Six Lessons of the Stock Market

2. Buy companies that have a limited number of competitors.

Monopolies, duopolies and oligopolies are more profitable over time and make better investments than businesses that lack a unique product or service. Oglove says NYSE Euronext (NYX - commentary - Cramer's Take) and Chicago Mercantile Holdings (CME - commentary - Cramer's Take) represent examples of companies with limited competition.

3. Don't talk to management.

"I stay away from the corporate suite," Oglove says. "There, you hear only the siren song to cover up downtrends in earnings, losses of markets or overloads of debt."

4. Categorize your stocks by their degree of risk.

Oglove has three buckets: "blue-chip," "speculative" and "roll of the dice." Oglove admits this exercise is part science, part gut. Still, the key point is that when you think a company is moving from one category to another, find out why. If a business looks like it is past its prime, then maybe you should sell, he advises.

One example of a blue-chip, according to Oglove, is Google. But at 40 times earnings, the Internet search giant is vulnerable to bad news. For comparison, he cites what happened to Whole Foods (WFMI - commentary - Cramer's Take): Due in part to fears over slowing same-store sales, the upscale grocer's price-to-earnings ratio is 30, down from a recent 50. When you own pricey companies, Oglove says, be prepared for sharp contractions in the P/E multiple.

5. Don't shun all initial public offerings.

New issues in aggregate are poor investments, Oglove knows. On the other hand, some of the best stocks of the past quarter-century -- McDonald's (MCD - commentary - Cramer's Take), Microsoft (MSFT - commentary - Cramer's Take), FedEx (FDX - commentary - Cramer's Take) and Starbucks (SBUX - commentary - Cramer's Take) -- were all IPOs. Your litmus test, Oglove says, is a dominant position in a growing niche market.

6. Don't get frightened by insider selling.

A lot of insider selling is the sale of stock options, Oglove explains. Especially with technology companies, insider selling will almost always exceed insider buying. A potentially bullish clue is when a cluster of insiders buy at the same time, as was the case with Dean Foods (DF - commentary - Cramer's Take) last month. Three insiders bought after a special $15 dividend was announced.

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At the time of publication, Heiserman had no positions in any of the stocks mentioned, although holdings can change at any time.

Hewitt Heiserman conceived the Earnings Power Chart and the Earnings Power Staircase. A graduate of Kenyon College with distinction in history, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count. For additional information, please visit www.earningspower.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback; click here to send him an email.

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