Roundtable: 1 Thing That Surprised Me in 2011

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As we close out 2011, it's time to reflect on what we've learned (or at least should have learned). With that in mind, let's see what struck four of our top analysts this year. We asked them:

What is one thing that surprised you in 2011?

Travis Hoium: My 2012 shocker: Chinese companies may not be what they appear. As flawed as it is, the U.S. has one of the best securities regulation systems in the world so this year the rampant fraud (or accusations of fraud) in U.S.-traded Chinese securities came as a huge surprise. I would like to think that audited financial statements filed with the SEC are about as reliable as we can get, but a tangled web of foreign subsidiaries and reverse mergers have made even SEC filings tough to count on. Companies like Sino-Forest, RINO, and China Media Express used this web to file financial statements that may have been misleading (or flat-out wrong) and are accused of defrauding investors.

And the investment community was alerted of this problem by a relatively unknown character -- Carson Block, of Muddy Waters Research, who has become a hero or villain, depending on whom you ask.

What did I learn from these Chinese frauds in 2011?

  1. Don't believe everything you read out of China, even if it was filed with the SEC.
  2. If a company has margins that wildly outpace the rest of the industry, be afraid, be very afraid.
  3. Finally, if a company's main email is a Yahoo! email address, you can't find their website, or they're exaggerating the complexity of their products, like Advanced Battery Technologies did calling electric scooters electric cars, run in the other direction.

Matt Koppenheffer: Financial journalism industry, my finger's pointing at you.

To be sure, it was a year with plenty of great surprises. Amazon.com (NAS: AMZN) took on Apple (NAS: AAPL) on its home turf, the U.S. lost its AAA credit rating from Standard & Poor's, a financial master of the universe presided over the nation's eighth-largest bankruptcy, and Angry Birds just... wouldn't... give... up.

However, overshadowing all of that, we had the sovereign debt crisis in Europe. And with that we had some of the most laughable finance coverage I've seen. For months on end, if I woke up and the market was up there were headlines trumpeting investors' confidence in Europe's ability to handle the crisis. On days when the market was falling, it was invariably explained as investors suddenly doubting Europe's ability to handle the mess.

This happened when there was actual news about Europe, but it also happened when there was absolutely no new news to speak of. It became so exaggerated that I figured it would be impossible for it to go on. And yet it did.

And that is why the single-note stock market coverage of 2011 was my biggest surprise.

One of the things that surprised me is that after a speculative run-up in August and a correction in September, the long gold trade appears to have lost much of its safe-haven appeal. Price movements appear to be no longer well-correlated with the ebbs and flows of investor fear related to macroeconomic factors, particularly the ongoing European sovereign debt fiasco. Is this breakdown due to temporary technical factors -- John Paulson trimming his massive SPDR Gold Shares (NYS: GLD) position, for example? Will gold regain its full safe-haven status in 2012? Maybe, but perhaps the long gold trade is busted and the August run-up was its last hurrah; I'm looking forward to monitoring this in 2012.

Morgan Housel: 2011 was one of the most volatile years for stocks in history -- one period during the summer was the most chaotic since 1932 -- and yet it ended up a pretty normal year. At one point in August the Dow (INDEX: ^DJI) was either up or down at least 4% in five out of six trading sessions, but the index looks like it'll finish the year up about 8% (including dividends), which is almost exactly average historically. For me, that's a powerful lesson in ignoring short-term volatility and focusing on longer-term returns.

The bottom line
We'll never be fully prepared for the future's surprises, but we can at least do our homework on the past. Here's hoping this roundtable helped solidify some of the lessons of 2011 for you.

As we look forward to 2012, our chief investment officer has identified one company as the No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.

At the time this article was published This roundtable article was compiled byAnand Chokkavelu, who owns shares of Apple.The Motley Fool owns shares of Apple and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Apple and Amazon.com and creating a bull call spread position in Apple.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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