Believe it or not, when it comes to investing, I’m not a big reader of news and opinion pieces–I prefer to listen to the market itself.  I usually check the headlines but that’s about it.  (Company-specific news is different; I do check the news on all my stocks each day, just to know what’s going on.)

But I couldn’t help noticing when, on a major news Web site the other day, I saw the headline “Once-trendy crocs could be on last legs,” with a subtitle that read “100 million foam clogs were sold in 7 years, but the firm is now in trouble.”  It made me a little sad … but also reminded me of a couple of the most important lessons for investors.

Crocs (CROX), the company, always seemed to be the butt of many jokes.  After all, the company simply made “plastic shoes,” and their traditional clogs were generally very ugly–bright yellow, pink or orange, among other colors.  By 2006, knockoff shoes were already hitting the market.  I honestly don’t know anyone that really loved Crocs; at best, most people thought they were cute for little kids.

Amid this sentiment, we recommended the stock in October 2006 at a price of 16.

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Why?  Well, here’s where the first lesson comes in:  Know what characteristics really count when picking a stock, and which ones don’t.  In terms of what counts, you have sales and earnings growth (both were growing at triple digit rates for CROX), institutional sponsorship (Fidelity had recently bought a chunk and the stock had built a great launching pad), big margins (18.3% in the second quarter of 2006), a high return on equity (57% in 2007) and a huge mass market–there were potentially tens of millions of customers around the world.

Criteria that DON’T matter include what everyone thinks of the company.  In fact, there’s usually an inverse correlation with young growth stocks’ performance, and common perception among investors–the more it’s hated, the better the chance it has to become a big winner as those early doubters eventually change their minds.

And many did just that, as CROX soared from 16 to as high as 75 within the next year.  It was a good bull market, but this one was one of the best glamour stocks out there, rewarding early investors in a big way.  We sold a third of our shares that June around 45, but held the rest until we saw clear signs of a top.  That sign came on November 1, right after the company reported earnings.

On its earnings news–which, by the way, was terrific, with sales and earnings up 130% and 144%, respectively, well ahead of estimates–the stock plummeted, falling 36%.  In one day!  After a heady advance, that was a clear signal the run was over.  We sold all our shares the next day.

Of course, with CROX down that much in such a short period of time, and on “good” news, most investors had trouble selling their shares.  And that brings up another lesson–every stock, no matter how good the story, is going to top out.  Every single one!  When these leaders top out, on average, they fall 70% from their peak before bottoming.  That is a historical fact.  As it turns out, CROX went straight down after gapping lower, eventually falling to 80 cents a share!

All of this leads to last week’s article, which stated that Crocs lost a whopping $185 million last year (I think that included some charges), laid off 2,000 workers and had to scramble to find ways to pay off its debt.  Even now, Crocs’ future is in doubt; sales were down 32% last quarter, earnings were a negative 27 cents a share, and the stock, now just above 3, is still down 95% from its all-time high.

Now, I’d be lying if I told you I predicted CROX would fall so far, so fast.  What happened to the company, however, wasn’t unforeseen–many times consumer product companies that experience explosive growth end up expanding way too fast.  And when things hit the fan, it turns out the company has too much inventory, too many employees and too much cost everywhere.

However, the trick is not to jump the gun.  In the case of Crocs, many of the early bears of the stock were eventually proved right … but in reality, where did that get them?  The stock quintupled during its bull run before it collapsed.  And that leads to the most important lesson of all–have a sound system of rules and tools to guide you in the marketplace.  Without them, not only might you miss an opportunity to own a stock like Crocs on the way up, you might get in way too late and hold it on the way down.

As for CROX today … forget about it.  The stock might rally if the market does, but its glory days are long gone.