Lessons Learned From A Dangerous Year

– I’m no one’s idea of a savvy investor. Back when the Dot-Com bust came down, I lost my shorts.

– These days, I’ve got a little money in my IRA to play around with and I try to be cautious with it. All I can say for this last year is I haven’t made much but then I haven’t lost much either and, as dangerous as it’s been out there, I think that’s good.

– I follow several economics and investing blogs (hat tip to Bruce S. for some of these). I’m always looking for small bits of insight and wisdom I can use. This piece by Barry Ritholtz seems to me to be composed of excellent advice and insight and I recommend it.

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In the beginning of the year, a column I wrote for Real Money discussed some lessons of the past year. It never was moved over to the free site, so here is my belated update.

It is a mix of fundamental, economic, technical and even philosophical lessons that those savvy CEOs, fund managers and individual investors who were paying attention picked up in the recent turmoil.

1) Ignore market rumors: It seemed every time some firm was in trouble, the same gossip was floated that Warren Buffett was about to buy them. Time and again, these tales proved to be unfounded money-losers. This year’s most egregious example was Berkshire’s imminent purchase of Bear Stearns (BSC).

That The New York Times Dealbook got suckered into printing this just shows you how pernicious these rumors are. The stock was as high as $123 the day of the rumor.

Anyone who bought homebuilders or Bear Stearns stock on the basis of either of these rumors — or nearly any other stock that had similar rumors floated throughout the year — lost boatloads of money.

2) Buy sector strength (and avoid sector weakness): It’s a truism of real estate: It’s better to own a lousy house in a great neighborhood than a great house in a lousy one. And the same is true for stock sectors: Buying mediocre companies in great sectors generated positive results, while great companies in poor sectors struggled.

The losers are obvious: The homebuilders, financials, monoline insurers and retailers all struggled this year. The winners? Anything related to agriculture, solar energy, oil servicing, industrials, software, exporters, infrastructure plays — even asset-gatherers thrived.

More…

…Later (17Aug08) here’s another list of ten rules to look over: 

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