Lessons From Black Monday

In July 2003, Tom Gardner opened up the small-cap Motley Fool Hidden Gems era with great fanfare -- and a recommendation to buy Talk America at a price of $10.63. Less than one year later, he advised members to sell at $8.27, for a 22% loss.

Today, the average return for all Hidden Gems recommendations stands at 62%, easily topping the market. There are two lessons to take away from this:

1. Don't hold for sentimental reasons
It would have been all too easy to hang on to that inaugural stock pick hoping things would change for the better. After all, no one wants to strike out in the very first at-bat. Why admit defeat so soon after the newsletter launched?

But regulatory winds began shifting in the telecom industry, and we noted in the sell recommendation, "It is dangerous to bank your long-term investment money on companies that rely heavily on committee rulings and government oversight." So Tom took his lumps, sold the stock, and concentrated on more promising investments.

2. Take the long view
The legendary Peter Lynch insisted on taking the long view, noting, "I've always believed that investors should ignore the ups and downs of the market."

That philosophy served him well through some trying times. He even has a name for it: the Lynch Law. It seems that every time things were going well for him personally, the market fell apart. His most famous example came when he took a few days off from running Fidelity Magellan for a dream vacation to Ireland ... in October 1987. On Oct. 19 alone -- Black Monday -- his Magellan shareholders lost 18% of their money. The Dow Jones Industrial Average tanked nearly 23% that day. Here's a small sampling:

Tom had a big loser for his very first pick. Lynch faltered plenty of times along the way. Yet both have gone on to post big gains for their members and shareholders. If you come out of the gate thinking that investing has to be about being right early, or being right all the time, you've got to change your temperament, or you'll fail as an investor.

As Kenny Rogers sang, you have to know when to hold 'em, and know when to fold 'em. Tom folded on Talk America because he realized things would only get worse. But those who sold at a panic on Black Monday missed out on some nice rebounds, because nothing had changed fundamentally.

Two big lessons
Apply logic, not sentiment, to your investing decisions. And do indeed take your failures seriously, but recognize that you will fail, and learn from them so you can supercharge your future gains.

Lynch went on to achieve nearly 30% annualized returns from 1977 to 1990. Tom and his Hidden Gems team have 62% total returns in less than four years (vs. 26% for equal amounts invested in the S&P 500). Interested in finding out which stocks he's recommending to members? Try a no-obligation 30-day free trial and you'll see all his picks as well as his five best buys for new money now. Here's more information.

Rex Moore just finished off the Wheaties, and helps Tom dig for Hidden Gems. He owns no companies mentioned in this article. Coca-Cola is a Motley Fool Inside Value recommendation. The Fool has a world-class disclosure policy.