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One of the fortunate things about getting older and having invested for several decades is I have lived through a lot of market cycles. Up markets, down markets, crashes, bubbles and go nowhere markets, I have been invested through all of them. Every one of those market cycles provided a lesson, sometimes a painful lesson, but a lesson nonetheless.

Secular Bear Market 1966 through 1982

Lesson - Well run dominant companies will outperform in flat markets.

I was invested during a portion of the secular bear market that lasted from 1966 through 1982. What happened during that period? Not much. During that period stocks lost an average of 1.18% a year. For much of that period stocks would begin to rally only to fall back to the bottom of the trading range. If you were an astute trader and were able to buy the dips and sell the rips you would have made money. But, how many average investors are actually successful at market timing?

If you had been invested in the entire market through an S&P Index Fund or some other market tracking fund you would have made very little money. However, if you would have invested in the stalwarts of the markets, the large sector dominating companies that pay dividends you would have done quite well.

I started investing in the 70s, so for my example I will start with 1975. If you had invested in McDonald's (NYSE:MCD) on the first trading day of 1975, you could have bought 100 shares at $29.62, six years later on the last trading day of 1981 those shares were selling for $48.75, a gain of approximately 65%, which does not include the dividends paid during that period.

Had you bought 100 shares of Exxon (NYSE:XOM) on January 2, 1975, you would have paid $66.25 a share, six years later on the last trading day of 1981, Exxon was trading for $31.25, however, during that six-year period, XOM twice split 2 for 1. So your initial $6,625 investment was now worth $12,500 ($31.25 x 400), a gain of 100%, before dividends.

My approach to investing involves buying large divided-paying companies that have dominant market positions. I try to buy these companies when they are on sale, but will pay a fair price when necessary. These companies can leverage their dominant market position to raise prices, take market share, and buy competitors, all of which helps to raise profits. In the long run, earnings drive share prices and dividend payouts. Over time, owning the best of breed, dominant business in any given sector will prove to be advantageous to the investor. Wait for a good entry point, buy these great businesses and hold them for as long as their business performs.

Black Monday Crash - October 19, 1987

Lesson 1 - Never ever panic.

Lesson 2 - Every disaster provides opportunity

I was also invested during the Black Monday Crash that occurred on October 19, 1987. On that day the Dow Jones Industrial Average dropped 22.61%; other markets around the world fell even further. This was before the Internet and smartphones, so I was not even aware the market was crashing until my lunch break when I heard a radio news report on the elevator.

Going back through my records I see on that day I had money invested in 20th Century Select Fund and owned shares in RJR Nabisco, a company that does not exist anymore. Since neither of those holdings would provide a good example, I will use Coca-Cola (NYSE:KO) as an example of why it is never wise to panic.

On Friday, October 16, KO closed at $40.50, on Black Monday, October 17, KO traded as low as $29.00 and closed at $30.50, a decline of 25%. Two days later on October 21, KO closed at $41.25, a slight gain from Friday's closing price and a big gain from Monday's closing price. Had an investor panicked and dumped shares because the market was in a big decline he/she would have sold a great company because he or she was scared. Investments decisions should never be made when a person is scared. Always remember, throughout the history of the stock market every big decline has been followed by a rally. During a crash, you should be buying, not selling

Rather than panic, an investor should get greedy and look for bargains in great companies, or add to the great companies they may already own. Best of breed companies like Coca-Cola, Johnson & Johnson (NYSE:JNJ), and Procter & Gamble (NYSE:PG) do not go on sale very often. When they do, ask yourself these questions. Is KO still the world's leading beverage company selling more beverages than anyone else? Is JNJ still the leading healthcare/pharmaceutical company in the world, selling more and more healthcare products to an aging population? Is PG still the leading home products/health and beauty company in the world selling more and more products to an emerging middle class? Are these companies and others like them selling for 20% less today than they were yesterday? If the answer is yes, than it seems to me you should be buying shares in those great businesses when others are panicking and selling.

DOT-Com Bubble 1995 through 2001

Lesson - Always Diversify

I was invested during the "dot com" bubble, which occurred approximately from 1995 to 2001. During those years, anything Internet related rose higher and higher and initial public offerings of Internet start-ups flooded the market, sometimes doubling on the first day of trading. Companies with minimal earnings were selling for 100 times those earnings. The investing public was told not to worry about valuation or the lack of earnings, eventually the earnings would catch up with the price. It was during this period that Henry Blodget an influential Oppenheimer analyst, said this about valuation "I think valuations do matter, but less in a big-bang stage of an industry where you have few metrics to get comfortable with." Unfortunately, the earnings did not catch up; in fact, many companies went under and valuations fell back to more reasonable levels. My participation in the dot-com era, included investments in Cisco Systems (NASDAQ:CSCO), which I purchased for $21.30 and sold for $74.60, a gain of 250%, the single best gain I have ever had. That would be great if that was my only investment, but it was not. I also invested in AOL, which lost 32% and WorldCom, which lost 62.5%.

