Investing Scrabble Via Lendingmemo Com

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Investing isn't easy, and that means that investors are constantly honing their skills. Although investors can learn a lot about investing by reading, there are lessons that investors simply either have to experience or learn from those who have "been there and done that". We asked three Motley Fool contributors to share with us their favorite words of wisdom. Read on to learn what they believe are important investment lessons you can't get from a book.

Dan Dzombak: One investing lesson you won't learn in a book is that most investors only use the income statement or the balance sheet to value a company, but not both. This leads to both opportunities and dangers as investors may be consistently undervaluing or overvaluing a company because they aren't considering the company's whole picture.

For example, many investors regularly talk in terms of earnings or sales multiples. They'll say things such as:

That is, most investors value companies based on income and sales multiples and never consider a company's balance sheet. This is true globally.

Harvard Business Review study found that out of all the factors for buying a stock, analysts around the world all listed balance sheet strength as being of very low importance. Analysts called out projected industry growth and quality of top management as factors they consider to be very important. 

On the negative side, balance sheets don't matter to investors until they do. This can lead to absolute disasters when investors ignore the balance sheet of heavily leveraged companies. A good recent example is GT Advanced Technologies which was partnering with Apple on a sapphire facility. Investors were so focused on the company's growth possibilities they didn't realize how overleveraged it was to Apple and were shocked by its sudden bankruptcy.

On the positive side, investors consistently undervalue companies with strong balance sheets. This can lead to opportunity if and when companies use their strong balance sheets to return capital to shareholders through buybacks or dividends. A good recent example is Apple which after years of hoarding cash is finally pursuing buybacks and dividends after constant prodding from Carl Icahn and others.

Patrick Morris: I don't intend to sound like a Debbie Downer, but one investing lesson you'll likely never learn in a book is that you will undoubtedly make mistakes. And it's not just you personally, but every investor everywhere.

We're not perfect, and there will be times, whether through omission or commission, when we make a decision about an investment that is simply incorrect. It could be buying or selling a stock at the wrong time, or neglecting to buy one entirely. Or perhaps it is falling into one of the many pitfalls that are all too common among investors like attempting to time the market, or letting emotions get the best of us.

And it happens to all of us. The Motley Fool recently chronicled three of Warren Buffett's biggest mistakes, and we didn't even mention that he once told CNBC buying Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) in its original form as a textile business was "a $200 billion dollar blunder."

So when they do occur, are we to simply shrug it off because it happens to all of us and move on? By no means, instead we must accept it, learn from it, and do all in our power not to repeat it again.

As Rick Warren said, "We are products of our past, but we don't have to be prisoners of it." 

Leo Sun: One lesson that investors don't learn from a textbook is the toxic mix of trailing stops, stop loss orders, and flash crashes.

Many investors are taught that trailing stops and stop loss orders can prevent small losses from becoming huge ones. For example, if you put a 10% trailing stop under a stock that rises from $100 to $200, a sell order will be triggered if the stock falls back to $180. Similarly, a stop loss order is executed when the stock falls to a preset price.

Unfortunately, stop loss orders can be fatal during "flash crashes", when high frequency trading (HFT) programs -- ironically programmed with cascading stop loss orders -- cause rapid, temporary declines. In 2010, for example, the Dow plunged about 1,000 points but recovered within three minutes. Trailing stops can't protect your stock when this happens. A stock that has a 10% trailing stop could be sold after a 50% drop, due to a lack of buyers on the way down, only to recover immediately afterwards.

Over the past few years, flash crashes have become increasingly common due to HFT programs. This means that long-term investors should resist the temptation to "protect" their stocks with trailing stops and stop loss orders, and only sell based on the fundamentals.   

Dan doesn't have any positions in the companies mentioned. Patrick owns Apple and Berkshire Hathaway. Leo owns Apple. The Motley Fool recommends Apple, Berkshire Hathaway, Chipotle Mexican Grill, and Netflix. The Motley Fool owns shares of Apple, Berkshire Hathaway, Chipotle Mexican Grill, and Netflix. 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 Motley Fool has a disclosure policy.