8 Valuable Lessons We Learned About Investing in 2010
It's time to prepare for 2011.
But before we do, first let's look back to the lessons learned in 2010.
As the S&P 500 climbs to levels not seen since September 2008, it's easy to forget the massive uncertainty that confronted investors at the beginning of this year. With so many conflicting trends and disparate prognostications, it was easy to become paralyzed -- afraid to make the wrong move. Needless to say, in 2010, I learned the value of having a plan and relying on it to counteract the forces of investing inertia.
Jeremy Grantham, chief investment strategist of global investment manager GMO, is one of my all time favorite investors and financial commentators. He wrote the following in a newsletter titled "Reinvesting When Terrified," way back in March 2009 when the S&P 500 plunged below 700:
"…a simple clear battle plan -- even if it comes directly from your stomach -- will be far better in a meltdown than none at all. Perversely, seeking for optimality is a snare and delusion; it will merely serve to increase your paralysis. Investors must respond to rapidly falling prices for events can change fast."
Which brings me to another lesson I learned in 2010: seek out the best and brightest financial minds before wading into the deep waters of investing. It's a world largely populated with sharks.
Luckily for us here at InvestingAnswers, our family of publications, including StreetAuthority.com, TopStockAnalysts.com and SmallStocks.com, draws on the expertise of some of the country's most thoughtful and experienced financial talents. I can just walk down the hall (or send an email) to ask our writers what they learned in 2010, and more importantly, how they hope to apply it in 2011.
Here's what they told me:
Andy Obermueller -- Chief Investment Strategist, Game-Changing Stocks
Here's what I learned this year: "It's the, stupid."
The market isn't going to charge ahead no matter how good earnings look or how optimistic the Street may be when so many people remain out of work. Uncertainty over the tax code and healthcare hasn't helped. But it's one thing for the market to sputter or stall, it's another thing entirely for such conditions to keep the best companies down. So while the S&P 500 didn't blow up anyone's skirt, there were plenty of big winners in 2010, despite the tough business climate. Cutting-edge technologies and products will always create value, and those companies' shareholders will be richly rewarded.
I've learned that now, perhaps more than ever, investing and politics are joined at the hip. I've told readers of my Market Advisor newsletter how banks and brokerages have been rocked by sweeping regulatory overhauls, how landmark reform dramatically tilted the healthcare playing field, and how the Federal Reserve's quantitative easing policy has artificially boosted bonds, weakened the dollar and sent commodity prices soaring.
[InvestingAnswers Feature: A Primer on Quantitative Easing -- What Is It and Will It Save the Economy?]
As we enter 2011, large swathes of the market will be shaped by the government: Will there be additional loan guarantees for nuclear energy development? Is cap-and-trade climate legislation dead? Could a handful of outspoken leaders spark a trade war with China? Are we through spending on infrastructure?
If you want to have an edge over the crowd, pay close attention to what's going on in Washington and make educated decisions about how these and other contentious debates will play out.
David Sterman -- InvestingAnswers/StreetAuthority Staff Writer
We're stuck with all of the intelligence we'll ever have. But we can keep accumulating wisdom.
#-ad_banner_2-#Here are two things I learned about investing this year:
1) The United States is no longer the world's economic center. And despite myriad fears, that's actually a good thing.
In the past year, it's become increasingly clear that emerging economies like Brazil, China and India can thrive even as Europe and the United States slump. With their fast-rising middle classes, these economies, along with other dynamic spots like Turkey and Colombia, look set to consume more and more finished goods. And finished goods are still a real strength for the U.S. economy. At last, we can finally say U.S. exporters have a bright future.
2) Cash is king. Companies are generating very high profits, leading to fattened balance sheets. All that cash will keep going toward buybacks, dividends and acquisitions, and will create a real floor for the stock market for a while to come as stock sell-offs are met with cash-boosting efforts.
[Click here to learn why David thinks Discounted Cash Flow is the Best Value Gauge for Fast-Growing Companies.]
Tom Hutchinson -- InvestingAnswers/StreetAuthority Staff Writer
It become clear to me in 2010 that emerging markets are here to stay.
Before this year, I understood that China, India, Brazil and other emerging markets had been the fastest growing regions of the world economy for many years and should continue to grow in the future. I also knew that these markets had risen in relative prominence as developed economies were wounded from the financial crisis.
But only this year did I fully realize that the global landscape had permanently changed. For example, I wrote that amid all the headlines about Ford's (NYSE: F) stellar performance and General Motors' (NYSE: GM) resurgence, most investors were ignoring Tata Motors (NYSE: TTM), India's emerging auto powerhouse.
Emerging markets will play a much larger role than ever before in the global economy from this point forward. China has become as central as the United States to any discussion involving the global economy. The G-7 nations (a global economic summit of developed countries) have now given way to the G-20 nations, which include emerging market countries.
Ryan Fuhrmann -- InvestingAnswers/StreetAuthority Contributor
I can't say I had any major revelations this year, but I am further convinced that having an investment strategy and sticking to it, no matter what, remains extremely important.
For instance, I held tight for the most part during the volatile periods of 2008 and through 2009, but realized that most of the positions I ended up selling are at or above the levels I sold them at during the downturn. What this tells me is that "buy-and-hold" investing is far from dead and that remaining calm during volatile periods in the market may be the best course of action. The same probably goes for other strategies, be it momentum investing, dividend income or other approaches.
Tom Taulli -- InvestingAnswers/StreetAuthority Contributor
My lesson for this year is that electronic trading has finally hit critical mass. It has taken several decades, but it appears to be finally entrenched. When seeing traders on the floor of an exchange, the activity looks like a throw-back to another age.
[Click here to see the 6 Low Commission Brokers that Make Our Cut.]
But with technology there will likely come more volatility. Of course, the striking example this year was the "flash crash." While the exchanges will likely make some adjustments and rule modifications, the fact remains that computers are making lots and lots of financial decisions. There's really no turning back.
This can actually be good for investors with a long-term outlook, however. When a good stock falls unexpectedly -- and by a large amount -- it makes for a good entry point to build a solid position in a good company.
Hans Wagner -- InvestingAnswers/StreetAuthority Contributor
While I suspected this, most analysts continued to prove that they are usually wrong. For example, pre-launch forecasts for sales of Apple's (Nasdaq: AAPL) iPad ranged from 1.1 million (Oppenheimer) to 2.9 million (Barclay's Bank). Now, it looks like Apple will sell 8.5 million iPads in 2010.
This all goes to show that if you do not do your homework, you have little chance to win as an investor. Without an understanding of economics, fundamental analysis and even a bit of technical analysis, an investor is betting against the house. Spend some time taking advantage of valuable, free resources, like our InvestingAnswers.com website, to gain the knowledge needed to place the odds on your side.