Timeless lessons from the recent market correction...
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Copyright 2001 Investor's Business Daily, Inc.
Investor's Business Daily
March 9, 2001
SECTION: A; Pg. 1
LENGTH: 471 words
HEADLINE: Timeless Lessons From Year-Old Bear Market
BYLINE: By, Investor's Business Daily
BODY:
By David Saito-Chung Investor's Business Daily
<<Tulip bulbs, the roaring '20s and tech stocks in 2000. What fun they were for investors when things went well. And how horrifying when things went wrong. The Nasdaq soared a record 86% in 1999, then tacked on another 26% in the first three months of 2000. Since then, its swan dive reminds chartists of the Dow's crash of 1929. Thought the Nasdaq's 21-month, 60% drop in 1973-74 was bad? It took half that time for the Nasdaq of 2000 to slide as far. In the year since this latest bubble burst, we learned again that, in the final analysis, earnings count. Many Internet firms had no profit, just a business model as flimsy as a cocktail napkin. Yet they made fortunes in the market in a snap. Then the Fed pulled the plug. Like the Dutch tulip bulbs that once traded at giddy prices in the mid-1600s, dot-coms crashed. Many are gone. If you lost money in the past 12 months, the experience may still sting. But look at it this way: You also should have learned some of the key rules of investing. Follow them, and the benefits will last a lifetime. Cut Losses. This lesson can't be overstressed. After you buy a stock, sell if it falls 7% to 8% below your purchase price. Follow this rule religiously, and no one bad trade will ever smash your nest egg. When top growth investors take a position, the first thing that comes to mind is reducing risk when things don't work out. "Only the humble survive," said hedge fund manager Jim Whitner in "The Best: TradingMarkets.com Conversations With Top Traders." Say you take four straight losses. If you make a 30% gain on the next stock, you'll end up even. But wait. A string of losers may be telling you the market is in poor shape. The best time to grab stocks is at the start of a new bull market, not at the tail end. Don't Buy On Dips. As tech stocks have shown the past year, this is akin to catching a falling knife. If you buy low and you're wrong, you'll bleed. Amazon.com's breakout from an eight-month base in late 1999 failed. Since then, it's skidded 90% from its high. Along the way, the online retailer rallied 20% or more seven times. Wall Street often boosted the stock with a bullish note or an upgrade. At least 13 analysts still rate it a buy. So much for opinions. Buy only high-quality stocks that zoom out of solid bases at or near new highs. Such stocks have proved to yield huge gains. Don't Quit. The next bull market will come. But if you're not ready, it and the new best stocks will pass you by. That's the biggest mistake you can't afford. Look at your past trades and see what went right and what went wrong, and why. Did you pick leading stocks? If not, study the leading groups and the indexes. If the market turns and these stocks are flying, you're in good company.>> |
