This summer was a bad one for growth stocks large and small. Between May 1 and Aug. 1, Nasdaq stocks got punished -- Nvidia
Every new stock you bought seemed to drop. And retailers like Urban Outfitters
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 loose if we see the long-term prospects of the company turn sour (like BioSante Pharmaceuticals in December 2005). And we'll cash out any loser whose worsening fundamentals make a comeback more difficult (see Overstock.com). But for the most part, we're buying and holding the best growth companies in America, looking for a five-year-plus ride. We call these companies Rule Breakers because they shake up the stodgy old industry stalwarts.
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, Nvidia is up 66%, XM 12%, Cisco 52%, and Juniper 48%.
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 11% since we recommended it, while a security company, 30% off its 52-week high, 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. David does not own shares of any company mentioned in this article. XM Satellite Radio is a Rule Breakers pick. Nvidia and Bed Bath & Beyond are Stock Advisor choices. The Fool has adisclosure policy.