchable -- fundamentals of a company's products, strategy and management, instead of capricious valuing by millions of traders.

Add that to reduced trading costs, and, assuming reasonably good stock picks -- voila! Long term wealth.

But then 2008 came along and took a hefty chunk of that long-term wealth back. While 2009 gave a lot of it back, we're still well under the market's historic high. Does that mean buy and hold is dead?

Nope. It only means you've got to take buy and hold to its next logical step: buy and hold and buy.

We're not in Kansas anymore, Toto
The bear markets of recent memory have been relatively short, shallow affairs. And because of that, your portfolio would recover fairly quickly -- and with little effort on your part.

In fact, according to the New York Times: "Since 1982, the Standard & Poor's 500-stock index has recouped about 88 cents, on average, of every dollar lost in a bear market by the end of the first year of the subsequent bull market. By the end of the second year, that dollar would have been recovered, and then gone up an additional 18 cents."

Historically, the market climbs by 38% the first year of a bull market, 11% the second, and 4% the third. In previous post-bear rallies, that was enough not only to recover what you lost, but to get ahead.

The sheer depth of this bear market, however, has called such optimistic predictions into question. It lost over 50% from the October 2007 high to the March 2009 low, and if the market recovers in the same pattern, after three years, a $100,000 pre-bear all-equities portfolio would be worth only $70,000.

Now, it's true that in the 10 months since the market's low, the market has gone up about 65%. That $100,000 pre-bear all-equities portfolio would be worth about $73,000 right now. But we don't know if this rally will even continue or whether we're looking at a sideways market or, heaven help us, more declines.

If you really want to get your portfolio back where it was before the market turned south -- much less to where it would have been if the market hadn't turned at all -- you'll have to start buying.

Buy and hold and buy
As the market has see-sawed down 56% and back up 65%, we've seen some big-name stocks sell for prices we never thought we'd see.

In early 2009, Microsoft (NASDAQ:MSFT), for instance, sold for less than it had since early 1998, while Apple (NASDAQ:AAPL) was cut roughly in half since late 2007 -- despite neither having much to do with either finance or housing. Both are now above the prices they sold for at those respective market peaks.

But many big-name stocks deserved their haircuts. Companies like AIG (NYSE:AIG) and Freddie Mac (NYSE:FRE) participated in the risky lending and leveraging that created the housing crisis -- and they're still down over 90%.

The challenge now is to find stocks that are both still undervalued (which will provide some margin of safety if the market fails to continue its rise) and likely to perform well from this point forward, and that means finding companies with the following:

  • Superior business models.
  • Strong and lasting competitive advantages.
  • Margins ripe for expansion.
  • Growing market opportunities.

Costco (NASDAQ:COST), for instance, has excellent management, has a strong and well-supported business model, and saw first-quarter membership fees and adjusted same-store sales rise. Dreamworks Animation (NYSE:DWA) has a P/E ratio well below that of its industry as well as a history of successful movie-making and a substantial portfolio of intellectual property. Waste Management (NYSE:WM) is the largest waste and environmental services provider in North America.

If you want to beat the market -- especially in unpredictable times -- you've got to keep on buying excellent companies for less than they're worth and then holding on to see your thesis play out.

The Foolish bottom line
Your portfolio can recover from the recent bear market -- but it's going to take some attention from you. Continuing to buy strong and promising companies will help you recover those losses -- and get ahead.

But if you'd like to help it recover even faster, consider adding tools like options trading and ETFs to the mix. They not only help you generate more income, they can also reduce your portfolio's volatility and increase the benefits of diversification.

Those are the tools we're using -- and teaching -- at Motley Fool Pro, a $1 million real-money portfolio designed to combine core holdings, options, and ETFs to make money whether the market is up, down, or stagnant. If you'd like to learn more about the service -- and how you can use these tools to improve your own portfolio -- just enter your email in the box below.

This article was originally published on Dec.29, 2008. It has been updated.

Fool editor Julie Clarenbach owns shares of Apple. Costco and Microsoft are Motley Fool Inside Value recommendations. Apple, Costco Wholesale, and DreamWorks Animation SKG are Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Costco. The Motley Fool's disclosure policy holds on forever.