It's amazing what a few weeks of crumbling share prices will do to one's confidence. Since stock prices peaked roughly two months ago, the major indices have dealt investors who were long in the market some pretty rough blows.
The S&P 500 may have only suffered a 6% slide since its early May top, but the Nasdaq Composite is now showing a double-digit percentage discount off its April highs.
For a growth stock investor like me, that's the carnage that hits closer to home. A lot of the high-growth stocks that I own or follow have been slammed even harder.
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The shares peaked at more than $40 a stub over the 2004 holiday season and they're now trading at nearly a third of that sum. I though I was looking at a bargain when I recommended the shares to Motley Fool Rule Breakers subscribers last year as they approached $30, but I was off -- way off -- and the recent market malaise has only made things worse.
Even Apple Computer
Where to from here?
I know what I'm doing. It may seem like a contrarian approach, but I've been looking to liquidate some of my more conservative holdings -- stocks that have held up relatively well -- and exploring many of the beaten-down equities. As long as there is the heart of a quality company beating underneath, who wouldn't want to take advantage of pre-screened Rule Breakers like security specialist American Science & Engineering
Curious about what my fellow Fools were up to, I asked them, in last week's issue of Motley Fool NOW, how they were managing their portfolios. This is what they had to say.
Tim Beyers : Last weekend, my brother-in-law was lamenting the market's downturn. Know what I told him? I'm celebrating. How often does the market go this nuts for an extended period? Not enough for my money. That's why I'm buying. Last week, I purchased shares of a semiconductor manufacturer, a hard-drive maker, and a clothing retailer, all of which I believe are selling at steep discounts, and two of which pay attractive dividends. Call me crazy, but I think I'll be sitting on a generous pile of moola in three years.
Seth Jayson : Being too picky and too lazy to have invested a large wad of cash earlier this year (I couldn't find any more stocks I loved) turned out to be my best investment move so far this year. Now I'm sitting flush, looking over a wish list a mile long -- but I'm wondering if the deals won't be even better come July ...
Rich Duprey : Well, I started enjoying the tiki bar down the shore. Sun, sand, and lots and lots of Coors Light have helped me weather the market's malaise. It's also allowed me time to save extra money to invest in my favorite stocks that have gone on sale.
Will Frankenhoff : I'm about to submit a piece arguing that the recent hammering of commodity plays is a buying opportunity since we're in the early innings of a cyclical bull market in commodities (average length 14-18 years). In past bull markets, corrections ranging from 15%-50% are not uncommon and have always represented an opportunity for long-term investors to pick up shares on the cheap.
Steve Mallas : What am I doing during this market downturn? Besides praying and taking over-the-counter acid-neutralizing nostrums, I am staying the course, for the most part, in my investment portfolio and am indeed adding to my positions.
However, I am also chiding myself -- I definitely should have done some better research on investment instruments that can still prosper while Fed-lord Bernanke wages a hellacious crusade against the ogre-beast of inflation. A friend of mine suggested EFR, a senior floating-rate trust that has seen its dividend rise the past several months (as well as its share price). That's been doing well, and I am going to heed the following lesson: Step away from learning about stocks all the time and learn the science of bonds and interest rates. Both are important.
Save as much as you can to take advantage of these cheaper prices. But don't be afraid to take profits, either, especially in positions that you may have held for years and that don't pay a dividend. Now is not the time to panic (no matter what my joking opening may imply); it is, however, a time to thoroughly review your portfolio and reacquaint yourself with your intentions vis-a-vis each individual position. Once that is done, forget the up/down shenanigans of the market and remember why you purchased most of your stocks in the first place: to remain in the game for a long, long time.
Nathan Alderman : I've been comforting myself during the market downturn, knowing that my buying power for shares of the mutual fund in my IRA has just increased. Now, the set amount I contribute every month buys more shares, and when the market inevitably rises again -- however many weeks, months, or years in the future that may be -- I'll have a bit of extra wealth to show for it.
For my part, I think we're in a bit of an odd market where one can buy quality at a lower price than the more speculative fare, and I'm taking advantage of the phenomenon both personally and in the pages of
. Folks seem to be tossing the baby out with the bathwater here. It's just not every day that you get a chance to snatch up such high-quality blue-chip players as Johnson & Johnson
I expect the market to decline at least an additional 10% by October, but only after a summer rally. Thus, I am currently 80% in cash and long September 157.5 call options in the mini-Nasdaq. Once the summer rally occurs (and it will occur because current investor sentiment readings are overly bearish), I will cash out of my call option position and switch gears by putting on a December/September 121 put calendar spread in the SPDRs
I am bearish for the following reasons: 1. Fed is raising rates and the three month-10 year yield curve has inverted, which signifies economic recession. 2. The second year of a presidential election cycle is the weakest of the four-year stock market cycle and will be especially weak this year because the Democrats are ready to take back the House in midterm elections this November, which Wall Street won't like. 3. The market has not experienced a 10% correction in over three years, which is one of the longest stretches in stock market history. 4. One of my favorite technicians is options and futures trader Mark Cook, whose proprietary TICK indicator is the most overbought since the market top in March 2000, and he predicts a market decline of 30%.
Andy Cross : I've taken a few steps. After reading Tom's advice in this month's Stock Advisor , I ranked all my current holdings based on attractiveness and long-term sustainability. Since I hold mostly large caps, I also decided to list the five Hidden Gems that I find most appealing. So far, I sold one large cap, decided which others to add to, and started my small-cap research. I also moved my cash position to a higher-yielding money market. I'm hoping over the next few weeks to plunk down some money on a few Hidden Gems. And I finally cracked into Quicken to set up my budget.
So it goes
We're 10 Fools. As you can tell, we each have our own unique way of kicking the market's tires. The one thing that we all have in common is that we are, in fact, kicking those tires. That's important. There may never be a foolproof way to beat the market consistently, but going by the collective returns of our various newsletters, we seem to have a clear leg up on the rest of Wall Street.
Even with the market's meltdown, the average pick in the Motley Fool Rule Breakers premium research service that I write for is currently beating the market average by over five percentage points. I favor high-octane stocks, and the downturn has hit these harder than the market as a whole, but that's all the more reason to be there when the market eventually bounces back.
Think you're a Rule Breaker? Take advantage of a free 30-day guest pass to kick the tires alongside your fellow Fools.
Longtime Fool contributor Rick Munarriz has been writing the "Early Adopter Roundup" column since the Rule Breakers newsletter's inception in the fall of 2004. XM, American Science & Engineering, and Openwave are all picks in the newsletter, but Rick doesn't own any at the moment. TheFool has a disclosure policy.