10 Lessons Learned in the Selloff

In times like these, it can be instructive to step back and look at the bigger picture. Events such as the recent market shellacking don't have to be all bad. For the Apprenticed Investor, there are some important lessons to be learned away from the experience.

What follows are the top 10 lessons you might have learned -- or at least may have been reminded of -- during the May 2006 selloff.

1) 'Cheap Stocks' Can Always Get Cheaper

With the expanding number of stocks making fresh 52-week lows, the temptation to buy on valuation alone is omnipresent. Don't give in! You wouldn't short a stock making 52-week highs for that reason alone -- so why buy a stock that's making 52-week lows?

As much as you may like eBay , Yahoo! and Amazon (AMZN - Cramer's Take - Stockpickr), they each made 52-week lows the week of May 15. That means, someone (perhaps with greater knowledge than you) was selling them heavily. Dell (DELL - Cramer's Take - Stockpickr) and Microsoft (MSFT - Cramer's Take - Stockpickr) made fresh lows the week before.

All these once-loved issues are under heavy distribution. When will it end? I sure don't know. If you don't know either, then you are just guessing as to when the big boys are done dumping. Guessing is hardly a recipe for becoming an astute buyer.

Remember, valuation is just one element of making a purchase. How much of a drawdown you are willing to tolerate in the name is important also. As Jesse Livermore observed, "It isn't as important to buy as cheaply as possible as it is to buy at the right time." I couldn't agree more.

2) Macro Issues Matter

This month, we saw commodities, the dollar, inflation, interest rates, the Federal Reserve, oil prices, market volatility, precious metals, geopolitics and liquidity issues all conflate at once. Investors who disregard these do so at their own peril.

Too often, many traders ignore these macro areas, focusing on either fundamentals or technicals. That is overlooking important elements that affect markets. You don't need to become an economics geek, but you should at least be somewhat knowledgeable. The best traders I know are well-rounded and well-informed. They rarely get unpleasant surprises.