Previous Columns
9:00 AM EST, Wednesday, December 31, 2008: Most everything I knew about investing came unstuck in 2008. The bad news: My net worth is down 23%. The good news: It could have been worse.

It's the last day of the year. Did I learn anything?

First, the world of investing has become an endless cycle of bubble and bust. There’s always a bubble somewhere. There are two bubble implications:

1. You must not invest long-term in illiquid things you don't control -- i.e. investments you can't dump when things start to go awry. These things are called "alternative" investments -- and they've been this year's big disasters for me (and Harvard, etc.) They were part of my Grand Portfolio Diversification Scheme. They include two commercial real estate funds, a leveraged buyout fund and a private equity fund. Had I not been locked into these things, I would have dumped them back in 2007. For now, alternative investments are dead -- for me and I bet for everyone else.

My new rule is my portfolio will never have more than 10% illiquid assets -- unless I control them. It's my own business, for example.

2. You must think like a "trader." When commodities turn down, get out of them instantly. Wen your "hot" stocks are up, take money "off the table." When you smell a downturn, get out completely. When in doubt, get out. And stay out. Wise words.

Going forward, securities traded on exchanges look increasingly attractive -- stocks, bonds, treasuries, etc. You can sell them from one day to the next. That's a huge plus. Given now a preference for listed securities, I'll lay out The New Rules:

+ Don't buy stocks or bonds on margin.

+ Don't borrow more than 50% when you buy real estate. Don't borrow short-term, i.e. less than five years.

+ Never a borrower or a lender be. Shakespeare said it 350+ years ago. And he was right.

+ The 15% Stop Loss Rule is inviolate. When it falls 15% from any point, you're out. But you're allowed to sell earlier if your gut warns of an upcoming disaster. I got out of my commodities fund when it was down just 6% for the year (though I made money on it). It later fell heavily. And is now down over 45% for the year.

+ Saying NO firmly and often saved me oodles. Had it not been for NO -- the hardest word in the language -- my losses would be much larger.

+ You have to check in on your stocks and bonds weekly. If you can't, cut down the number you own until you can. Know why you bought them. If your reasons are no longer valid, get out -- instantly, if not sooner.

+ All Wall Street "inventions" are good for Wall Street. Most are not good for the investor, i.e. you and me. Wall Street tends to substitute creativity for safety. Words on Wall Street mean whatever Alice wants them to mean. Hedge funds are rarely hedged, and often a ripoff. Fund of funds are an absolute ripoff. Then there are options, credit default swaps, derivatives, structured investments, auction rate securities, splits, ultra-short ETFs, etc. They all have their day in the sun before they fail, disappear and new ones are created. Only a few stay. I predict a return to long-only mutual funds.

+ Don't chase yield. I always thought 18% a year was risky, but not 8%. I was wrong. Anything above 2% is ultra-risky, until proven otherwise.

+ No one will protect you. That includes your favorite, expensive money manager, Big Four accounting firms, regulatory agencies, the rating agencies, the sell-side analysts, the attorney-generals, the SEC, or anyone else. You are 100% master of your own destiny. If you don't understand it, don't touch it.

+ Every great investment manager and/or corporate manager eventually loses his touch. Don't get wedded to anyone. There's a sound argument for never meeting the management..

+ Cash is always king. Black swans are more common than Wall Street would let us believe.

+ KISS. Keep it simple. Don't sneer at a peaceful life. Stick your money in treasuries and some safe muni bonds. Go play tennis. Never read this column again.

What Brett Arends of the Wall Street Journal learned in 2008:

It's been a terrible year, but those who learn some valuable lessons won't walk away empty handed. What lessons have you learned, or had reinforced? I'd love to hear. Here are 12 that struck me.

* 1. You have to take charge of your own finances. And that means understanding where your money is invested and why. There's only so far you can rely on advisers, portfolio managers and company plans. After all, you will own the results, not them.

* 2. Never put all your trust in one financial whiz, no matter how highly recommended. Few turn out to be Bernie Madoffs, thank heavens. But most of Wall Street's best and brightest still lost 40% or more this year.

