13 Things You Wish You'd Known in 2007

It helps if you think of P/Es not as a photo but as video. The direction matters more than the mere number: Were P/Es likely to come down as sales ramped up? Or were P/Es modest because they were at the top of a profit cycle, and were likely to fall? The answer to these questions explains the difference between the winners and losers.

6. Ignore deteriorating fundamentals at your peril: At various points in 2007, we saw or read recommendations to buy the unholy trinity: retailers, financials and homebuilders. Each of these buy recommendations came despite the deteriorating economic fundamentals of each sector. That turned out to be a recipe for big losses.

One would think this doesn't need to be said, and yet it does: When the fundamentals of a given market, sector or consumer group are decaying, profit gains are sure to slow.

7. Nothing is more costly than chasing yield: For fixed-income investors, what matters most is not the return on your money, it's the return of your money. I learned this early in my career, and never was it more true than in 2007. Reaching down the risk curve for a few bips of additional yield is one of the dumbest things an investor can ever do.

8. Know what you own: This very basic issue was mostly forgotten in recent years, and it was forgotten by pros and individuals.

The investment banks like Bear Stearns, Morgan Stanley(MS Quote) and Merrill Lynch(MER Quote), big banks like Citigroup(C Quote) and Washington Mutual(WM Quote), and GSEs like Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) were scooping up assets apparently without doing their homework. The complexity of these pools of mortgages almost guarantees that no one truly knows what's in them (see the next rule). If you don't know what you own, how can you properly manage risk?