FOOL'S EYE VIEW
Investing Lessons of 2000

By Bruce Jackson (TMFGoogly)
January 2, 2001

For many, 2000 was a tough investing year. All the main indices finished the year in negative territory, with the techMARK 100 losing a whopping 32.2%. The FTSE 100 index had its worst year since 1994, losing 10.2%.

Many people will be quick to label 2000 an exceptional investing year -- exceptional in that it was a one-off. They will be thinking the January to March dot-com mania was a once in a lifetime experience, as was the April to December bursting of the bubble. They will be thinking that a falling market is not normal. In short, they will be thinking 2000 will not be repeated.

News For You

Well, have we got news for you. Last year was not particularly exceptional. Every so often, manias come in and out of fashion. The market can and does fall. And 2000 will be repeated, somewhere, somehow. Only the names will be changed.

Here are the lessons of 2000.

Did you hear the four words "It's different this time" muttered in 2000, usually in relation to the thing called the "new economy"? Legendary investor Sir John Templeton labelled those four words the most dangerous in investing. The Internet was supposed to change everything. Well, it changed some things, for some companies. What it didn't do was change the old rules of investing. It wasn't "different this time". It won't be different next time.

The new economy doesn't exist. Those who embrace new methods of doing business will prosper, just as they've done over the centuries. The Internet may be new, but it's not 'new economy'.

A bad business is a bad business whether it transacts purely on the Internet or not. Boo.com was destined to fail. Name a clothing retailer who has successfully entered multiple European countries simultaneously. Bad idea, bad business, gone business.

Hot, "can't fail" IPOs can fail. Lastminute.com (LSE: LMC) finished the year down 80% from its float price, and Interactive Investor International (LSE: IIN) shares were down 83%. Freeserve (LSE: FRE) finished the year at 98p, well below its July 1999 float price of 150p. Ouch! There's no such thing as a sure thing.

Valuation eventually matters. Companies should always be valued on the sum of their future cash flows. Simply buying a company, no matter how good you think it is and how great you think its future prospects, regardless of its share price, is an extremely high risk strategy. Only the very best visionaries can play that game, and even then they need their fair share of luck. Great investors need a lot more than luck.

Form is temporary, class is permanent. After a poor 1999 (by his standards), and despite the media claiming he was finished because he didn't invest in technology shares, Warren Buffett didn't change his investing philosophies or style. Shares in his company Berkshire Hathaway (NYSE: BRK.A) finished 2000 up 29%, and up 72% from their March 2000 nadir. Enough said.

Day trading doesn't work. It is dead. Or at the very least, it is dying. When the market was booming, about 80% of day traders were losing money. Now that the market is floundering, that number is probably higher. If you're one of those 80% or more, you're probably (hopefully) not day trading anymore. If you are, you're only kidding yourself. It will all end in tears.

Long term investing still wins. Over the past 10 years, the FTSE 100 has gained on average 11.2% per annum, and that includes last year's fall. Buy yourself a simple index tracking fund, wrap it in an ISA, and those are the sort of returns you can look forward to in the future -- over the long term.

Hindsight investing doesn't make you any money. Instead, put the lessons of 2000 to good use, and avoid repeating the mistakes you made last year.

And Finally...

You need a robust selling strategy. For me, this is the number one lesson coming out of 2000. In the early part of this year, if you held shares in the Technology, Media and Telecommunications sectors (known as TMT) you would probably have seen your holdings fly significantly higher. You would have known in your heart that they were overvalued. Yet you didn't sell. You were sucked in by the euphoria of it all, using spurious comparisons with other insanely valued companies to justify holding on to the shares in your company. Only now do you realise you should have sold. Next time, do it!

Where Next?

What did you learn in 2000? Let us know on the Fool's Eye View discussion board.
ISAs -- learn and find one.
Looking for stock ideas for 2001? The Motley Fool's Industry Focus is on sale now.