* 3. Never invest in something you don't understand. For years, I refused to recommend Fannie Mae and Freddie Mac stock for this reason, despite the urgings of various market sources. Imagine my relief when it emerged that nobody else really understood them either -- including their own CEOs. Simple stocks, like Amazon, or Anheuser-Busch, rarely embarrass you in this way.

* 4. Invest more, not less. Is that a guffaw from the peanut gallery? I don't blame you. Your savings just fell 40% or more. But higher risk and lower returns means you need to invest more to reach your goals.

* 5. Never assume there is investment safety in numbers. The most "popular" investments often turn out worst -- from technology stocks (1999) to real estate (2004) to emerging markets (2006-7).

* 6. Your grandma was right after all. A penny saved really is a penny earned. Debt really is dangerous. And an economy where it's easier to borrow $10,000 on a credit card than find a working electrician is heading for trouble.

* 7. Psmith was right, too. Who? This fictional character, created by the great English comic novelist P.G. Wodehouse, frequently warned against the perils of confusing "the unusual with the impossible." Certainly the events of the last year were unusual. Alas, too many thought they were impossible.

* 8. Own plenty of bonds. Yes, they're less exciting than stocks. Turns out, that's the point. There's little use keeping everything in stocks "for the long run" if they kill before you get there.

* 9. When someone offers you obviously good value -- like inflation-protected Treasurys with a 4% real yield -- take it. When they offer you bad value -- like those same bonds with a real yield of 0%, as they had last winter -- don't.

* 10. Avoid needless risks. Those who speculated on Citigroup or WaMu or General Motors stocks suffered more than most this year. The biggest investment mistakes will generally be those you bought, not ones you missed.

* 11. Take all expert predictions with a pinch of salt. That goes double when the experts all agree. Remember, most economists successfully predicted 12 of the last four recessions, but somehow missed this one. After long experience, when I read a headline like "Pound Poised to Gain in 2009 as Top Strategists See Slower Cuts in Rates" (Bloomberg, Dec. 30) it makes me fear for the poor old pound sterling.

* 12. Still trying to predict the next short-term move, or call the market bottom? Sure, maybe November (Dow 7550) will turn out to be the market low. But that's what some people said in January (Dow 11971), March (11740), July (10963), September (10365), and October (8176). One day, doubtless, they will be right.

Our taxman answers from the Caribbean. Remember yesterday? I asked why would a company sell land at such a great loss? Clearly, I wrote, it needs cash. It will get cash from the sale and it will get cash back and cash benefits from the IRS. The IRS has rules about tax loss carrybacks and tax loss carryforwards. Go back, get back the taxes you paid in previous years. Go forward, save on taxes you will pay in the future.

IRS rules? Here's the scope from our Caribbean vacationing accountant:

Since you are in the business of building and development, the land is inventory and the loss would be an ordinary business loss, not a capital loss. You would carry back the loss two years and forward 15 years.

Iceland's sad 2008 disaster. Iceland has suffered the worst from this year's financial crisis. It privatized its banks in 2000. The banks borrowed heavily, offering high interest rates to savers -- and Europeans (especially the British) flocked there. Iceland's stockmarket rose ninefold between 2001 and 2007. In five years, the average family's wealth rose 50%. Households amassed debts of up to 213% of their disposable income. (In the U.S. it's 140%.) This year everyone pulled the plug on Iceland after they noticed that Iceland's banks had grown highly leveraged. After the Lehman Brothers bankruptcy, interbank lending froze. Iceland's three largest banks had liabilities of 10 times the country's national GDP. And the government nationalized them. National debt was downgraded. Iceland's stockmarket shut down (temporarily) and the krona ceased to function as an international currency -- no one wanted it. Iceland has borrowed some money. Most foreign deposits in Icelandic banks Meanwhile, it's back to fishing and praying. There's a really excellent chart on what happened in Iceland in the latest issue of Atlantic magazine.

The year in review. Uncle Jay explains the news. It's cute. Use Internet Explorer. Click on YouTube.

Latest two wonderful New Yorker cartoons

h

Hug the kids and the spouse. Make a New Year's Resolution: "When in doubt, get out." See you next Monday, January 5.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.