December 29, 2009 - Every year I make the same resolutions about dieting and exercise. Every year they last for a few weeks and old habits easily, seductively, come back. So I'll do those again this year. But I'll also add the following resolutions, ones that will help me not repeat mistakes that cost dearly in the last two years.

1) I will buy more steak, less sizzle. No one likes a good story better than I. Tell me a company has a cure for cancer, has the best software to take on Microsoft, or can make teeth white in 5 minutes, and I'll listen very hard, most likely invest. Being an optimist, I want to believe all these things are true, that people do have great ideas, that businesses will thrive. But they don't. Most of the time. Not because the management is crooked (sometimes it is), but because business is extremely competitive and getting new products to market, then making a profit, is close to impossible. That's because big, established firms in the same industry have either tried the same idea or passed on it because it doesn't work. This year, I'm buying more well-capitalized companies with proven histories of profits, ones that are growing revenues and profits in a very tough economy. More steak, less sizzle.

2) I will remember that big does not mean safe. I bought Washington Mutual and Countrywide Credit because they were big (the biggest in their industries). I bought them well below book value, thinking there was some margin of safety when the stocks sold for a small percentage of their book values. I had no idea their losses were so large (did anyone?) nor how fast these companies could collapse. Simply being big isn't safe enough. I want big and growing, not big and shrinking.

3) I will diversify, to survive. With the above resolution in mind, I will make it a top priority to never put more than 10% of my investing funds into 1 company, no matter how great that company is doing, no matter how "cheap" it looks. Both WaMu and Countrywide looked extremely cheap when I finally bought them, only to watch them get really cheap and then very expensive as they became worthless.

Diversification also means across industries. Putting everything into 10 tech stocks isn't diversification. One tech stock, one consumer products, one home builder, one financial, that's diversification. Diversifying also means not buying a lot of the stock in the company where I work, putting a large percentage of my assets into it because I "know" how well the company is doing. I did with Drexel Burnham, and it was the hottest firm on Wall Street until it flamed into oblivion. Diversifying also means holding bonds and real estate or other inflation-protection investments.

4) I will receive dividends. Most investors don't realize that much of the return from stocks comes in the form of dividends. When large statistical models are run on large-cap stocks, they show average returns over many decades of about 10%. When those returns are analyzed, a large percentage comes from dividend these stock pay. Furthermore, receiving a quarterly payment from a stock rewards patient investors who wait for years while a stock sits or even goes down before, hopefully, it moves higher. Dividends matter. But I won't take too much risk to get them. The higher the dividend yield, the more likely it won't be paid too much longer. Stick with stocks that pay dividends that require less than 50% of earnings to pay.

5) I will admit that I don't know where the market is going. All of us have an opinion on where the market is going. But none of us knows for sure. By taking an objective, I don't know, perspective, we can make better investment decisions. For example, if we all believe inflation is going to be rampant, we naturally would buy gold, putting all our money into one inflation hedge that has rewarded investors for decades. But we don't know for sure that inflation will return, though it seems highly likely, nor when it will return. If it doesn't, we'll be sitting on an asset that pays no dividend and requires another scare of some type to make it rally. Better to have a bias that there will be inflation and put 10% of your investing dollars into an inflation hedge such as gold or real estate, then invest the remaining 90% into other investments that reflect the possibility that inflation may be a problem but will do well if it isn't. Or invest 50% into 5 different stocks that would benefit from inflation but will do well if there isn't any, and 40% into stocks that are neutral regarding inflation. In other words, you don't know exactly what will happen, but you think you do and diversify your investments with a bias without being totally committed to that thinking.

You probably have your own resolutions, learned from this unprecedented investing debacle. Whatever they are, stick to them. They'll serve you well as 2010 unfolds. No one knows what lies ahead, but being a little more conservative seems another good resolution to follow.

Now I have to exercise and eat a salad.

- Ted Allrich