My Smartest Investment

Back in the late 1980s, I bought some shares of networking giant Cisco Systems when the price dropped from about $9 per share to $4. It immediately dropped further, to $2 per share, and I sold in order to preserve my capital. Then Cisco went on a tear, with its stock price surging and splitting about eight times over the next 10 years. I could have retired on that stock had I held on.

— C. P. Henderson, Nev. The Fool Responds: It’s important to not just look at numbers. Any stock plunging can keep plunging — or it could rebound sharply. It all depends on what the company does, its business model, its competitive position, its financial health and the skill of its management, among other things.

When a stock drops, determine whether it’s facing a short-term problem (it was overvalued, for example, or posted poor earnings due to oversupply) or a long-term one (its technology has been eclipsed by a competitor’s or has become obsolete). Look for great companies and aim to buy them when they’re undervalued. (The Motley Fool owns shares of Cisco.) ¦