The Basics of Better Investing

This article is part of our Better Investor series, in which The Motley Fool goes back to basics to help you improve your returns and be more successful with your investing.

Every new investor quickly learns that while it's easy to invest, it's tough to invest well. No matter how much or how little experience you have with investing, though, you can never have too firm a grasp on the fundamentals.

Looking back at this series, you've gotten a good introduction to many important elements that successful investors have in their toolboxes. We've covered investing in individual stocks, mutual funds, and ETFs. You've learned about all sorts of stocks, from beaten-down value opportunities to high-flying explosive growth stocks, from tiny unknown up-and-comers to established dividend-paying stocks that millions of investors rely on for income and growth. We've even touched on some areas of investing that many people shy away from, such as options investing and selling stocks short. Combined with a look at whether you have the best partner you can find to help you buy and sell the stocks you want, you can feel confident that you have the basics down pat.

But that doesn't mean you're done. Far from it.

A Foolish journey of a lifetime
You see, the thing about investing that's both fascinating and annoying is that once you think you understand the rules of the game, they'll change on you. If you can't adapt to those changing conditions, you'll find yourself fighting the last war -- and potentially getting crushed in the process.

No matter how much experience you have, you can fall prey to this phenomenon. Legendary investor Bill Miller beat the S&P 500 for 15 years running, but he failed to jump on the boom in energy stocks in 2006 and made ill-timed bets in 2007 on housing stocks such as PulteGroup (NYS: PHM) and KB Home (NYS: KBH) . Then in 2008, he loaded up on shares of Citigroup (NYS: C) , AIG (NYS: AIG) , and Freddie Mac -- and rode them down for huge losses.

Right now, it seems like all the rules of investing are changing. Not so long ago, keeping your portfolio diversified with different asset classes, geographical exposure, and sizes and types of companies was enough to give you some security that your portfolio wouldn't implode. During the bear market from 2000 to 2002, for instance, tech stocks plummeted, with many tech companies failing entirely. But stalwart stocks like Altria (NYS: MO) and Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) made up for their bad performance during the bull market of the late 1990s by providing truly exceptional returns in those years.

Nowadays, though, the interconnected nature of the global financial markets makes them move almost in lockstep. Fears of Greek debt contagion can send stocks in the U.S. diving, while rising activity in emerging-market economies can push up shares of natural resource companies around the world. The downside of that interconnectedness is that investors have few places to hide anymore -- when stocks drop, they can all drop at the same time.

Similarly, you used to be able to count on 10% returns from your stock portfolio. But experts like Jeremy Grantham and Bill Gross have repeatedly warned investors that expecting historical performance to lead to strong results over the next decade or so will get you in trouble, and that much more modest returns are likely for the foreseeable future.

Don't fear change
All of this might make you think that investing is a lost cause. But it's not. The key, though, is to stay humble and realize that even if you find investing success in the short term, you haven't necessarily discovered a lasting secret that will give you the same stellar returns throughout your lifetime.

The best thing you can do is to stay aware of changing investing trends to spot new opportunities that less attentive investors will miss. You have the basics down pat. Now, by stretching your wings for real, it's time to learn how to fly.

Thanks for reading our Better Investor series! Click back to the series intro for links to the entire series, and please leave your comments about any areas of interest we didn't cover or what you thought about the series.

At the time this article was published Fool contributor Dan Caplinger tries to help everyone be a better investor. You can follow him on Twitter here. He owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, Altria, and Citigroup. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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's disclosure policy is the most basic principle we know.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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Mutterwolf

Fundamentals remain just as true as they have ever been. Read Benjamin Grahm, Buffet and Peter Lynch.
1) Mister Market is manic-depressive and subject to wild mood swings.
2) Past performance is no indicator of future performance - especially in the short term. Look at 5, 10 years or more.
3) PE - price/earnings ratio. The PE under most circumstances is how many years you will need to HOLD a stock to make your investment back. Small young companies may be worth a higher PE. Or maybe they are just over priced.
4) Buy what you know and like. Many of my best researched investments have been beaten massively by favorites like Marvel Comics and Apple.
5) Markets do a punctuated equalibrium. Stock values may move up or down significantly for a time but they spend YEARS wobbling within a narrow stable zone before and after price changes. Dividends and DRIP make a huge difference in the long run.

Anyone who does read these forums and does serious research on their stocks knows these already. But I find that time and again when I drift from these points, I don't do so well.

October 28 2011 at 9:31 PM Report abuse rate up rate down Reply