Meet the World's Worst Investor
My stocks have been getting killed. How about yours? It's been a horrible run since the market peaked in late April. The Nasdaq is down 12% in just a few months. You know how bad it's been for me? I wish my stocks were down just 12%!
As the lead advisor for Motley Fool Rule Breakers, I've watched many of the 34 dynamic growth stocks we follow drop 30% to 50% from their highs.
Still, no safety in numbers
Maybe you know the feeling. Every good earnings report these past few weeks triggers a 10% sell-off. Netflix (NAS: NFLX) : Great numbers. Dumped. Intuitive Surgical (NAS: ISRG) : Expanding its robot-assisted surgery from prostatectomies to hysterectomies -- huge profit margins -- who cares? Dumped. Disney (NYS: DIS) : Biggest box-office opening ever with Pirates of the Caribbean 2 ... and don't let the door slap you on the way out, Mickey.
Every new buy you make drops. And that stock you'd meant to sell last spring ... it drops too. And the industries you like are in cyclical declines! Interactive entertainment, a great long-term place to concentrate some investing dollars, is sagging as it waits for the PlayStation 3. Sure, I think Electronic Arts (NAS: ERTS) is going to beat the stock market over the next 10 years, but this summer doesn't care. How about alternative energy stocks? We follow those, too, in Rule Breakers. The world knows it needs to begin the shift away from oil, and government subsidies are forcing progress in areas such as solar and wind energy. And speaking of solar, these stocks have been fried, summer-side-up, off 20% across the board. And those are the strong ones.
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. After the summer of 2006, O'Neil's advice may strike the new investor 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 bad days doesn't feel like investing. The most dynamic winners will routinely give back 20% gains along their multiyear runs to stock market glory.
At Rule Breakers, we will occasionally cash in a profit if the valuation gets silly (like Bankrate (NAS: RATE) for a five-month 58% win earlier this year). 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. Think of how Blue Nile (NAS: NILE) is slowly but surely taking market share for engagement rings away from Tiffany & Co. (NYS: TIF) .
Of course, Blue Nile is down this summer.
And that's my point
You see, when growth-stock investors feel like the World's Worst, causing newer and shakier hands to sell, I have 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.
I see a couple dozen companies in our Rule Breakers service now that represent compelling buys at today's prices. One solidly profitable technology company is off 42% since May 1, while a biotech company, 25% off its April highs, has the same deep pipeline for cancer drugs that it had at the beginning of the summer. Both of these companies are leaders in their fields but are in early enough stages that they don't have household name recognition. We recommend them for purchase today.
Our scorecard has gotten hammered over the past four months, giving up most of our gains of the past year. But you're not investing over the past year. You're investing over the next year, and the years to come.
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 when the everyday growth-stock investor feels like he's 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 will discover tomorrow's great companies a day early.
David Gardneris co-founder of The Motley Fool and lead advisor of Motley Fool Rule Breakers. He has been investing successfully in dynamic growth stocks for 22 years. Rule Breakers just came out with its "5 Best Recommendations for New Money Now," which you can access for free with a30-day trial.
David owns shares of Electronic Arts, Disney, Bankrate, Netflix, Intuitive Surgical, and Blue Nile.Intuitive Surgical and Blue Nile are Rule Breakers recommendations. Electronic Arts, Disney, and Netflix are among his Stock Advisor recommendations. The Fool has a disclosure policy.
The article Meet the World's Worst Investor originally appeared on Fool.com.
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