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2001 Financial Survival Guide

Quit moping about last year's stock market meltdown. That's ancient history. The time to get on with the rest of your investing life is right now!

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Most people still don't know what hit them. They thought they would be safe in Intel. They thought they could hide in Cisco. They didn't think the granite wall of Microsoft would ever crack below 100, let alone crumble to 90, 80, 70, 60, 50, or -- this isn't happening! -- 40 measly dollars per share! The prudent among us didn't traffic in shooting stars like Scient or Viant or Internet Capital Group, bits and flashes of light that arced long enough to attract and destroy tons of capital. You and I owned the good ones, the solid, long-lasting blue-chip tech, those wonder companies that beat the estimates effortlessly. We bought only the trusted techies that never go down. We thought these stocks were growth annuities that one could buy and forget about, and total up all the gains at year's end.

Wrong!

Now, as we reflect on the miserable year past, where all the averages dropped single digits, except that mangy Nazzdog, which shed almost 40 percent of its value, we are waking up to the idea that any stock, but particularly any technology stock, has a tremendous amount of risk to it. We are discovering that diversification does not mean buying Compaq and Intel and Sun Micro! Those three turned out to be joined at their sagging hips. On New Year's Day, it finally dawned on too many people that they may not have been such stock-market geniuses after all. That they were simply bull-market players, that derisive term we professionals apply to jokers who lose more in bad times than they ever make in the good years.

To which I say, relax. Now that I've retired from managing a hedge fund, where I could trade in and out of a stock in seconds if I didn't like the way it drooped on my screen, I am in the same private-investor lifeboat as everyone else. I now have the same longer-term time horizon as you should have.

My new job, finding stocks and, instead of trading them, owning them, challenges me far more than I thought it would. It forces me to think about what will happen to companies three or four more Fed eases down the road. For example, now that the Fed has started letting up on the brakes, it is time to buy the stocks of companies that directly benefit from the lowering of rates: banks, savings-and-loans, and brokerages. And when the Fed really puts its foot on the gas, cutting rates faster and faster, you have to gravitate toward what is known in my business as deep cyclicals -- i.e., companies that start doing well after the economy goes into high gear. That's when you want to be in the paper and chemical stocks, and even the metals. I have to think that far out into the future now, and I'm psyched.

I do so with some degree of contrition, though. From 1996 until the spring of 2000, a tremendous number of you wanted to be me, the gunslinging fund manager, shooting in and out of stocks on a moment's notice. But when stocks crashed in April, I stopped shooting, while many of you didn't. Now some of you are out of bullets. Yet this is precisely the moment, at the beginning of the new cycle, when you want to buy and hold and let the Fed work for you. Now the tables have turned: I want to be you. I want to get long and stay there and let the business cycle make money for me.

And in preparation for managing my own finances, I have put together a Survivor's Guide to this new hard market. I can show you where the bulls still live and the bears prey on senseless online neophytes who are waiting for the next big IPO or the next Microsoft. I can even suggest a scenario for how things just might work out positively this year, exactly the outcome that few professionals expect for 2001.

But first, what can we learn from last year's fiasco?
We have to address it, because what happened in 2000 may turn out to be less aberrant than we want to admit. So many of us made mistakes, casualties of our own hubris, that we have to learn not to repeat them if we are to remain in the stock market. (For the record, I retired with a plus-35 percent year, so I may very well be worth listening to on the subject.)

One thing is certain: If you traded a stock that did not even exist before 1998, chances are you lost a fortune. You're probably thinking that the market must be rigged or that you're just stupid or that you will never, ever be able to get it right again. Guess what: You're right on all three counts. If you didn't switch out of the newly minted tech at some point in early 2000, you were stupid. The game was rigged, because most of these companies weren't seasoned and the callow managements didn't know what the heck they were doing. And you may never get it right again, at least all by yourself, so perhaps this time you shouldn't do it all on your own. Which brings us to the first of four hard lessons of 2000.

LESSON 1:
Doing it yourself is not for everybody. Five years ago, I used to tell anybody who would listen that the Net and all its information would revolutionize stock investing. The Net, and sites like TheStreet.com and its competitors, CBSMarketWatch and the Motley Fool, would serve as your personal Home Depot, where you could get all of the tools you needed to compete with, if not beat, the professionals. To some extent, that happened. You could learn about stocks and execute trades with extremely low commission costs. But just as everyone can't build a house or wire tricky electrical devices or install a furnace, there are investing tasks that turned out to be too overwhelming and time-consuming for most people.

This conclusion is painful for me, because as someone who encouraged people to go online, I never thought that it would turn into the reckless binge that it became. I never thought that so many people would financially electrocute themselves or shoot one another in the heads with nail guns. But that's what happened.

It was ghastly. People lost trillions in individual stocks, stocks they might never have bought if they had never gone online and found out how easy it was to trade! They bought stocks with less thought or angst than they picked movies out at Blockbuster. And when the stocks went down, they bought more, because, after all, they were taught to "buy and hold" and to "average down" and to "dollar-cost average." They were not taught to sell, because every dip is buyable and everything, just like in a good old-fashioned Hollywood movie, works out in the end. Getting blown away by CMGI? Buy more. Extreme Networks got you down? Double up. How can you go wrong buying more Internet Capital Group at the bargain price of $30 if it once traded at $200? Well, how about if it ends the year trading at $3, as it did last year?

And who can blame ordinary investors? The pros made tons of mistakes, too. I have never seen so many mutual-fund managers drop 40 percent of people's hard-earned capital so fast in my life, many of them household names who should have known better. The brokerage houses were no better. The dot-com dreck never came off the recommended lists until it was too late, and tech remained at the heart of most of their table-pounding because that's where the underwritings were. And underwritings were where the profits were.

Still, some of the old-fashioned professionals, scorned as fuddy-duddies for dwelling on brutal times past, can teach the amateurs something and must belatedly be given their due. For example, they knew from training and history the value of diversification. Or, in English, you can't just have a portfolio full of tech stocks, because tech trades together as a monolith, even if it shouldn't. They could have served as much-needed circuit breakers for some of you do-it-yourselfers who overheated on highfliers.

Talking it over with someone can help. Some of the more harebrained, crazier propositions did get vetted out in the old client-to-human-broker process. My old friend Byron Wien, head strategist at Morgan Stanley, told me four years ago that people would still need to speak with other people before they made investment decisions, if only for a sanity check. But I argued that they would just go directly online. I was right, and he was right. They did do it by themselves, but they should have talked to someone else. Certainly, less capital would have been vaporized if we had simply run more of our investing ideas by others before pulling the trigger.


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