Five Lessons From the Mortgage Meltdown

1. Don't Be a 'Marginal Moron'

I have a theory I call The Marginal Moron Rule, meaning: Whenever a market reaches peak levels of speculation, the last entrants into that market lack the necessary knowledge or sophistication to properly navigate their newly chosen field. As my old boss Joe at Merrill Lynch would say, "These are the guys who take the last nickel off the table."

During the height of the technology and Internet boom, there were schoolteachers, doctors, attorneys, housewives and police officers who left their daily roles to take up daytrading . Their fundamental knowledge of investing was practically nil. Some of them took up technical trading by taking courses.

However, ultimately, most of them found out the hard way that they were at the end of a speculative bubble, and their money management days quickly ended. (That is not to say that some of these people did not succeed, because some did, such as RealMoney.com's James "Rev Shark" De Porre.)

After the tech/Net bubble burst, we saw the marginal morons flock to the next investment flavor of the month, real estate -- just when the housing market reached its heights. Again, untrained individuals quit their day jobs and entered a sophisticated market. Many took courses or read books on subjects along the lines of "how to make millions in real estate with no money down."

My wife, a real estate attorney with more than 20 years of experience, would have to face off or work with self-proclaimed real estate attorneys who had little or no real estate law experience or brokers who were clueless as to the ways in which the market operated in the real world. Now they are all out of real estate (and several are unemployed). The lesson: Don't enter a market where the marginal morons are fighting over the "last nickel."

2. If You Can Afford Beer, Then Stick to Beer

My Aunt Bernice has an expression about people who buy things that they cannot afford. She describes them as having "champagne taste with a beer pocketbook."

As a matter of public policy, we should ensure that everyone has affordable housing, but that does not entitle each citizen to own their own home. Yet, throughout the last several years the housing system was bastardized to make home ownership affordable to everyone who could not afford true home ownership.

Besides the complexities of dealing with adjustable rate mortgages (ARMs ), "no doc" and "no money down" loans, home ownership has many more costs and variables, such as insurance, taxes and maintenance.