LESSON 2:
Investors and traders discovered during the heady days of 1999 and 2000 that if you are making a ton of money in the market, you can guarantee that you will make even more if you just leverage up your account. If you are going to turn $500,000 into $1 million buying stocks, why not borrow $500,000 from the broker and make double that? Brokerage houses issued margin by the billions and the public gobbled it up like popcorn. The loans were cheap, and the collateral, the stocks you owned, was right there in the account. You could borrow $500,000 from a brokerage house easier and faster than Bill Gates could get a $500,000 mortgage from Chase.

The dirty little secret behind the immense profitability of brokerage houses is the credit balance on your account. They loan virtually risk-free if they are prudent about maintaining margin accounts, because they already have your collateral in their possession. It can be sold in a flash with or without you, and I can't tell you how many people wrote and told me how outraged they were that their positions were simply sold out when they ran afoul of the margin clerk. But they agreed to that sell-out provision from the get-go! The luckiest only gave up 1999's and 1998's gains. The unlucky souls gave it all up. That's what happens when you buy stocks with the brokers' version of MasterCards.

Margin debt turned out to be the biggest source of woe in 2000. Not only did it infect everyday buyers, but its contagion wiped out a whole officer corps of chief executives who borrowed against their tech stocks to finance their New Economy lifestyles. The top dogs at Safeguard Scientific, PSI Net, Worldcom, and the chimerical Priceline got sold out at the bottom when their margin calls came due. They distinguished themselves as the true goats of the 2000 game. I can personally attest to brigades of millionaires who are now thousandaires because of margin calls. They never thought the markets could go against them, and nobody told them otherwise. Shame on everyone, and, of course, better luck next time, if there is a next time.

LESSON 3:
In 2000 we learned the virtues of that long-forgotten, old-fashioned asset -- maybe you once heard your parents talking about it -- they used to call it cash. Somehow, at some point in the past five years, we decided that cash was like some weird form of flesh-eating disease, and as long as we didn't have any, we were safe in our skins! Mutual-fund managers thought they would lose their jobs if they had cash lying around. Brokers swept accounts regularly to be sure there was no cash buildup -- it all had to be "put to work"! Individuals thought owning cash meant they didn't know what they were doing. Having cash meant you weren't drinking at the greatest Bacchanalian Bull Bar of all time. Owning bonds, another form of cash if they are short-term (they're riskier in the long term), also became sheer blasphemy, the equivalent of giving your portfolio a lobotomy. No wonder the ten-year bond turned out to be one of the single greatest-performing investments for 2000. It was the most despised and hooted going into the year! In 2001, we must disabuse ourselves of this notion that cash is terminal. You're going to want a lot of it around for much of the year.

LESSON 4:
Finally, we sincerely believed, going into 2000, that only tech stocks were capable of making big money. It was the bizarro version of the classic Peter Lynch method (buying only the stocks of companies we know) combined with a bizarro version of the Warren Buffett method (buying tech "brands," then holding them or buying more over time). This produced a portfolio of stocks we thought we knew that went down every day beginning in March. And so we bought more. We bought more of the Covads and the Rhythms and the Northpoints because they installed our nifty DSL lines that made us trade faster. We bought more Gateway and Dell because we liked our computers. We bought more Ericsson and Motorola because we liked our cell phones! And we were slaughtered every time.

None of this would have happened if the Federal Reserve hadn't taken action. Year 2000 had to be the first federally mandated bear market in history. But what's a Fed to do? We had this glaring lesson of Japan staring us in the face every day, where, in 1989, the most prosperous nation on earth, if we use stock-market valuations, sank into a still-continuing depression that probably rivals that of the thirties in this country. Margin buying was at the root of the Great Japanese Depression. Near the height of their stock-market bubble, earnest Japanese brokers would call me at my hedge fund and say, "We are taking up the railroads tonight; you can buy 30,000 shares of Tokyo Rail at 300 yen and sell it at 350 yen tomorrow." It was that simple.

"Why bother to even do the trade?" I would joke back. "Just deduct the commission and send me the proceeds." They wouldn't even laugh. That's just what they were doing. So the Federal Reserve jacked up rates six times in succession and raised the cost of anything borrowed. The effect, not clear initially, was to create a most inhospitable climate for renting stocks with borrowed money, which is all that people were doing anyway. You needed to borrow the money to own the hundreds of stocks that traded in the 200s and 300s, and when they fell below the levels where your collateral was safe, you got sold out in a hurry. Because of those hikes, you were forced out of tech with the same gusto with which you dove into it. Anyone who switched from tech to nontech, literally anything nontech, made fabulous money in 2000. Phillip Morris bested all of the Dow stocks. Anything in your fridge or your pantry crushed anything in your personal computer or on the Net. In fact, we had a wild bull market in 2000 in everything from drug stocks and oil equities to the good old utilities and transports. Some of these stocks hit new highs every single day in the last months of the year even as tech stumbled, faltered, and crumbled into oblivion. This was the year when my mother-in-law's ossified 1967-vintage portfolio, filled with the Niagara Mohawks and the Southern Energys, crushed the sharpies at Putnam OTC Emerging Growth and Pilgrim Baxter.

Then again, who didn't? And will it be the same in 2001? The year began with a bang as the Fed aggressively eased interest rates. (The interest rates on your credit card won't come down, but what the banks pay for the money they're lending you will. And as they make more money, they become freer about lending money, which eventually makes all of us freer with our money . . . and that is supposed to restimulate the economy.)

So can we stick with those mundane winners of the second half of 2000? Or must we return to beaten-down technology, betting on a revival because the stocks are so darned low now? I wish it were that easy. I wish I could just tell you to plunk your money down on the values that the fourth-quarter selling created.

No can do. Two little problems stop me: earnings and stock price. Put simply, the earnings of technology companies are still plummeting, and the stock prices, if you back out through all of those years of splits, are still much higher than we thought. A stock like CMGI, which might seem so cheap at $5, is really closer to $100 without the splits. That's an unholy combination of high expectations that must be dashed and high prices that must come down.

Wall Street is a silly place. Analysts will only recommend a stock if they expect up earnings year after year. But the recession in tech is so great that many companies will report negative "comparisons." These "difficult compares," as they are known in the business, will give way to the delightful "easy compares" in the second half of the year. That's when I want to pounce on the group. Patience, another term that was rarely confused with brains during the heady days, may be your best friend when it comes to tech.