Peter Lynch, the legendary mutual fund manager, argues that success in the stock market has as much to do with your stomach as with your mind. Owning stocks is easy, just as long as you're making money. If only we could listen to Will Rogers who advised us to, "Buy good quality common stocks and hold them until they go up. If they don't go up, don't buy them."
Look at what happened with Coca-Cola: if you bought shares in 1973, you've made thirty times your original investment. And you made these profits with a great company, not with some esoteric speculation.
But it wasn't a smooth ride. After only a year, you had lost half your money and the cover of Life magazine was questioning the future of the stock market. After nearly a decade, you were still down 50%, inflation was rampant, and the world economy was in serious decline.
In the face of all this bad news, would you have had the courage of your convictions? Would you have stood up to all these pressures to sell, any one of which could've turned your thirty-fold profit into a miserable illusion? Well, at least with a Coca-Cola, you never had to doubt that you owned a great company whose profits were continuing to rise year after year.
But what if you own some unpredictable company whose business you don't really understand, whose once "can't miss" stock has plummeted, whose profits are all over the map? How can you be comfortable that the value of the business is rising? How can you possibly wake up each morning hoping its price has gone down?
In a bull market such as we've had for these many years, these questions don't matter much. But bull markets don't last forever. You might believe in the long-term case for stocks, and you'd be right, but your belief has to stand up in bad times as well as good. As Mark Twain wrote, "A virtue which has not been tested in the fire is no virtue at all."