Nine Basics of Sound Investing

Take an accounting class. Accounting is the language of business, so you need to understand basic concepts such as revenue, depreciation, goodwill and capital spending. If you don't, investing is an uphill battle.

Be skeptical of analysts' reports. Thirty-eight analysts were covering Lucent Technologies (LU - commentary - Cramer's Take) on Jan. 8, 2000, that fateful day when management announced an earnings shortfall and the stock began falling into the abyss. There were 15 strong buys, 17 moderate buys and 6 holds. There was not one sell rating.

These bright, expensively educated, highly paid analysts didn't see -- or chose not to see -- the red flags in Lucent's balance sheet. One analyst even issued a higher price target the same day Lucent announced it was lowering its earnings targets. Never underestimate Wall Street's ability to find a way to get you to invest.

Create an on-deck circle of stocks. Some investors feel compelled to put their coin to work immediately, so they buy shares of companies they don't really want.

Don't make this mistake. Instead, keep a list of companies you want to own and buy only when they sell at an attractive price. If you like the company but not the stock, then buy a starter position, say 10% of your total commitment. If the stock remains expensive, do nothing. But if you are patient, the price may come to you at a later date. If the fundamentals are still solid, then build your position.

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Hewitt Heiserman conceived the Earnings Power Chart, Earnings Power Box and Earnings Power Staircase. A financial analyst for the past 15 years, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count, a book published by McGraw-Hill. For additional information, please visit www.earningspower.com. At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].

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