Last summer was a bad one for growth stocks large and small. Between May 1 and Aug. 1, Nasdaq stocks got punished -- Netflix
Every new stock you bought seemed to drop. And retailers like Abercrombie & Fitch
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, Abercrombie is up 50%, Blue Nile 59%, Tiffany 31%, and Bankrate 35%.
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.
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 owns shares of Electronic Arts, Bankrate, Netflix, Intuitive Surgical, and Blue Nile. Intuitive Surgical, Bankrate, and Blue Nile are Rule Breakers recommendations. Electronic Arts and Netflix are among his Stock Advisor recommendations. Blue Nile is also a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.