Last summer was a bad one for growth stocks large and small. Between May 1 and Aug. 1, eBay
Every new stock you bought seemed to drop. And retailers like Jos. A Bank
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 in 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 Great Wolf Resorts
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, Jos. A Bank is up 28%, Blue Nile 64%, and Tiffany 40%.
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've felt 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 of Rule Breakers, and join us as we look for tomorrow's great companies a day early.
This article was originally published on Aug. 1, 2006. It has been updated.
Motley Fool co-founder David Gardner owns shares of eBay, Starbucks, and Blue Nile. Blue Nile is a Rule Breakers recommendation. EBay and Starbucks are among his Stock Advisor recommendations. Blue Nile is also a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.