22 Lessons Learned about Stock Investing

Most of the really valuable lessons I've learned about investing have come from experience. An MBA degree is nice, but that's only enough to get you into the game. If you want to win the game, you have to follow some rules of thumb that the textbooks won't teach you. Here are 22 of them; next week, I'll follow up with another 22.

1. When someone says, "Things are different this time," they're trying to sell you something.

2. Don't invest in what you don't understand. If you do, you'll eventually get burned.

3. When a company delays a financial filing for any reason, avoid the stock.

4. For each 1% rise in the stock market, an investor's estimate of his own IQ goes up 1 point. For each 1% decline in the market, an investor's estimate of his fund manager's IQ goes down 1 point.

5. Investors are risk-averse. The pain of losing $1 is greater than the pleasure of making $1.

6. Nearly all investors are too bullish. We love being right, we love making money, and we get to do more of both when stocks are going up.

7. The financial media, too, is predisposed to being wildly bullish--television ratings and magazine subscriptions are far higher during a bull market than a bear market. Optimism sells; pessimism doesn't.

8. Even a stopped clock is right twice a day; perma-bears and perma-bulls are stopped clocks.

9. When you read an interview with a mutual fund manager, don't rush out and buy the stocks he or she recommends. Even the best portfolio managers are wrong on one third of their picks.

10. If a company's CEO has a Ph.D., avoid the stock. Often, the CEO is too brilliant for his own good, and misses the forest for the trees. (There are exceptions to this rule, of course.)

11. Stay away from any company with allegations of accounting misdeeds. There's rarely just one cockroach.  

12. When a company beats earnings expectations but misses revenue expectations, tread carefully.

13. Great management can't always cause a stock to go up, but bad management will nearly always cause a stock to go down.

14. Great CEOs find new ways to outperform expectations year after year. Poor CEOs find new ways to underperform expectations year after year.

15. Management integrity should be a major factor in the investment decision.

16. Beware of management teams that say "we expect a rebound during the second half of the year." They have no idea what will happen, but since no one else does either, they can't be challenged when making this statement.

17. When an industry suffers from massive overcapacity--think autos, airlines, telecom, office supplies, computer hardware--all but the strongest companies will get creamed. No matter how well you know the industry, it will take far longer for it to "hit bottom" than you think.

18. A buying opportunity will always appear eventually, so track a watch list closely and be ready to pounce.

19. Always hold some cash for a rainy day. The ability to move quickly is valuable; holding cash is akin to holding an option to buy.

20. Buy stocks when everyone is fearful. These are the times when you make your money, you just won't know it until later.

21. Broad stock market panics come along every two or three years. Sector panics happen more often than this, though the sectors change each time.

22. Don't worry about leaving some money on the table. The only person who always buys at the bottom and sells at the top is a liar.

Click for Part 2 of this article, "22 More Lessons about Stock Investing".