My friend swears he's learned his lesson.

Back in July 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 the market is the best wealth-creating machine available to us regular folks, but stocks to him were sort of like husbands to Elizabeth Taylor. 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 400% higher than 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.

This table should really drive home the point for you. These are true all-star performers from the past five years, yet investors who bailed out on them missed out on some big gains.


5-Year Gain

Largest Drop

Cliffs Natural Resources (NYSE: CLF)



PotashCorp (NYSE: POT)


-43% (Nasdaq: PCLN)



Akamai Technologies (Nasdaq: AKAM)



Titanium Metals (NYSE: TIE)



Ebix (Nasdaq: EBIX)






I'd suggest you take a hard look at any of these if they drop 25% from current levels; each has averaged at least 10% net margins and 20% returns on equity over the past five years. A significant drop from here could make for a great entry point.

So, the lesson Charlie learned is that practically all of the great performers of the past decades have dropped at least 25% at one time or another. It will 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 nameCMGI.

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, the Gardners' recommendations are beating the S&P 500 by an average of 60 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 a Motley Fool Inside Value recommendation. Akamai Technologies and Ebix are Rule Breakers picks. and Titanium Metals are Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on Ebix and a diagonal call position on Microsoft. The Fool owns shares of Ebix. The Fool has a disclosure policy.