Wise guy Lesson No. 4: Read, read and then read some more

Most investing greats are voracious readers. Ernest Monrad, manager of the Northeast Investors Fund (NTHEX) is no exception. Monrad's bond fund has beaten competitors by two percentage points a year, annualized, over the past 10 years, according to Morningstar. He attributes his success in part to avid reading.

Monrad, who is 82, reads everything from seven newspapers a day and Barron's to women's fashion magazines to keep up with trends. He mostly skips Wall Street analyst reports, though, because of the potential for bias. Stock analysts work for banks whose investment divisions often solicit business from the companies they cover.

Extensive reading helps you gain the confidence to avoid joining the crowds, a key to success in the market, he says.

In the contrarian spirit, Monrad likes Citigroup and Bank of America (BAC), which many investors still avoid because of their role in the credit meltdown. He thinks Citigroup will eventually earn $4-$5 per share, compared to the $2.40 it earned over the past 12 months. And Bank of America has the potential to earn $3-$4 per share compared to 25 cents a share in the past year. If he's right, both stocks should go much higher from current prices.

Wise guy Lesson No.5: Don't assume you're the only one who noticed a hot trend

"The number one lesson for a newbie is: Do not assume that what you know is not in the stock price," says Samuel Stewart Jr., who at 70 still manages the Wasatch World Innovators Fund (WAGTX). The fund has outperformed competitors by an annualized 8.6 percentage points over the past five years, according to Morningstar.

Besides spotting a hot trend, you also have to know when the market is getting it wrong by not yet pricing it in to a stock, says Stewart, who has been investing since the mid-1950s. This requires a lot of detective work.

What are most investors missing right now? That large-cap tech companies like IBM, EMC Corp. (EMC) and Google (GOOG) still have great growth prospects. You wouldn't think so, given the relatively low valuations on their stocks. "Today, what is amazingly cheap is big cap tech," says Stewart. (See my column on this theme, "8 dirt-cheap tech stocks.")

IBM and EMC will continue to benefit from the need of companies to analyze and store lots of data. As for Google, only a fraction of advertising has shifted online, and the search giant will benefit as more moves over.

Wise guy Lesson No. 6: Wall Street is full of bull

Wall Street supposedly cleaned up after all the scandals linked to its role as paid cheerleader during the tech bubble. "But there's still a lot of hype," cautions Don Hodges, who started his career in 1960 with Merrill Lynch before launching his own investment company, Hodges Capital Management, in 1989.

He's skeptical of the hype surrounding "cloud computing" companies -- which offer software and storage services from offsite servers -- like Salesforce.com (CRM). "I ignore it because I have never done well playing the latest fad on Wall Street," he says.

But it's not just Wall Street. Negative stories are regularly planted in the press by people betting against companies. The key takeaway: "You have to do your own research and thinking," he says.

A year ago, for example, he was buying airlines like Delta Air Lines (DAL) and United ContinentalHoldings (UAL), often overlooked by investors since airlines regularly lose money. But he liked positive trends in the sector like shrinking capacity, and the practice of charging extra for additional luggage or seat reservations. Both posted huge gains over the past year -- UAL is up more than 50%, DAL more than 70% -- and he thinks those move will continue.

As for the overall market, he doesn't think it's a mistake to buy, as the Dow hits new highs. Lots of money flowed out of stock mutual funds and into bond funds in the past several years. It will flow back as interest rates rise, which he foresees, which typically hurts bond prices.

Wise guy Lesson No. 7: Dividends pay

New investors, especially young ones, often ignore dividends in the search for hot growth stocks, which don't offer many payouts.

This is a big mistake. First, strong companies typically keep paying dividends even during market declines. So you keep making money. Dividends can also signal a company's stock will outperform, especially if the company has been raising dividends over a long period, says Thomas Cameron, 85.

Until late last year, Cameron was a portfolio manager at the Goldman Sachs Rising Dividend Growth Fund (GSRAX), which has bested competitors by three percentage points a year, annualized, over the past five years, says Morningstar. He still consults the fund.

Cameron likes companies with low debt that have been raising dividends for at least 10 years, by at least 10% a year, on average. He says he can't recommend stocks to us, but two big fund holdings which have been raising dividends a lot, for a long time, are IBM and McDonald's (MCD).

Wise guy Lesson No. 8: Be careful! The stock market is risky

John Bogle, the 83-year-old founder of Vanguard, knows about the damage the stock market can do. He was born into a wealthy family in 1929. But all his family's wealth was lost by money managers in the stock market carnage of the Great Depression and the hard years that followed.

Bogle tells me it was that best thing that ever happened to him, since it taught him a key lesson. "Ultimately, we all have to take responsibility for ourselves in the investment world," he says.

The experience also colored a key investing takeaway: You have to be very careful in the stock market. Bogle, for example, advises against using borrowed money, or margin, to invest. He also says you should avoid owning individual stocks (something other masters might disagree with, to be sure).

But Bogle says it's better to stay widely diversified with funds -- and use broad index funds, which happen to be a mainstay at Vanguard, rather than those that rely on stock-picking managers. Why? Mainly because it's tough to predict when an individual fund manager will ever outperform, if at all.

Click here to become a fan of MSN Money on Facebook

Next, be prepared for pullbacks, so you don't get shaken out. Too many investors sell out on drops and miss the upswings that inevitably follow, a losing proposition long term.

So when pullbacks happen, don't peek at your portfolio, because that will make you emotional, a big problem in investing. "Our emotions lead us to do exactly the opposite of what we should be doing," he says.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.