Lessons From 2007: A Baker's Dozen

Talk about a roller coaster ride. 2007 presented investors with many surprises -- and quite a few expected problems -- ranging from subprime mortgage defaults to term auction facility (TAF) to sticky inflation. Agriculture boomed, the Fed surprised, homebuilders collapsed, and Google (GOOG - commentary - Cramer's Take) and Apple (AAPL - commentary - Cramer's Take) were unstoppable.

As we launch into 2008, now is a good time for us to look back and reflect upon what lessons 2007 provided us. For those who paid attention, there were many insights to be gained, even wisdom to be attained. Some of these we learned through observations; others, we learned the old-fashioned way (painfully).

What follows is a mix of fundamental, economic, technical and even philosophical lessons that those savvy CEOs, fund managers and individual investors who were paying attention picked up in 2007. My hope is you will glean something worthwhile from the misfortune of others.

1) Ignore market rumors: Sometimes the big bucks don't even have to make the buy, they need only have to be rumored to be kicking the tires. That was never truer than in 2007. It seemed every time some firm was in trouble, the same gossip was floated that Warren Buffett was about to buy them. Time and again, these tales proved to be unfounded money-losers.

This year's most egregious example was Berkshire's imminent purchase of Bear Stearns (BSC - commentary - Cramer's Take). I don't know who bought on the rumor that Mr. Derivatives-Are-Financial-WMDs was going to buy the poster child for bad CDO bets, but if they merely gave it even a millisecond of thought, they would have seen how obviously absurd it was.

That The New York Times Dealbook got suckered into printing this just shows you how pernicious these rumors are. The stock was as high as $123 the day of the rumor. Yesterday's closing price was $88.

Anyone who bought homebuilders or Bear Stearns stock on the basis of either of these rumors -- or nearly any other stock that had similar rumors floated throughout the year -- lost boatloads of money.

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At the time of publication, Ritholtz had no positions in stocks mentioned, although holdings can change at any time. Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.