As years go, 2011 has been a doozy for investors.

Punch drunk from a tough couple of years, the New Year arrived with high hopes for a strong recovery that would make 2009 and 2010 a bad – but distant – memory.

So near, but yet so far
For the first few months, all went according to plan. By mid-April, sanity seemed to have been restored and life was slowly returning to normal.

A quick look at a 12 month chart of the S&P / ASX 200 confirms that things went off track around the end of April, and though we didn’t know it at the time, that was to be as good as 2011 would get.

Rather than wallow in the opportunities lost and the portfolio values that seem to have gone up in smoke, I want to instead reflect on the underlying lessons we can take from 2011.

When the going gets tough
The old sawhorse suggests that ‘a rising tide lifts all boats’ – i.e. when investors are optimistic, even the worst companies get a share price boost. Unfortunately, 2011 has shown us that the opposite is also true. When pessimism grips the market, very few are spared. You’ll read many commentators who use that herd mentality as a reason for trying to time the market – too get in and out of certain sectors or the market altogether when times are tough.

I have a very different view. Even the bravest among us feels a little poorer when the market has a bad run. That said, these markets remind me of two key components of a successful investing mindset.

Price matters
Firstly, the importance of the price you pay. This was a mistake I made, myself. I bought shares of quality businesses, but I paid too much in prior years and the prices still haven’t recovered. I’m not the worst offender by any stretch, but the lesson is to not be afraid to wait for a better price before buying.

The corollary to that is a mistake Warren Buffett believes has cost Berkshire Hathaway (NYSE: BRK-B) US$8 billion  – missing out on a massive upside by trying to penny-pinch on his purchase price.

Contradictory? Not really – like all guidelines, the value is in the detail. Buffett missed out on his opportunity by trying to save a few cents on his buy price. That’s a long way from the mistake many investors make of buying at price/earnings multiples that are way too high. Most often, that’s because investors expect ‘good time’ profits to go on forever.

If you pay a few cents more than your target price, that difference is hardly going to wreck your portfolio.  If your target price is set way too high in the first place, well that’s a much more dangerous pursuit altogether.

Ride out the bumps
The second lesson from 2011 is the importance of focussing on the long term. If you look back at some of the best-performing companies over the past couple of decades, there are very few (if any) that have escaped bouts of company underperformance, share price underperformance, or both.

Even the best businesses stumble. Sometimes it’s their own doing, other times they get blindsided by events outside their control. Inevitably, the best of the best recover to go on to bigger and better things. They usually have the best people, the best underlying economics and low debt – which is far from coincidental. The ability to overcome adversity bodes well for long term success

Any investor who sold out during those bad times is surely kicking themselves (unless they’ve been able to wipe it from their memories – in which case, I want to know how!), after these companies have recovered the lost ground and much, much more.

Of course if the performance challenges are more endemic and the company isn’t what it once was, you’d be right to sell. If the investment case hasn’t changed, however, you should be closer to buying than selling, even as other investors are bailing out in droves.

Foolish take-away
In investing, as in life, there are good years and bad years. Again, as in life, the ability to stay the course despite some knocks is an attribute common among successful investors. 2011 wasn’t a great year for most investors, but I remain convinced that investing in equities is the best way I know to build a nest egg – and if we can’t finish the year richer than we started it, we can certainly learn the lessons that have come our way.

On behalf of all at The Motley Fool Australia, we hope you have a very Merry Christmas and a prosperous 2012.

Are you looking for more quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool’s Top Stock For 2012.

More reading:

Billabong wipes out

Successful investing: Who cares?

Two small caps pursuing healthy growth

Scott Phillips is The Motley Fool’s feature columnist. Scott owns shares in Berkshire Hathaway. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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