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As someone who started buying individual stocks in January 1999, I can really appreciate your post. Fortunately, we did spread out our investments in regular chunks. As an illustration of our experience, our first two investments were in Coca-Cola (KO) and Whole Foods (WFMI). Back then, as you know, P/E's were generally sky high and we weren't as good about insisting on reasonable valuations as we are now. Coke is still down 27% from where we bought it (which is about a -4% annualized return, not counting dividends. Dividends are about 2.5%, so at least that helps a little). Whole Foods, on the other hand, is up 485% since we bought it, and that's even with a recent huge drop in price from about $65/share to about $49/share. We also managed to stay away from the most insanely valued tech stocks. Though I did make the mistake of buying Intel and Microsoft when they started falling in 2000 and thereby seemed "cheap" in comparison to where they had been. They are both still in negative territory, but not so badly that we've actually sold them. We have sold a few stocks that have fallen a long, long way, realizing it makes sense to be able to write off the tax loss. (Delta Airlines and Ford Motor Company) We were able to continue buying some stocks, though perhaps not at as consistent a rate as would have been ideal over the years, with some performing well and some not so well. Our saving grace was a small cap industry diversification pick bought shortly after 9/11/2001, Clean Harbors (CLHB). It's been the star performer in our portfolio (see my pitch on my CAPS pick for it), and has really reinforced the truth that the most you can lose on a stock purchase is 100%, but the upside is unlimited!

We definitely benefitted greatly from buying some small caps with good fundamentals and holding on to them. And yes I think it's good to diversify across sectors and industries. I recently did a sector weighting analysis and realized we should have more raw materials, etc. Resulted in recent purchases of PD (Phelps Dodge, copper mining plus) and BTU (coal mining). Which have both done very well so far. I see good cases for individual companies with great stories, fundamentals, and management and it's tempting to buy them, but so far I'm sticking with picking an industry and then looking for the best stock to buy in that industry. Keeping the overall portfolio diversified.

Did some rough estimates of return recently and got the following: As of 7/2/06, we had approximately a 75% gain, while the S&P 500 was only about 3% higher than it was in January 1999 when we started buying stocks. (The Russell 2000 small cap index was up about 70% over the same time period, though.)

The dollar-weighted average investment time for our stock holdings is around five years, so maybe the average annual return has been about 12%, very roughly. We also get about 1% in dividends annually on the whole portfolio amount. (Without the stupendous performance of CLHB, we'd still be up about 35%, not counting dividends, which might be an average annual return of around 6%. Not bad considering the S&P performance over the same time period, and the low money market savings rates available at the time.)

So, yeah, with a few stars, a few bankruptcies or close to it, and a lot of others that do pretty well or not that great, you can do okay with a long term buy and hold strategy. I've found that the smarter I get about making sure a company is in good financial shape, growing, and has lots of room to grow, usually tilting toward smaller cap companies when I can find a good one in the industry I'm looking at, the better the results seem to be.

It's nice for me to see that you've come to some of the same conclusions I have over the last decade or so. I'm sorry your road involved more pain.

I agree that you are now on the right track. And I truly do appreciate your writing about it all.

I also want to encourage you by telling you that if you pick great stocks that have long term staying power, you don't have to be ultra worried about an individual stock going south. Just diversify. And your losses will be limited. I did recently sell Gap (GPS), since its same store comparable sales have been on such a bad trend for years and years. Sold it while it was a winner (in a self-directed IRA account, therefore no tax on the gains), figuring I could find something better to replace it. In this case Viropharma (VPHM).

(I also want to do some more reading of Fool reports about knowing when to sell.) And we still do have a large portion of our investments in mutual funds and even cash. But I do continue to gradually move some of the mutual fund $ into individual stocks. And may do more so once I get a more solid handle on an asset allocation strategy that I want to work toward, stick to and rebalance to.




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