If it's true that a picture is worth a thousand words, then by including this link, I've exceeded my word limit for this column before even getting started. Even so, go ahead and click it. The rest of this piece will make a whole lot more sense if you do.
See that 20-odd-percent drop in the price of Select Comfort (NASDAQ:SCSS) on the left? My friends, that's panic. That's overreaction. And that was a very bad time to sell the stock. I wrote as much in a column that ran on the very day of the drop, December 3, 2004. Some Fool readers didn't much like that column. Plenty of "shorts" -- and some frustrated "longs" as well -- wrote in to argue that this mattress deserved to get taken out and beaten.
And perhaps it did, to an extent. But in translating a 6% slowdown in sales growth into a 22% slashing of the stock's price, the market simply overreacted to Select Comfort's bad news. And given a little time to think about it, investors ultimately came to the same conclusion. Today, 45 days after the drop, Select Comfort is trading right back where it was the day before the news.
So what's my point? Just to say "I told you so?" (Well, I did....) But no, the point is that Select Comfort has given us an object lesson in the dangers of overreacting to bad news, and it's one worth noting. There's a reason that at Motley Fool Hidden Gems, we invest with a three- to-five-year time horizon. To borrow a cliche, accidents happen; great companies get over them. Time was, Time Warner's (NYSE:TWX) AOL couldn't deliver the mail. Every so often, Coke (NYSE:KO) loses its fizz. In September, Merck (NYSE:MRK) nearly gave investors a heart attack. And most recently, Wal-Mart (NYSE:WMT) tolled the bell of doom over weak sales in one month, only to crow over beating its forecasts the next.
But if you've done your due diligence and you're confident that you've found a "great one," give the company time to prove you right. If one gray morning, one of your favorite companies falls out of bed -- perish the thought -- do yourself a favor and spend at least as long considering whether to sell as you spent deciding whether to buy the stock. Head over to the Motley FoolHidden Gemsmessage boards and talk it over with your friends. That's what we're here for, and 45 days later, you may just thank yourself that you did.
Over the past 19 months of Foolish investing, all of our Motley Fool Hidden Gems selections have had their share of ups and downs. But overall and over time, they've risen an average of 40% and walloped the market's 9% return in the process. To reach returns like those, we're willing to traverse a few bumps in the road. Are you?
Fool contributor Rich Smith owns no shares in any company mentioned in this article.
