(MONEY Magazine) – My son Steven turned four months old today. One of the things you learn as a new parent is that all cliches are true. The syrupy things people say about their children--the stuff you could barely endure before your own little monster was cooing at you--suddenly evolves from cheesy to profound. One of those nuggets is that kids have to learn from their own mistakes. As much as I want to save Steve from the pain of falling down, having his heart broken and a million other reversals, the only way he'll really learn is to have those life experiences himself.

Investors are the same way. In the carefree days of Nasdaq 5000, the only important lesson seemed to be: Don't wait to invest or you'll miss out on the riches. The events of the past couple of years have taught us otherwise: the tech-stock crash, accounting debacles, indictments, plea bargains and executive suicide. Bankruptcies of blue chips and blue-light specials alike. Hijacked airliners attacking the very heart of our economic system, killing thousands and horrifying millions. Now the lesson seems to be: Don't get hurt.

But I think back to my son. If he falls while running, do I want him never to run again, to be fearful with every step? No. I want him to keep his enthusiasm--just learn when to temper it with a little common sense.

As investors, we face the same balancing act. America's equity markets finally appear to be regrouping after a colossal cycle of run-up and meltdown. The Nasdaq, on which the great majority of public companies are traded, remains more than 60% below the peak it hit just two years ago. On paper, investors are billions of dollars poorer than we thought we were. But have recent challenges made us smarter? Are we better investors, shrewder stewards of our personal finances? Have we learned the right lessons?

In this 27-page "Invest to Win" package, we hope to steer you in the right direction: toward opportunity and away from peril. On page 84 we assess the biggest blue-chip stocks, kings of the bull market that now face operating challenges and valuation questions. We make blunt calls about which ones we think are poised to win--and to lose. Recognizing the risks of concentrating on only one part of the market, we also scout a wide variety of opportunities in other areas, beginning on page 92. And on page 103 we present a quiz to help you determine what kind of investor you are, accompanied by profiles of real-life investors and the lessons they take into battle with them. (Fund investors should be sure to check out "What Every Fund Investor Needs to Know" on page 110, which offers our exclusive rating of nearly 700 portfolios based on the actual wealth they've created for shareholders--a figure that sometimes differs markedly from the officially reported total returns.)

But before we get into the details of what to do now, it might be helpful to step back and remind ourselves what got us into trouble in the past--not just over the past few years, but even during the more placid times of the 1980s and early 1990s. With that in mind, we present the following 10 lessons, about the markets, company executives and, most important, about ourselves.

NO. 1 LOOK PAST THE PRESENT. It's just human nature to get caught up in the mood of the moment. When stocks set record highs every day, it's hard to believe they will ever stop. When they're going nowhere fast, as they have been lately, it's hard to imagine ever seeing another boom. Back in 1991 we were limping out of a recession; we were at war in the Mideast, and multi-billion-dollar annual budget deficits seemed a permanent fact of life. Did anyone know that we were about to enter on the greatest bull market in history? Now we're in another slump. Are we on the threshold of another big bull run or simply headed for years of stagnation? No one knows.

NO. 2 THE CROWD IS AN IDIOT. Over the past decade, we've seen time and again that the crowd is wrong. Investors--individuals and professionals alike--abandoned drug and medical stocks in 1993 fearing that the Clinton health-care plan would wipe out private profits. Anyone with the nerve to buy into the group at the moment of maximum pessimism did just fine: The S&P health-care index rose 385% from July 30, 1993 to April 26, 2002 vs. 140% for the S&P 500 index.

In 1993, emerging markets were the place to be, as fledgling economies took flight around the world. Until they crashed. And we don't need to mention the Internet lunacy....

NO. 3 YOU CAN BE RIGHT AND STILL LOSE MONEY. While following the crowd is wrong, going in the opposite direction can be extremely painful. Ask a value-fund manager. During the five years when growth stocks ruled the market, some of the smartest minds in the business found themselves holding undervalued shares that stayed undervalued. A few, like Oakmark fund manager Robert Sanborn, who clung to a big stake in Philip Morris, lost their jobs--so they weren't around to say "I told you so" when value stocks trounced growth shares in 2000 and 2001. And anyone who shorted Amazon stock in early 1999 was dead right--but probably also dead broke before the stock finally fell apart in 2000. To take a sharply contrarian stand, you must have plenty of nerve, plenty of patience--and deep pockets.

NO. 4 YOU CAN MAKE MONEY AND STILL BE WRONG. Maybe you heard two guys at the gym talking about the killing they were making in a stock called JDS Uniphase. You didn't know what the company did, but you decided to get in on the game. Then you pulled out at the top--not because you thought the stock was overvalued but because you needed the money for a new car. Congratulations. Enjoy your winnings. But don't confuse good luck with great stock-picking ability. You were gambling, not investing.

