The Dow Jones Industrial Average's recent single-day 400-point drop may be weeks behind and thoughts may be turning toward an early interest rate cut. But I promise another huge decline is never too far off. It's during these cautious but optimistic times when investors should really mentally prepare themselves for another blood-letting.

Baron Rothschild, the quintessential banking opportunist, is said to have advised that the best time to buy is when there is "blood in the streets." I agree. An investor who embraces this axiom casts aside the bears and turns bullish in times of maximum pessimism.

The bloodiest days
Imagine picking up a company such as Yahoo! (NASDAQ:YHOO), which was beaten down from all-time highs of $108 to about $4.50 at its lowest during the broad sell-off of technology stocks in 2000 and 2001. Yahoo! today sells for approximately $30 per stub. That's a greater than 550% return. And sure, telling you to buy a fairly risky Internet company like Yahoo! in those days is Grade A 20/20 hindsight. But consider picking up the more stodgy Walt Disney (NYSE:DIS) during that same period. Your returns would still be a robust 160%.

The point is, you can easily profit from a ghastly investing environment. When everyone else is selling, it may just be the best time for you to step in and pick up a great company for cheap.

Sometimes the blood is your own
But Mark Morbius reported in his book Passport to Profits that there is a second part to Rothschild's quote -- one that is perhaps even more impressive and intellectually inspiring. Buy when there's blood in the streets, "even if the blood is your own."

That means being confident enough in your analysis to buy stocks you already own even when the market is telling you your analysis is wrong. And it's hard to do. There have been plenty of times when I have sworn off good companies when chips were down. I advised family members to flee from Amgen (NASDAQ:AMGN) when it got battered in early 2002, only to see it nearly double by the end of 2006. Now Amgen is being battered again.

In the past year alone, my personal holdings of miner Coeur d'Alene (NYSE:CDE) have seen precipitous falls. I've lost about 34% on that stock. There's blood in the streets of the silver industry and much of it, without a doubt, is mine.

Take advantage of a great opportunity
But Coeur d'Alene is still a strong operator with a bright future, as was Amgen during its 2002 sell-off. And today, even though I've gotten hammered on the stock, I'm just as convinced of Coeur d'Alene's prospects as I was when I purchased it months ago because the fundamentals haven't changed.

Human instinct persuades us against staying aboard a sinking ship. It's an innate survival tactic that affects the way in which we invest. In many cases, this instinct alerts us to situations that would otherwise doom our portfolio. When I see accounting malfeasance or strong insider selling going on this instinct kicks in and I get scared. But when I see a terrorized market that's unjustifiably killing great companies including my own, I get excited.

Seeing red on your portfolio is nothing to be afraid of. Admittedly, too much red is just flat-out unacceptable, but sometimes it's opportunity staring you in the face.

Warning and opportunity
While Rothschild's quote is a bit visceral, it's right on the money. At our own Motley Fool Hidden Gems service, which looks for stocks that fly too low for most investors' radar, we have some amazing companies that have seen some "bloody days" of late. For instance, specialty bed manufactuer Select Comfort (NASDAQ:SCSS) is some 30% off its highs. Yet it's a solid company with growth prospects, good management, and a superior product. The recent fall just means its cheaper. The same can be said for another Hidden Gems recommendation Flamel Technologies (NASDAQ:FLML) -- which has shed 20% in the past two months.

So when it comes to your own portfolio, I advise you to think twice before selling that dog that's lost money. If your original analysis holds, it may actually be time to hold steady -- or buy more. And if you're looking for some fantastic stocks to buy, many of which are off recent hights, I encourage you to look at our Hidden Gems small-cap investing service. A risk free 30-day trial is yours to enjoy.

Fool analyst Nick Kapur owns shares of Coeur d'Alene. Yahoo! and Disney are Motley Fool Stock Advisor recommendations. Select Comfort and Flamel Technologies are Hidden Gems picks. The Fool has a disclosure policy.