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Believing that It's Different This Time
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The four most expensive words on Wall Street are "It's different this time." History does repeat itself, bubbles do burst, and not knowing market history is a major handicap.

In the spring of 2000, for example, the financial press started writing that semiconductor stocks were no longer cyclical. That turned out to be pretty close to the top in chip shares. A year later, energy stocks were all the rage, and many analysts "were projecting their earnings to grow at 2O percent for the next several years. Then, the economy slowed, hurting the demand for power, and new plants came online, driving up the supply. As a result, energy stocks such as Mirant and Calpine tanked 4O percent to 60 percent even before the Enron debacle sealed their fate.

The point here is very simple: Ifou have to be a student of the market's history to understand its future. Any time you hear someone say, "It really is different this time," turn off the TV and go for a walk.

Falling in Love with Products

This is one of the easiest stock investment traps to fall into. Who wouldn't have thought that Palm was a great investment after buying a Palm Pilot when they "were first introduced a few years ago? It seems entirely logical, but the reality is that great products do not necessarily translate into great profits. For example, Palm was the first company to invent a handheld organizer that was relatively easy to use and affordable, but consumer electronics is simply not an attractive business. Margins are thin, competition is intense, and it's very tough to make a consistent profit.

Although great products and innovative technologies do matter when you're assessing companies, neither matters nearly as much as economics. Sure, Palm made a great device that millions of people purchased, and the firm even acquired one of its chief competitors, but the industry's dismal economics still caught up with the firm in the end—Palm lost hundreds of millions of dollars in 2001 and 2002, and as of mid-2003, the firm's shares had plunged more than 98 percent since they started trading in early 2000.

When you look at a stock, ask yourself, "Is this an attractive business? Would I buy the whole company if I could?" If the answer is no, give the stock a pass—no matter how much you might like the firm's products.

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