NO. 5 ANALYSTS ARE SALESMEN, NOT SEERS. Of course analysts get it wrong most of the time. Because they're corrupt? Rarely. Because they're stupid? Seldom. Because they're salesmen? Always.

Outrage at analysts' lack of objectivity is akin to saying the lady at the makeup counter at Bloomingdale's isn't impartial when she tells your mom a particular shade of lipstick is pretty. Of course she isn't. She works for Bloomie's and is probably paid a commission based on sales. Does it make her a liar to recommend lipstick? Is she corrupt for not disclosing her fee structure? No. You just have to remember that she's there to sell lipstick, not to make your mom beautiful.

NO. 6 CASH COUNTS. One of the least-discussed investing changes of the past 10 years is the near disappearance of dividends. From March 1992 to December 2001 the average quarterly dividend yield for the S&P 500 fell from $3.05 to $1.37. Even hugely profitable companies like Microsoft, with more cash than they knew what to do with, didn't commit to substantial dividend payments. But the dividend has traditionally provided a way for investors to monitor the company's performance in a very real, direct way. A dividend check that doesn't bounce shows a certain stability. When companies don't pay dividends, their financial health is less transparent.

NO. 7 GREAT COMPANIES CAN DIE (AND SICK ONES CAN RECOVER). We can't consistently predict which franchises really have staying power. Great American names like Kodak, Xerox, Woolworth and K Mart have either vanished or fallen on desperate times in recent years. Others, such as Motorola, AT&T and Lucent, have faltered badly but seem to have sidestepped the abyss.

Still others, like Dell and Coca-Cola, continue to dominate their industries but have exhibited uncharacteristic weakness and proved that leaders must constantly innovate and refine. Meanwhile, giants that were written off for dead have shown inspiring reserves of strength and a surprising capacity for reinvention. Not too many investors in the early '90s would have predicted that General Motors would be beating estimates in 2002. Buy and hold is a wonderful strategy, but you can't follow it blindly.

NO. 8 INVESTING IS HARD WORK. As investors, we are not always fond of undiluted truth. Sure, if a great tip comes our way we'll look into it, but the dull, painstaking work of looking for clues in annual reports doesn't seem to interest many investors. In hindsight, the sheer complexity of the deals that Enron struck with its subsidiaries--and with many of its customers--was a clear warning of trouble ahead. But it was easier for most people, including professionals who are paid to read footnotes, to take the company on faith.

NO. 9 INVESTING IS ALSO A GAME. Instead of shunning companies that practice fancy financial engineering, we have tended to admire their hustle. Even the ones that charter themselves in countries with disclosure standards based on the mobster's code of omerta (for example, Tyco, "based" in Bermuda) get kudos for their creativity. There's nothing wrong with that as long as such aggressive tactics are used to enhance actual business operations, not create the illusion of profits. Investing can be a game if that's the way you want to play it; let's just hope you can laugh it off if you lose.

NO. 10 THE FUNDAMENTAL THINGS APPLY. We'll say it again: Investing is hard work. It's treacherous and full of unknowns and often defies common sense. Does that mean you shouldn't do it? Not at all. The stock market still offers the best chance for building the wealth that most of us will have. But you have to invest with an eye to counteracting all the pitfalls in human nature and the markets. That's why boring concepts like diversification, dollar-cost averaging and index investing are so important--not because they are justified by some underlying mathematical thesis but because they help prevent us from making big mistakes. Of course you are not going to avoid all mistakes; you just want to limit the damage of the ones you will inevitably make.

Like a lot of kids, I used to spend a hefty chunk of my allowance "investing" in the Hershey company. I couldn't wait till I was older and presumably could buy unlimited candy bars. Fortunately, the way it usually works out is that by the time a kid can afford a couple dozen Kit Kats, he has the sense not to. The lessons we investors have learned over these extraordinary past 10 years haven't changed us as people. We'll still fall for the next scam, still believe that "it's different this time" and still believe our eyes more than our stomachs.

Does that mean we're suckers? Not at all. Just the opposite, in fact. American investors are the most generous funders of new ideas and nascent companies. But short-term losses are the price we pay for long-term strength. For as painful as many of the lessons of the past 10 years have been, our system has worked pretty much as it was supposed to. Our tendency toward wild enthusiasm occasionally allows us to suspend disbelief more than we should.

That same enthusiasm led us to fund a couple of kids with an operating system; it allows a baseball fan in Omaha to cool-handedly build value for decades; it breeds the wonderful brilliance of eBay. The price we pay for our big-swing optimism comes in the form of spectacular strikeouts. We see an Enron leap from nowhere to No. 7 on the Fortune 500, and we shrug and say, "Those guys must be smart." We get burned from time to time. But in return we create a stunning number of special companies and real value. That's something to be proud of, even if it sometimes hurts a little. After all, the lessons we remember best are the ones we learn the hard way.