The toughest part about investing is that it involves predicting the future. That absolutely guarantees you won't get it perfectly right 100% of the time. It also means that at least every once in awhile, you'll buy an investment that moves in the wrong way.
But there's a difference between merely being wrong and being downright stupid. Being wrong is inevitable, but being stupid can be prevented. And in order to keep a resolution to invest smarter in 2011, in hopes of a brighter year, let me share with you some of my stupidest investing decisions and how you can avoid them. After all -- the only thing better than learning from your own mistakes is learning from someone else's.
First: Stop buying clearly damaged goods
It was obvious that the former General Motors
Likewise, it didn't take much insight to question valuations in the housing market and see that particular bubble before it burst. But I still owned class B shares of homebuilder Lennar
Nobody gets every investment choice right all the time -- not even Warren Buffett. But if you can manage to avoid completely unforced errors of the type I've made far too often, you'll be doing yourself and your future net worth a great favor.
Next: Know and spread your risks
Even a seemingly healthy company can fall upon hard times. My wife bought shares of General Growth Properties
On a similar note, I held onto Bank of America
Sure, fellow banking giant Citigroup
No matter what the company or industry, it makes no sense to risk too much money on any one investment. A company that goes bankrupt or an industry that radically downsizes will sting an investor's portfolio if that investor owns shares, but that sting need not be fatal. Key to assuring you can financially survive even when a stock you own doesn't is to not put too much of your money in any one investment.
Finally: Look for solid balance sheets
The risk of a surprise failure is especially large if the company relies heavily on debt, like REITs and banks so often do. After all, rising interest rates or a worsening risk profile can turn what had been a successful leverage play into an abject failure in the blink of an eye. When a company over-exposes itself to debt, its investors face magnified risks not only from the business' operations, but its financiers' mood swings, as well.
The importance of a clean balance sheet was again driven home to me recently when Life Partners Holdings
Yet the company's shares remained largely intact, even after that very respected publication shed light on some rather questionable (though apparently legal) business practices. Why did Life Partners survive when the very rumor of a potential hiccup sent Bear Stearns into a death spiral? In large part, it's because Bear was leveraged to the hilt, while Life Partners carries no long term debt on its balance sheet.
The right way to be wrong
No investor is going to get it right 100% of the time. But there's a difference between a company's outlook deteriorating and an unforced error caused by an investor not paying attention to some very real (and obvious) warning signs.
My investing resolution for 2011 is to stop making those unforced errors. By understanding a company's operations, the market it competes in, and the financing choices it makes, I expect to do a far better job avoiding the very dumbest of my dumb mistakes.
At the time of publication, Fool contributor Chuck Saletta owned shares of Impac Mortgage, Bank of America, Fifth Third Bank, Life Partners Holdings, and class B shares of Lennar.
General Motors is a Motley Fool Inside Value recommendation. The Fool owns shares of Bank of America and, through a separate account in its Rising Stars portfolios, also holds a short position in Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.