Investing Advice

Changes in Stock Values Can Be Big Numbers

Ready or not, I'm going to throw some more numbers at you. You can't appreciate the daily moves in the market or understand where it may be headed, without a basic understanding of where it has been.

If you only look at where the price of a stock was and where it is now, you may be misled about the return on your investment. This example should be an eye-opener:

One dollar invested in large company stocks in 1926 grew to $2,473.52 in 2001 if you re-invested your dividends, but just grew to $98.44 if you spent your dividends instead of re-investing. And that $2,473.52 was worth only $396 after inflation - ouch!

But that's still a whole lot better than the $1.71 your T-bill investment would be worth. Speaking of inflation, in 1 year out of every 3, it wipes out any advance in the stock market (exactly 25 times in the last 75 years).

Okay, that's enough about inflation. Let's get to the good stuff. Pick the right stocks, and you can make a fortune:

If you bought $100 of Coca-Cola stock in 1919, that's $12.5 million today even though the stock dropped 63% in 1972. Here is the potential of true market leaders:
 

1981-2000       Home Depot       up 34,000%
1984-2000    Dell Computer   up 55,100%
1986-2000   Microsoft   up 61,000%
1986-2000   Oracle   up 70,800%
1998-2000    Yahoo   up 18,200%
 1990-2000    Cisco   up 27,442%
1962-2001   McDonald's   up 72,000%
1985-2000   America Online   up 63,500%

Other companies who saw their stock price rise thousands of percent, include Wal-Mart, Nokia, Qualcomm, Amazon.com, and dozens of little internet companies you've probably never heard of.

Okay, pause & catch your breath. Now look at this:

1900-2000, Dow up 450,000% (with dividends re-invested)
Zikes! That’s $4,500 for each and every one dollar.

So why not just invest in big companies and forget about it, be a long-term investor?

Making money on big-company stocks is not automatic unless you buy into a mutual fund. Even if you select your stocks from companies with a solid brand name you might still get burned.

From 1972 to 1974, adjusted for splits

  • Avon dropped from $140 down to $18.62

  • Coca-cola down from $148.75 to $44.63

  • IBM down from $341.31 to $150.50

  • Intel down from $56.05 to $10.25

  • Johnson and Johnson down from $133 to $57.60

  • Eastman Kodak down from $151.75 to $57.63

  • Mc Donald’s from $77.31 down to $21.25

  • Polaroid, from $149.50 down to $14.13, now gone

  • Procter and Gamble fell from $112.75 to $67

  • Walt Disney from $211.63 to $30.75

  • Xerox down to $49, from a high of $171.88

From June 1990 - June 2000

  • JC Penney down 39%

  • Toys R Us down 49%

  • K-Mart down 50% and now about $1.00

  • Xerox back up to $124 in 1999, is now trading at $5.50

And sorry investors who’ve held on to the stocks are saying “sooner or later, these companies have to come back!

Remember Woolworth’s, TWA, Polaroid, and Montgomery Ward? How quickly we forget that even giants like Texaco went through a bankruptcy reorganization.

Of the 500 largest companies in the San Francisco area which includes Silicon Valley:

250           lost money       in 1998
274    lost money   in 1999
302    lost money   in 2000
357    lost money   in 2001

Even the general market, full of big companies, can hurt you.

  • If you invested in the market in 1969, you didn’t break even for 4 years, then lost again, and finally made money in 1981.

  • In just one day, on October 19 1987, the Dow dropped 22.8%

  • From 1973 to 1974, The S&P 500 dropped 42%

  • There were 9 recessions in the past 30 years

Sounds awful! Why would anyone make such losing investments? Well hang on there, wait just a second. I wouldn't send you down a dead-end street.

The average bear market may last 9 months, but the average bull market lasts 3 years and 9 months.

From 1982 through 1999, the S&P 500 averaged a gain of 19% a year - that's a total return of 2,200% !

It even gets better:
In 1961, if you began investing just $5.00 a day in the S&P 500 and stopped saving after only 10 years, you would have (in 2001) a cool $1,212,000 - that’s 1.2 million dollars!

I hope a light is glowing brightly in your head, if not you'd better check your pulse. You see, if you are properly invested, it just doesn't matter what the market does year-to-year.

Yes, there were 9 recessions this past 30 years, but there were also 9 recoveries!

No matter how severe the bad years, the stock market always recovers and soars to new heights. Always has, and as long as America stays strong, it always will.
 

“Your objective is not to be right all the time. It’s to make big money when you are right and to get out when you appear to be wrong … I want to buy only really great companies that have unique new products or superior services. I’m looking for true market leaders.”

William O’Neil
founder of the Investor’s Business Daily

Other Stock Market Basics Topics:

  1. Stock Market Investing – the Right Way
  2. More Stock Marketing Investing
  3. How to Pick Winning Stocks
  4. The Golden Rule of Investing
  5. Avoid Psychological Traps to Have Successful Investing
  6. Changes in Stock Values Can Be Big Numbers
  7. How to Invest Smart
  8. Stock Advice - Important Selling Rules
  9. Poor Stock Buying Decisions
  10. Market Indicators
  11. Stock Market Cycles
  12. When a bear stock market may not be a bear market
  13. Stock Index Futures
  14. Four Things that Affect Stock Valuation
  15. What is a P/E ratio?
  16. Value Investing
  17. Cheap Stocks
  18. What is a Financial Statement?
  19. Analyzing Financial Statements
  20. Stock Market Tip - Red Flags to Look For When Investing?
  21. The Annual Report – How to Read
  22. Stock Market Analysts – Stock Market Advice and Tips

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