10 Investment Guidelines: Part 2

9. Investors should research financial history as much as possible.

I can not emphasize enough how important this guideline is. There is a tendency for people to understand economics and the financial markets from only one event or cycle. That is a big mistake. If all you can relate to is the tech and Internet boom and bust, then you have an incomplete view of financial history. You must go back as far as possible to see how markets reacted under similar circumstances.

For example, as I wrote just last month, this is not the first major bank-related financial crisis that this nation has endured, nor is it the first time that the U.S. central bank and government stepped in to stabilize and support the banking system. Nor will it be the last.

I have lived through two market crashes, in 1987 and 200, yet I still read about prior market crashes and have always made sure to get counsel of elder and more-experienced investors throughout my investment career. Furthermore, through my writing and teaching, I am also passing on my knowledge of such history to the next generation of investors.

While you can, listen to and read what market veterans and historians such as Teddy Weisberg, Art Cashin and Warren Buffett have to say. You won't be disappointed.

10. Leverage gives the illusion of wealth. Savings is wealth.

I could not agree with this accounting lessonmore. Think of your wealth as your own personal shareholders' equity. Anytime you save money, you are pushing net income into your net worth. However, when you borrow, the leverage inflates both assets and liabilities but does not impact net worth. Only once you manage to sell an asset, pay off the debt and convert the gains (after tax of course) to net worth can you safely say that you have created wealth.