Get Ready for a 25% Drop

My friend swears he's learned his lesson.

Back in July of 1995, this friend -- let's call him Charlie -- bought Microsoft at what turned out to be the highest price it would see that year. The stock was down 15% in no time, and Charlie was worried. He was smart enough to know that the market is the best wealth-creating machine available to us regular folks, but he felt about stocks the way Elizabeth Taylor felt about husbands. He liked them well enough, but he tended to give up when things got a little rocky.

In a matter of weeks, his paper loss was approaching 25%, and he couldn't stand it anymore. He bailed out.

Needless to say, the next few years were even rougher on Charlie, as he watched Mr. Softy march steadily higher. It achieved 10-bagger status at the height of the bull market in 2000, but even today, it's returned more than 220% from when he sold.

Get ready for a 25% drop
As Tom and David Gardner tell their Motley Fool Stock Advisor members, you have to expect significant dips from some of your stocks, and you must remain firm if you've done your homework. Otherwise, you sort of screw up that legendary investing formula by buying high and selling low. The vast majority of stocks are down significantly this year, but this is not the time for panic selling.

This table should really drive home the point for you. These are true all-stars from the past decade, yet investors who bailed out on them missed out on some solid gains -- especially considering the S&P 500 lost 24% during this period.

Data from Capital IQ, a division of Standard & Poor's.

So, the lesson Charlie learned is that practically all of the great superstar stocks of the past decades have dropped at least 25% at one time or another. It would be very hard for you to find one that hasn't.

Hey, I'll be the first to admit that many stocks drop 25% and keep dropping. That can happen when a business that has no real competitive advantages to begin with gets the rug pulled out from under it. It happened to me several years ago, and like a shell-shocked boxer, I still duck when I hear the name CMGI. (Shudder.)

Lesson learned
We've all learned some things throughout the years. But if, as Tom Gardner says, you can invest for decades, add money to your existing holdings steadily over time, and stay committed to focusing on truly great businesses, you stand to make a fortune.

For the seven years since Stock Advisor was launched, Tom and David Gardner's recommendations have beaten the S&P 500 by an average of 49 percentage points each. Interested in finding out which stocks to start with? Try a no-obligation 30-day free trial and you'll see Tom and David's five best buys for new money now. Here's more information.

This article was originally published on Jan. 8, 2007. It has been updated.

Rex Moore lathers and rinses, but never repeats. Of the companies mentioned in this article, he owns shares of Microsoft. Microsoft is an Inside Value recommendations. Leucadia National is a Motley Fool Stock Advisor recommendation. Enterprise Products Partners LP is a Motley Fool Income Investor selection. The Motley Fool has a disclosure policy.