It's easy to drool at stocks and funds that have been amazing long-term performers. Think of Microsoft (NASDAQ:MSFT), for example. In July, 1988, the stock was trading around $70 per share. (To compare that with today's price near $25, use the split-adjusted version of that price, which would be thirty-some cents per share.) A mere four months later, shares touched $45, down a whopping 35%. If you'd been invested then, would you have sold? Many people might have -- some even have rules to automatically sell a holding if it drops a certain percentage amount. But if they did, they'd have lost out on subsequent success, as the stock has increased some 70-fold since then!

Consider also Tiffany (NYSE:TIF), which Bill Mann wrote about back in February. He explained:

In 2002, its stock dropped by 50% in about four months, as sales, particularly in its Japanese stores, were extremely anemic. But had anything particularly changed at Tiffany? Sure, there was a rise of reputable online jewelry outlets, including Motley Fool Hidden Gems recommendation Blue Nile, but Tiffany's position at the top of the jewelry food chain remains fairly unassailable. Folks who piled in during the period when the market fretted about Tiffany have done extraordinarily well.

The lessons here? Well, when a stock tumbles, you shouldn't necessarily sell. Determine whether its problem is short-term or long-term (or -- gasp! -- permanent). Indeed, you can even do well by buying certain stocks when they tumble.

Even funds
Even great mutual funds have lackluster periods. For a good example, look at renowned investor Bill Miller's Legg Mason Value Trust (LMVTX), famous for having outperformed the S&P 500 over 15 consecutive calendar years. Its 10-year annualized growth rate, according to Morningstar, is 13%, topping the S&P 500 by more than four percentage points. In 10 years, 13% growth can turn $10,000 into almost $34,000. At 9%, it will only grow to $23,600 or so. That's a big difference.

Still, check out how zig-zaggy the fund's record is:

  • 1999: 26.7%
  • 2000: (7.1%)
  • 2001: (9.3%)
  • 2002: (18.9%)
  • 2003: 43.5%
  • 2004: 11.9%
  • 2005: 5.3%

See -- for three years in a row, it lost money (though less than the S&P 500). I bet many investors bailed out during that period, missing out on the subsequent positive returns. When a fund hits a dry spell, it's useful to ask yourself what's going on, and to determine whether the reasons are temporary or lasting. You might ask, for example, whether the fund manager has lost his or her touch. (I doubt that Mr. Miller would have become less intelligent over time -- it seems more likely that he keeps learning and becomes a better investor from year to year.) You might also look at the fund's holdings, to see whether you find any answers there.

As of the end of August, the fund was down nearly 6% year-to-date. Let's peek at some of the fund's top holdings, shall we? Well, there's Tyco (NYSE:TYC), recently representing some 5.2% of the fund's value. It fell from the $50s to the teens in the wake of its big scandal several years ago, and after having climbed back to the $30s, it's been trading around the mid-$20s. Then there's Eastman Kodak (NYSE:EK), making up nearly 3% of the fund. Many have written it off for dead, but as BusinessWeek magazine recently reported, Miller has high hopes for its new commercial printing technology. There's Sears Holdings (NASDAQ:SHLD), which arguably needs more time to show its stuff as it regroups post-bankruptcy. (Other top holdings include Sprint Nextel, Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), Home Depot, and Shareholders need to assess whether they trust Miller's decision-making. If they do, they should give his investments time to prove themselves.

Our recommended funds
Our Champion Funds newsletter is my current favorite may to find great mutual funds, delivering new recommendations and updates each month. Together, the picks of our analyst, Shannon Zimmerman, have more than doubled the market's return (as of the last time I checked), gaining an average of 19% vs. 11% in the same time period.

Try the newsletter for free to see all his picks and how well they've done. A small handful of the funds are trading at prices below where they were recommended (only four out of 42, last time I checked). For some people, that's cause for dismay. To me, that suggests that the funds may now be even more attractive than they were on recommendation.

Great companies and great funds will go through heady, surging times and sluggish periods alike. Each could last for years. Assuming you've invested in strong and growing companies with competitive advantages (or that your chosen fund has done so), patience should eventually reward you. Don't be blindly patient, though -- do some digging into why any investment may be underwater. And if you're not yet invested in the stock or fund, a slump is often a good time to buy.

Learn much more in these Zimmerman articles:

Home Depot, Microsoft, and Tyco are Motley Fool Inside Value recommendations. Yahoo! and are Motley Fool Stock Advisor selections. Whatever your investing style, the Motley Fool has a premium newsletter for you.

Longtime Fool contributor Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library , Television Banter and Card & Board Games . She owns shares of Microsoft, Home Depot, and For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.