The financial theme song for 2008 should be Stephan Sondheim's poignant ballad, "Send in the Clowns." It was written for the musical, A Little Night Music and it was sung by a 40 something actress who was rejected by a former lover. Overcome by regret, sadness, self-pity and anger, she sings the song, "Send in the Clowns." It ends with the desperate lines:

But where are the clowns
There ought to be clowns
Well, maybe next year.

"Send in the clowns," is a theatrical term used when things haven't been going well. In other words, the clowns are supposed to liven up the act. For millions of investors, things certainly have not gone well in 2008 and they definitely would like to liven up their portfolios. In 50 years of investing, I have never seen such massive, wide-spread loss of wealth. It is sad, indeed, but what can we do about it?

Surely, regret, sadness, self-pity and anger doesn't do any good. So one needs to examine what went wrong, learn from adversity and get better. I can say this from experience because I grew up during the depression, made a lot of financial mistakes, and faced adversity on many occasions. The key is to identify the root causes of one's adverse experiences and take corrective action to get better. I'm not going to go off on a tangent here, but I've learned more from my mistakes than I ever did from my successes.

The problem most investors face is that it's not easy to identify the root causes of one's failures. The reason is that much of what Wall Street has taught us about investing is wrong. It's not all wrong, of course, but that makes it even harder to know what one has done wrong. To see what I mean, let's consider the recent Business Week article, "Back to Basics," (pg. 44, 12/29/08), written by Mr. Christopher Farrell. It says that while many investing mantras, e.g., the investing trinity of diversifying, buying and holding stocks, and dollar-cost averaging, have been ineffective over the last decade, the old proverbs that preach diversification and dollar-cost averaging remain good advice for anyone investing for the long haul. Well, let's take a look at these items one at a time.

Diversification has not been shown to be ineffective over the past decade, so I continue to believe that it remains good advice for anyone's investment strategy. Buying and holding stocks is a flawed strategy. The fact that stock prices are back to 10-year lows is a sordid reminder of that. Dollar-averaging has indeed been ineffective over the last ten years and it is not good advice for anyone. Since it entails buying stocks going down in price, dollar-averaging is a sucker's game.

Legendary money manager, Bill Miller, destroyed his reputation as a premier fund manager by buying Citigroup, AIG, Freddie Mac, Wachovia, Bear Stearns, Washington Mutual, Countrywide Financial and other stocks as they were getting crushed. His fund dropped 58% this year and he now says he's working on new strategies to improve performance. Mama mia, Send in the Clowns.

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