With the recent turmoil in the stock market, I have been in contact with doctors around the country wanting guidance on what to do with the stocks in their portfolio. Yesterday, I received a fax from a doctor that contained a spreadsheet from his broker showing that buying and holding is always better than selling stocks at the bottom of a bear market.

The printout was based on a 1973 $100,000 portfolio of stocks representing the S&P 500. The figures show the value of the portfolio dropping quickly from $100,000 down to $57,378 during the following 21 months. The illustration assumes the investor sold at the bottom from $57,378 and invested in 5% CDs. Ten years later the CDs are worth $93,462.

The next page of the comparison shows how the portfolio would have performed if the same investor had held onto the same stocks. After five years the $57,378 portfolio has recovered to $124,768. After 10 years it had reached $244,437.

On the surface this type of illustration can be comforting for someone who has just seen half of his or her portfolio disappear in under a year. It can even fend off an enraged spouse who was dead set against taking a position in high tech stocks. There are some disturbing differences between the great bear market of '73-74 and the tech wreck of past few years.

In a USA Today interview some years ago, Warren Buffet was asked what he thought of the "buy & hold" strategy as a viable strategy for the less sophisticated stock market investor. He said in short that it was absurd. He went on to name a long list of companies, most of their names were household words, whose stock price had collapsed 20 years ago and had yet to recover.

He summed up his warning to would-be buy & hold investors as follows. If you want to buy and hold stocks, you had better have a buy & hold portfolio. He went on to explain that unless you had real bargains to begin with in your portfolio, the odds of time making you whole were low at best.

The difference boils down to what brokers refer to as a "narrow market." That term means that the entire stock market was being carried by a hand full of companies that eventually became so overpriced that in some cases the losses were as high as 97% of the original purchase price.

People who invested in these overpriced companies were referred to as momentum players. If a stock was going up their theory was that it would continue to do so. The fact that it had nothing that resembled earnings or even a workable business plan was disregarded by the momentum investor. Kind of like the law of gravity in reverse. What goes up will eventually continue to go up.

This approach eventually attracted investors that we think of as the guardians of conservatism. From multibillion dollar insurance companies investment portfolios of June Cleaver's college fund for Wally and the Beaver, every uncommitted investment dollar got ear marked for the momentum stocks and mutual funds that specialized in them.

Before you can intelligently answer the question of whether buying and holding stocks makes sense in today's market, you have to be able to answer two very basic questions: 1. What represents a "bargain" in the stock world? 2. Did I overpay for the stocks and mutual funds I now hold, and if so, how much did I overpay?

Jonathan Clemens, staff writer for the Wall Street Journal wrote in a Jan. 2000 article that the long term norm for stock prices is $14 price to $1 of earnings. This is referred to as the P/E ratio or price to earnings ratio. If you bought a stock priced at $10 of price to $1 of earnings, you could argue that time is on your side if all other aspects of the company are favorable. Clemens says in the same article that the 1929 crash was caused by an overpriced stock market that was carried a 22/1 PE ratio.

According to a Forbes article entitled "The Nitty Fifty Rises Again" by Marius Meland Dec. 8, 1999, the tech market was (and may even still be) hopelessly overpriced. He said that in order to get some pricing perspective, the three hottest segments of the market were, software priced at 418 times earnings, computer storage devices at 327 times earnings, and communication stocks priced at 148 times earnings. This meant that if you were a momentum player you probably bought software stocks that were 29 times overpriced.

Now that all three of these market categories are in the tank you would be optimistic, to say the least, to think that you are going to recover your principle in your lifetime. I read that Yahoo.com was selling for over 700 times earnings before it completely collapsed. Warren Buffet was quoted in a Forbes article saying that the average Yahoo investor saw his broker make five times in trading commissions what the investor made in appreciation.

This explains why I recommend that you find out what's in your portfolio. When the market was at its peak two years ago, it was common knowledge that a dozen stocks were carrying the entire market. Do you have these grotesquely overpriced stocks, or do you have bargains with strong fundamentals, like impressive earnings per share and good dividend histories? In short, do you have a buy & hold portfolio or do you have a tech nightmare in the form of a mutual fund?

The buy & hold theory has one other serious flaw for doctors considering holding on to diminished stocks for the long run. That flaw is that you don't have the long run. You are going to need that money within a few short years. When you decide that you're ready for a life outside of chiropractic, your damaged stocks may not have recovered. It's a little like a game of stock market musical chairs. When the chiropractic music stops is there going to be a stock market chair for you sit down in?

When I hear brokers telling doctors who have been literally wiped out by the recent stock market reversal that they don't need to worry as long as they just hold on, I'm reminded of Vince Lombardi's famous saying that he never really lost a football game, he just ran out of time.

If you're thinking that my response to the buy & hold fallacy is that you should buy municipal bonds to heal the wounds inflicted by a savage stock market you're wrong. Municipal bonds are not designed to make up for anything. Over time the interest they pay has just kept up with inflation. Bonds pay an interest rate that simply protects your buying power so that the $10,000 you have saved today will buy the same amount of bread and milk 20 years from now as it buys today.

What the broker didn't show my friend who faxed me the S&P buy and hold support sheet was what would have happened if the original $100,000 had not been invested in stocks at all. If the same $100,000 had been invested in high grade municipal bonds instead of stocks to begin with. Earning just 5.5% (remember, it's fax free) it would have amounted to $170,814.45 at the end of 10 years. The $244,437 figure that resulted from holding onto the $100,000 (that shrank to $57,378) for 10 more years would equal the municipal bond number ($170,814) if you paid taxes and commissions on the reinvested gains.

So, what is the answer to the question, "Should I hold onto my damaged stocks?" Analyze them one stock at a time. If you have one that was priced right when you bought it and the company has a great story (as Peter Lynch would say), you may want hold onto that one. If, on the other hand, you have a stock priced at 90 times earnings and you just saw the company's CEO being put into a police car on the evening news for accounting irregularities, you should probably consider bailing regardless of your broker's optimism.