An investor who put all of his/her money into internet stocks would have done alright if the investor got out at the right moment, however, if he/she hesitated, the story was not so pretty. The heavily technology weighted NASDAQ hit an all-time high of 5,132.52 on March 10, 2000. Approximately one year later on March 13, 2001, the NASDAQ was at 1,923.38, a drop of almost 62%. Some individual companies fell much further than that.

It is never wise to put all your investing money into one sector, no matter how hot that sector gets, because it will not last. Investing euphoria is often followed by despair. Maintaining a diversified portfolio avoids the pain of watching your entire portfolio take a huge loss because one market sector falls. What level of diversification an investor should have is a subject for another day, but in general, I do not think any one sector should ever make up more than 20% of a portfolio.

Flash Crash - May 6, 2010

Lesson - Always have some cash available for quick market declines.

By chance, I was off of work on the day of the flash crash and was watching CNBC when the market, which was already down from European concerns, started to fall like a rock. As I watched, the markets tumbled hundreds of points within minutes. I remember thinking something was odd because at one point the market ticker showed a drop of 200 points in about five seconds. As the market approached a 1,000 point loss, it suddenly turned and started back again. I remember watching the television wishing I had some cash because some stocks I always wanted to buy were down huge and I had a hunch they would come most of the way back, which they did.

Opportunities like I described above are unusual and most quick market moves don't move that fast or far. But, in today's high frequency trading environment, market drops can be fast. Having cash available to take advantage of declines is an excellent tool for the investor tool box. Having cash is something I have had trouble getting comfortable with. When I have that cash I always feel I should put it to work. I am working at understanding cash is a tool for use when Mr. Market decides to throw a crazy day sale.

I currently have a watch list of five stocks. By following these stocks on a day-to-day basis I have a good idea what the value of the company is. One of the companies on the list is AT&T (NYSE:T). I have followed T for some time, monitoring the price action and listening to the quarterly conference calls. I feel T is solid company with a business that will continue to grow. Besides the cellular service and U-verse businesses, AT&T has plans to is use its vast network to expand into home entertainment and home security. I think AT&T with its generous dividend is a buy at the right price. That price is $34.00 or lower. By identifying a company with a solid business and determining what price would make a good entry point I will be ready the next time the market takes a quick drop.

Rising From the Ashes - 2008 through 2012

Lesson - Have a Plan and Stick To It

There is nothing I am more proud of in my investing career than my performance from 2008 through 2012. That pride is not based on my returns; it is based on knowing I never wavered from my plan. I kept investing. I did not try to market-time; I did not switch to defensive stocks, I did not wait to get back to even and then get out, and I did not switch to bonds or cash. I stayed with my plan of investing money from my pay check every two weeks into my retirement funds, which is 100% stock funds. I also continued buying individual stocks in my IRA. At times, investing in the stock market requires a great deal of resolve; those that had the resolve to not panic and stick with their investing plan have been rewarded.

I have faith that over time great companies will provide a solid return. Like a glacier, these dominant companies continue moving forward, gathering up market share, growing sales and increasing profits. As the share price steadily grows, the quarterly dividends are paid and then increased every year. As a shareholder, my only job is to sit back and let the company work for me. In 2008 and 2009 it was not easy to stick to the plan as the market seemed to fall every day. However, KO kept selling beverages and gaining market share, AT&T was still signing up customers for cellular service and Johnson & Johnson was still selling medical supplies. The great businesses were still great businesses; given time they would return to their true value.

To succeed you need a plan, investing aimlessly seldom works. There is no right or wrong plan, all types of investors have succeeded with various plans. Develop a plan that works for your goals and risk tolerance and then stick to it.

Conclusion - What to Make of Today's Market

2013 has been an unusual year, no matter what the news, the market goes up. When there is bad news overnight, the market opens down and then rallies before the end of the day. As I write this, the S&P 500 (NYSEARCA:SPY) is up 17% for the year. If the market continued at this pace it would end the year up about 40%. Is that possible? Yes, but not likely, it has been over 50 years since the market was up 40% or more in a year.

I would agree with those who say, despite the run-up, valuations are not outrageous. Last week, Seeking Alpha author Chuck Carnevale wrote another one of his excellent articles. This one showed that many of the Dow stocks are still at reasonable valuations. As Chuck showed, I believe there are still values to be found, just not as many as there were a year or two ago.

In anticipation of better prices ahead, I have been raising cash, hoping that a pullback occurs at some point. Years from now I may look back and be glad I was raising cash, or I may be bemoaning the fact that I wasn't more aggressive. That's what makes investing so challenging, no one knows what the future brings. One lesson I have learned well from all my years of investing, is that the market is always ready to teach me a new lesson.


Disclosure: I am long XOM, KO, MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.