Comedian Paul Rodriguez once said he thought war was God's way of teaching us geography. In the same vein, wouldn't it be great if it took one -- and only one -- bear market to teach us all about investing? On Wednesday, when the Nasdaq suddenly shot up more than 8% on the news of the Fed's interest rate cut, I had a deep, foreboding feeling: not one of elation, but of "Here we go again."

In 1999, we had stocks that moved without regard to underlying fundamentals, and investors were ecstatic. When the music stopped, everyone lost. Those who stepped farthest out into the risk/reward continuum got slaughtered. Many of these "investors" are not coming back.

And now we have another surging market. Nothing makes investors feel better than a sea of green. In three weeks, the Nasdaq Composite Index has gained more than 30%, the Dow nearly 20%. A few more days of this and we'll all be rich!

One problem here: There is no fundamental rationale for this surge. This is the John Joseph rally, the "Hell, it can't get any worse" market surge. Suddenly people are emerging from their bunkers, many not to buy a sanely priced, well-researched company they've been eying, but rather to hitch on to a fast-moving rocket blast. Such companies as Broadvision (Nasdaq: BVSN), Avanex (Nasdaq: AVNX), and Brocade (Nasdaq: BRCD) are up 100% or more in the last two weeks.

As an owner of Avanex, I'm of course pleased, but at the same time my hackles are up. I'd love to think that people are buying Avanex based upon improving fundamentals or an improving business environment. But one look at the most recent news from Avanex tells me otherwise:

"Avanex Corp., a maker of photonic processors, on Wednesday said it was cutting 29 percent of its work force as part of a "cost-containment" plan and warned third-quarter results would miss analysts' forecasts..."

Last year's portfolio drop should have been a learning experience, the kind that makes for better investors over the long run. And yet the majority of the drivel on CNBC and the other financial circuses focus on whether or not we have hit "the bottom." Am I dreaming, or did not many of these same yahoos call bottoms all the way down over the past year? Give me 30 shots at it and I'll call the bottom, too.

Suddenly a few companies announce some marginally unhorrible stuff and the market is off to the races. Now we can get back to the business of making money, right? Great, I'm all for it. But would it not be better, rather than just diving back in, to figure out what you have learned from the bloodletting of the last year?

What should we have learned?
Rule Number 1: Risk Has a Downside. People who bought the most speculative stocks are the ones who got hurt the most. High-risk does not automatically equal higher returns. I've got no problem with speculative companies, as noted above by my ownership of Avanex. But my portfolio is weighted far away from these lottery tickets. Some people put their entire portfolio into companies like CMGI (Nasdaq: CMGI) and Xcelera (AMEX: XLA) during the boom. These people lost badly.

Those who took the most risk, day trading, holding on margin, buying "story stocks," or penny stocks, were not coincidentally the most likely to lose the most. One enduring lesson I take from the past year is that those who take the most risk are in no way superior investors. Many of them, as it turns out, were just plain dumb.

This may seem obvious now, and it was intuitively clear when times were great, but it is tough to resist feeling a wee bit jealous when faced with the fact that someone had 100% of his money in some previously unknown moonshot. The vast majority of people with money in these companies did not get out before the crash. Their lead at the end of the first quarter did not hold up.

Rule Number 2: Know what you own. This isn't because of a slavish devotion to holding companies for the long term, but because those who know their companies have an edge when emotional highs and lows come along. We hold dear the belief that an investor in individual companies should be diligent about learning the intricacies of how the companies he holds make money.

If you cannot explain it to someone in 30 seconds, you probably shouldn't be holding it. Try it sometime: You should be able to say, "SanDisk (Nasdaq: SNDK) makes memory cards that are used in digital cameras, digital recorders, and other electronic systems. SanDisk specializes in flash memory. The company has historically had gross margins around 40%, and net margins over 10%."

Sounds stupid, right? Compare it with discussion board posts that focus only on stock prices. In investing, you should make the market be your tool, not your master. This is impossible to do if the majority of your analysis consists of "So, how'd the market do today?"

Rule Number 3: Emotions are not your friend. Most of our emotional responses to the stock market are net negatives for us. There are people few and far between who can invest on "gut feeling," but I'm guessing  you are not one of them.

Number one emotional enemy: greed. Greed makes you do dumb stuff. It makes you chase last year's hot mutual fund. It makes you give credence to that hot tip you heard from a guy at the bar. Greed is not your friend. Greed makes you believe a 19% annual return in the stock market is failure. Greed is wrong.

Number two emotional enemy: fear. Fear helps part us from our money at times when we should be chomping at the bit to buy some bargains. Fear is what happens when we look at a stock chart and see our early retirement melting away. Fear turns volatility into a loss.

Number three emotional enemy: jealousy. How many of us felt a twinge of envy when our neighbors were getting rich from stocks? Did you feel entitled? Did you run out and buy some of the same companies to get your own? Chances are your neighbor didn't get rich in the end, and neither did you.

The fourth emotion is so important it gets its own rule.

Rule Number 4: Investing requires patience. How many people rushed to jump on the Qualcomm (Nasdaq: QCOM) or the Juniper (Nasdaq: JNPR) missiles just before they plunged back to earth? The reason so many people got burned on these stocks is that the underlying companies are, in almost every way, great. Greatness comes at a price, but it should not come at ANY price.

It's not theglobe.com (Nasdaq: TGLO) that confounds most people: A baboon could have picked holes in its business plan. Rather, it is the solid companies, the ones with real products and real potential, that give us problems. If this past year taught us anything at all, I hope that it drives home the fact that it is OK to look at a great company and say "Yes" and then look at its valuation and say "Not today." There is no requirement that says we have to invest in every company that tickles our fancy. In fact, that can be downright oppressive to our eventual returns.

Investing is about both the appreciation of wealth AND the preservation of capital. When shares were flying high, investors too often concentrated on the former and ignored the latter. Should the market continue to spiral up -- particularly if based upon little but euphoria -- those who remember this may just save themselves from yet another big hurt.

Fiat Fool!

Bill Mann

Bill Mann thinks bacon should be reclassified as a spice. At time of publishing, Bill had beneficial interest in Avanex. To see Bill's holdings, check his profile. The Motley Fool is investors writing for investors.