Should You Quit Buying Stocks?

More than 2 million people saw Jon Stewart clobber CNBC's Jim Cramer during a recent episode of The Daily Show.

Stewart the comedian became Stewart the commentator -- and he sounded a lot like former presidential candidate John Edwards talking about "two Americas," one for the rich and one for the poor. Stewart said:

One [market] has been sold to us as long-term. Put your money in 401(k)s. Put your money in pensions and just leave it there. Don't worry about it. It's all doing fine. Then, there's this other market -- this real market that is occurring in the back room, where giant piles of money are going in and out and people are trading them, and it's transactional and it's fast. But it's dangerous, it's ethically dubious, and it hurts that long-term market.

Stewart and his righteous outrage were speaking for a lot of people that night. Not only have most of us lost money in the market recently, but also nearly every day brings new tales of outright deception, monetary malfeasance, and just plain unethical behavior.

It's enough to make you wonder whether you should just get out.

How about an Ethics 101 course?
And Cramer is better than most. At least the guy admits he's bent (but not broken, he says) the rules for personal gain. Many of the Wall Street players at the heart of this mess still want to claim a measure of innocence.

Ethics have never seemed to matter on the Street, and, apparently, they still don't. Witness AIG (NYSE:AIG). Only in the alternative universe that we call high finance could incompetence be rewarded with $450 million in bonuses.

Stupid really is as stupid does
Mind-numbing stupidity really does appear to be the coin of the realm when it comes to banking, brokering, and regulating. Consider the FDIC. Created to protect depositors after earlier meltdowns, we're now learning that the agency failed to collect premiums from JPMorgan Chase (NYSE:JPM) and its peers for a decade.

So Stewart is right to at least question the fairness of the financial system as we know it. But is there really a stock market for those "in the know" and another for the suckers who aren't?

Ignorance is, in fact, bliss
Only the insiders can say for sure, but history paints a reassuring picture for those of us not "in the know" -- at least if you're committed to long-term investing:

Source: Capital IQ, a division of Standard & Poor's.
* Includes only stocks that trade on major U.S. exchanges and began the year worth at least $250 million in market cap.

Notice the pattern. In most years, those who held individual stocks saw an average of 40% of their picks beat the market. In two of the three worst years, six out of 10 were market-beaters.

Sometimes, the gains during down years were huge. Amylin Pharmaceuticals (NASDAQ:AMLN) rose nearly 80% in 2002. Southern Copper (NYSE:PCU) tripled in 2003. And in 2005, Titanium Metals (NYSE:TIE) quintupled. You needn't have been an insider to get those gains. You needed only to be brave enough to buy, and then hold.

There are risks to buying and holding, of course. Take graphics-chip maker NVIDIA (NASDAQ:NVDA). Had you bought at the dawn of 2001 and held till today, you'd have a double. But you'd have tripled your money had you sold after one year.

Either way, though, you'd have won. The market, on the other hand, has lost more than 30% of its value over the past eight years.

Kick the market when it's down
The lesson? The way to beat a broken market -- the one that Stewart so viscerally fears -- is still to bet on the best businesses over the very long term -- businesses that resemble the best stock idea I've ever seen. These are companies that:

• Produce abundant free cash flow.
• Sustain high rates of revenue growth.
• Demonstrate sustainable advantages by way of expanding gross margin.

Apple (NASDAQ:AAPL) is a good example. That's why David Gardner has made the Mac maker one of his signature recommendations for Motley Fool Stock Advisor. Combined, his picks, along with those from his brother and Motley Fool co-founder Tom, are outperforming the market by more than 30 percentage points.

Care to learn more? Click here to join Stock Advisor free for 30 days. You'll get access to all of David's and Tom's picks, special reports, and custom stock research. And as with all of our services, there's never an obligation to subscribe.

Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. He's also a member of the Rule Breakers growth stock picking team. Apple, NVIDIA, and Titanium Metals are Motley Fool Stock Advisor selections. The Motley Fool's disclosure policy won't quit on your portfolio.