INVESTING: Don’t turn bullish too fast on ravaged market sectors

British investor Joe Lewis (who is still a billionaire, although after you find out what happened to him, you will wonder how he has any money left) started buying stock in Bear Stearns back in August when it fell to $120 a share. When the stock fell to $110 in October, he bought more, to the tune of $300 million. In November, Bear fell to about $90, and Joe was at it again. All told, he bought $1 billion of Bear before the end of the year. Joe was a famous currency trader, but he must have forgotten rule No. 1 in trading: Never average down! I think he regrets overlooking that bit of wisdom.

By mid-March, Bear Stearns was standing on the edge of bankruptcy, and its management was forced to accept a buyout offer from JP Morgan for $2 a share. Though the price was renegotiated to $10 a share, Joe Lewis lost almost his entire investment.

We are all going to learn a lot by the time this story ends, but the most immediate point is, don’t jump in too early. Bear markets are a nasty business, and while it is true that the next great fortune will be made in the current downturn, Lewis will tell you that being a little too eager can cost you. I’m not averse to taking a risk, but how about using a smaller chunk of your capital?

There are a few ways to successfully navigate the late stages of a bear market, which we may be reaching soon. One thing to keep in mind, though, is that the largest losses often occur at the end of bear markets. News like Bear Stearns could become as common as stock buybacks and merger announcements, for a short while.

And how you handle it depends on what you are looking for out of the next bull market. Me, I want the best risk-adjustedreturn profile available. All through the last bear market, one hero after another got shot trying to time the bottom of the tech wreck. Tech stocks did rebound, but for less risk you made a lot more money buying energy stocks.

It also is unlikely that the greatest place for your money in the next bull market will be what worked best in the last run. Investors are way too focused on trying to pick the bottom of the mess in financial stocks. Two new funds recently raised more than $1 billion to buy collateralizeddebt obligations and other mortgagebacked stuff.

Too soon for that. When gold started its current bull run in 1999, it was selling for $275 an ounce and no one, I mean no one, was talking about starting funds to buy gold. Now, it’s at $1,033 an ounce. Small-cap stocks took off in 2002 because they were so utterly ignored during the spectacular technology market in the late 1990s.

Right now, I don’t know what is going to lead the next bull market, but I am pretty sure it won’t be financials. Maybe it will be technology again, and perhaps semiconductors are a good place to start looking. Financials are down about 37 percent from their highs, and semis are down 34 percent, and no one, I mean no one, is talking about buying semiconductor stocks.