The last two days have been pretty strong, and the advance of the major indices off their June 15 lows has been impressive and essentially unexpected. The Asian problem has faded slightly from investors' priority fears, Japan gave the boot to "Do nothing leadership," and the Russian bail-out has solved their problem for now.

There is some focus but not much worry about the next Fed pronouncements around July 21. Things are still going pretty well for the bulls, including favorable inflation and interest rate environments. Labor costs are always a worry, with their biggest impact being on corporate earnings rather than inflation levels. With cheap goods pouring in from our Asian buddies, our producers are forced to eat any labor cost pressures.

All this means that earnings are the big deal, as well they should be. Accordingly, when you do your research, buy companies with long-term earnings growth records, even if you must pay "too much." That means you don't buy companies with ragged earnings histories, and you especially avoid those that have had decreasing earnings trends. We won't even discuss companies that have been losing money; they are the sure road to stock market losses.

There are a large number of Mutual Funds that will dump a stock on the first news of an earnings decline. They won't try to find comfort in the reasons given by the company. These Funds prefer to let stupid guys like you and me hold on to our stock in the hopes of an earnings recovery next quarter. Experience says that this is a fool's game much more often than not. It just takes a company more than one quarter to turn things around, just like a big ocean liner.

On occasion, if I think the company's story of an immediate turnaround is plausible, and if I really like the stock's long-term prospects, I'll hold the stock for one more quarter. My worst losses have been when I have broken that rule and gotten into the game of holding quarter after quarter of poor results. The truth is that if you really like the stock, you can still sell on the first bad news and probably buy it back quite a bit cheaper in the ensuing weeks.

All this complies with the maxim of "cut your losses short." It also fits in with Peter Lynch's famous "water your flowers and cut your weeds." You sure don't want to do the reverse. If you follow this approach you will be ahead of the game on average, and that is all you have any right to expect. Just as in poker, any good policy like "don't draw to inside straights" or "cut your losses short" as in stocks, will not work all the time. But in the long-run they usually do work, and it's a winning policy over the long-run that produces the significant gains we all should be after. Stay tuned.

The Market Pro - July 17, 1998