I should have never invested in Global Crossing ( GBLXQ). That's clear in retrospect, of course. In hindsight, it's equally clear that the company's revenue numbers weren't to be trusted.
But even without the virtue of hindsight -- even without knowing then what investors know now about how Global Crossing manipulated its revenue numbers -- I shouldn't have invested in the stock. Buying Global Crossing violated one of the most important rules for protecting and growing your capital: invest in what you know. At market tops, some investors stop thinking of stocks as real-world entities and treat them just as financial instruments. In 2000, many investors weren't thinking of Global Crossing shares and other hot stocks as investments in specific businesses, but rather as tickets to a ride. In addition, many investors who remembered that owning shares means receiving partial ownership in a business were too optimistic about their ability to understand that business. At market tops, when everything is working, we all fall in love with our own analytical abilities. For example, I thought I understood Global Crossing's business. What hubris! I was completely out of my league when it came to pitting wits with the guys keeping the books at that company. Global Crossing even hired the accountant from Arthur Andersen who had warned the company about violating the rules on counting revenue from some of its deals and put him in charge of making sure that the deals followed the letter of the law. For a while, anyway. I bring all this up not to relive the past, but because "invest in what you know" is the best strategy I know for navigating the post- Enron market. I'd add one twist to this strategy: Put more emphasis on a company's books while we continue to unwind the accounting excesses of the stock market bubble. The result, which I'd rename to "invest in what you can understand," is an approach to investing that I think is especially valuable at a time like this when so many investors are asking whom they can trust in the financial markets. The ultimate answer to that question is investors can only trust themselves -- and "invest in what you can understand" is a reassuring way to approach what can seem a daunting task. (The two books by mutual-fund superstar Peter Lynch and John Rothchild, Beating the Street and One Up on Wall Street , are still the best common sense introductions to "invest in what you know.")