This past summer was a bad one for growth stocks. Between May 1 and Aug. 1, Nasdaq stalwarts got punished -- Adobe Systems
Every new stock you bought seemed to drop. And that stock you meant to sell last spring? It dropped, too. And the industries you like are in cyclical declines! High-end food and beverage retailers like Whole Foods
You know the feeling. And even if you don't, I know the feeling. I've felt it before, during several bear markets. World's Worst Investor: Me.
A simple solution?
William O'Neil, the founder of Investor's Business Daily, seems to offer the perfect balm. O'Neil advocates selling any stock that drops 7% from your purchase price. His premise? This will help you avoid large losses. During the summer of 2006, O'Neil's advice might have seemed to the new investor to be somewhere between tempting and ingenious. But for those of us who are shooting for the real home runs on the stock market, jitterbugging your way out of a stock because of a couple of bad days isn't investing. The most dynamic winners will routinely give back 20% gains along their multiyear runs to stock market glory.
At Rule Breakers, we occasionally cut a stock if we see the long-term prospects of the company turn sour (like BioSante Pharmaceuticals
The winds of change are upon us
And if you cashed out your positions during the summer, you've missed a nice rebound in some of those same great companies. Since Aug. 1, Adobe Systems is up 35%, Electronic Arts 18%, Intel 18%, Teva 5%, and Whole Foods 22%.
And that's my point
You see, when the market makes growth-stock investors feel like the World's Worst, causing newer and shakier hands to sell, I've learned to do quite the opposite. Whenever I feel like the World's Worst Investor, like four years ago in the summer of 2002, or four years before that during the "Asian Contagion" summer of 1998, those were actually great times to start buying.
I see a couple dozen companies in our Rule Breakers service now that still represent compelling buys at today's prices. One solidly profitable alternative energy company is off nearly 40% since we recommended it, while a security company, 50% off its highs, has the same deep pipeline for X-ray and inspection systems that it had at the beginning of the summer. Both of these companies are leaders in their fields but are in early enough stages that they don't have household name recognition. We recommend them for purchase today.
If, like us, you got hammered over the summer, just remember that you're not investing over the past summer. You're investing over the next summer, and over many summers to come.
Outlast the summer heat
Rather than trade along with William O'Neil -- who'll help you avoid some losses but also cause you to sell yourself out of some great long-term profits -- we have a different answer: Get educated, get Foolish about your money, find the best companies the stock market has to offer, build long-term positions, and ride out the occasional bad summer. It's precisely when everyday growth-stock investors feel like they're the World's Worst that investors sitting on the sidelines should sit up, take notice, and add a Rule Breaker or two to their portfolios. Take us up on our offer of a 30-day free trial to Rule Breakers, and you'll discover tomorrow's great companies a day early.
This article was originally published on Aug. 1, 2006. It has been updated.
David Gardner is co-founder of The Motley Fool and lead advisor of Motley Fool Rule Breakers. He has been investing successfully in dynamic growth stocks for 22 years. He owns shares of Electronic Arts, Intel, and Whole Foods. Intel is an Inside Value pick. Whole Foods and Electronic Arts are Stock Advisor choices. The Fool has adisclosure policy.