Lessons I Didn't Learn Last Year

Sigh. That old saying, "Do as I say, not as I do," certainly applies to me. I think I've dispensed a lot of good advice over more than a decade of writing for The Motley Fool. And yet, I still commit basic blunders now and then. Here are some lessons I didn't learn (or at least, didn't apply) in 2008.

I didn't focus my investments, even though I believe in the power of concentrating your money over your best ideas. By spreading it over too many different holdings, you dilute the potential of any one holding to turbocharge your portfolio. I know that, and yet I added to my holdings without paring them down much. In my defense, the concentration strategy should only be used when you've done a lot of research and have a high degree of confidence in your relatively few holdings. That wasn't me this year -- so in that case, a little more diversification can spread out the risk.

Too late, or just in time
As I've done before, I identified a bunch of stocks I'd like to own, but I didn't buy them. Instead, I waited for the price to get even more attractive, and instead, it got less attractive. I was looking at Amazon.com (Nasdaq: AMZN) when it was 20% lower. Caterpillar (NYSE: CAT) hit my radar screen some 33% ago. General Mills (NYSE: GIS) and Alcoa (NYSE: AA)? More than 25% ago.

There's an upside or two here, though. For one thing, buying in later than you want can still be effective. Take Alcoa, for example. Its P/E ratio is around 6, suggesting it might still be a bargain. Its price is still down more than 70% from its 52-week high. Once the world economy starts cranking again, aluminum's demand should grow stronger, boosting the stock. It's not necessarily too late.

And also, though these stocks rose significantly after being added to my watch list, they aren't the only ones on it. There are still lots of stocks that are down considerably since making the list. And that would probably be true even if the overall market hadn't tanked this past year. They might not be down quite so much, but if you maintain a sizable watch list of attractive-to-you companies, you're sure to end up with some that fall and retain their appeal.

The main lesson here is to just take action once you're convinced of what you'd like to do. By waiting for just a little more drop in a stock price, you can end up never getting in. As Warren Buffett and his partner Charlie Munger have noted, it's often better to buy a great business at a fair price than a fair business at a great price.

Falling knives
Another lesson I tell others is that just because something is down a lot doesn't mean it won't fall more. I thought I was getting shares of Starbucks (Nasdaq: SBUX) and General Electric (NYSE: GE) at attractive prices, for example, but over the past year, they fell much more, and I'm now down more than 50% on both of them.

Of course, much of that can be blamed on the overall economy and the stock market -- it's hard to find companies that didn't lose ground in 2008. In general, though, it's valuable for us to remember that stocks can always fall more. It's a good rule of thumb that if you're thinking of buying a fallen stock, you perform some extra research on it, because sometimes stocks fall for good reasons, not just because the economy stinks.

And don't let yourself think that penny stocks are attractive just because they cost $1 or $2 each and surely can't fall much further. They can, and they often do. A $100 stock can be a bargain, if it's really worth $200, while a $1.25 stock can be worth $0.05 or less.

A final thing I shouldn't have done last year is get cocky. Early in the year, I watched shares I'd bought of Intuitive Surgical (Nasdaq: ISRG) triple. I wrote about it excitedly, only to see it succumb to the market's influence by year's end, leaving me with a much smaller profit. Fortunately, this error is a small one, and one that doesn't really matter. I'm still bullish on the stock. I hope to hold it for many years, so what it did in 2008 won't really matter in the long run. I'll perhaps have a right to be a little cocky about it in 2018, but any smugness this past year was premature.

The bright side
Finally, I comfort myself that I've done much right, too. My portfolio is down a lot, but I haven't invested money that I'll need soon in stocks. I can ride it out. I'm being patient, adding to my investments in this amazing environment, not trading frequently, and paying reasonable commissions. I'm doing OK.