Be Brave. Make Money.

The 1987 market crash was more surprising. The dot-com implosion was more severe. But to me, this market is far more frightening. As far as I'm concerned, this is the scariest stock market we've ever seen -- and that likely means it's a golden opportunity to make a lot of money.

Worse than Black Monday
On Oct. 19, 1987, the S&P 500 shed more than 20% of its value. This sharp and sudden drop caught everyone by surprise -- and the experts still aren't sure exactly why it happened.

Just like ripping off a bandage, the pain was intense but short-lived; following a few aftershocks, the market resumed its steady ascent.

Worse than the dot-com crash
The bursting of the Internet bubble was far more prolonged and painful than the 1987 crash, but in this instance, investors had no one but themselves to blame. By paying premium prices for companies without an earnings history (or in many instances, a sensible business plan), investors set the stage for a spectacular correction.

The dot-com crash was brutal, but its wrath was primarily targeted toward tech companies. To wit: Between March 2000 and September 2002, Yahoo! (Nasdaq: YHOO  ) lost 95% of its market value. Meanwhile, shares of UnitedHealth Group (NYSE: UNH  ) tripled.

That's exactly what makes today's market so scary. The problem isn't going away quickly, like the 1987 crash. The impact isn't restricted to a specific sector, as it was from 2000 through 2002. There seems to be no end in sight and no safe place to hide.

And that's exactly why you should be thinking about buying stocks.

No, I'm not taking crazy pills
Let me be perfectly clear: I'm not calling a bottom. In fact, I wouldn't be at all surprised if stocks continue to slide from their current levels. But I believe that shares of quality companies are trading at discounted prices because of the market's pessimistic mood, and people buying today will be very pleased in a few years. That's why I'm putting my available capital into this market with a grin from ear to ear, and I'm suggesting that you do the same.

Thanks to concerns over declining consumer spending, great companies like Cintas are trading cheap today. While the uniform rental king has unquestionably been affected by the economic slowdown, this is a best-in-class business with dedicated management and enduring competitive advantages. Short-term earnings will suffer, but the company's enormous customer base and significant scale advantages all but ensure that Cintas will be a long-haul market-beater from today's price.

However, I don't believe that Cintas represents your best bet for new money today. Instead, I'm putting my money to work in the segment of the market where stocks have become outrageously cheap. I'm buying small-cap stocks.

Smaller stocks, bigger returns
In volatile markets like the one we're seeing today, small-cap stocks are often discounted disproportionately to the rest of the market. The reason is simple: Smaller companies typically have fewer competitive advantages and financial resources to weather a market downturn. When investors panic, they tend to flee to safety -- and in their minds, that means Treasury bills and stodgy large-cap stocks.

As I've written before, small caps were among the hardest hit when the stock market dropped in the summer of 1998 -- but they rebounded in spectacular fashion. In fact, the 10 best-performing stocks since the 1998 market crash were all small caps. Just take a look at how well they've performed compared to some of Wall Street's biggest names.

Large-caps did well ...

Company

Market Cap on Oct. 8, 1998

Stock Performance, Oct. 8, 1998 to Oct. 23, 2008

ExxonMobil (NYSE: XOM  )

$175 billion

96%

McDonald's (NYSE: MCD  )

$42 billion

79%

Procter & Gamble (NYSE: PG  )

$105 billion

54%

Source: Capital IQ.

... but small-caps did even better.

Company

Market Cap on Oct. 8, 1998

Stock Performance, Oct. 8, 1998 to Oct. 23, 2008

CheckPoint Software

$445 million

757%

Fastenal (Nasdaq: FAST  )

$830 million

534%

Quest Diagnostics (NYSE: DGX  )

$441 million

1,033%

Source: Capital IQ.

Those kind of returns over a 10-year period are phenomenal, but they aren't surprising. After all, small-cap stocks have been the best performers over the past decade, as well as the past 80 years.

Take a deep breath and buy
I know the idea of buying stocks -- especially small-cap stocks -- in a volatile market like this is terrifying. But if history is any indication, in 10 years' time, you'll be very glad you pulled the trigger.

Ready to buy? If you're looking for some promising small-cap stock ideas, we've got a slew of them at Motley Fool Hidden Gems. To see detailed recommendations for all our stocks, as well as our best bets for new money now, click here for a free 30-day trial. As always, there is no obligation to subscribe.

This article was originally published April 14, 2008. It has been updated.

Rich Greifner is usually brave, except when spiders are involved. He does not own shares of any company mentioned in this article. The Motley Fool owns shares of UnitedHealth. UnitedHealth is a Motley Fool Stock Advisor and Inside Value recommendation. Quest Diagnostics is an Inside Value pick. The Fool has a disclosure policy.


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  • Report this Comment On December 01, 2008, at 11:32 PM, TicoHombre wrote:

    Proofofincome,

    What an absolute blithering mass of idiocracy.

    Don't waste our time!

    TH

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12/19/2014 4:03 PM
DGX $66.34 Up +0.78 +1.19%
Quest Diagnostics CAPS Rating: ****
FAST $47.31 Up +0.73 +1.57%
Fastenal Company CAPS Rating: ****
MCD $93.22 Down -0.45 -0.48%
McDonald's CAPS Rating: ****
PG $92.05 Up +0.05 +0.05%
Procter & Gamble CAPS Rating: ****
UNH $102.49 Up +0.25 +0.24%
UnitedHealth Group CAPS Rating: ****
XOM $93.64 Up +2.48 +2.72%
ExxonMobil Corp CAPS Rating: ****
YHOO $50.88 Down -0.03 -0.06%
Yahoo CAPS Rating: ***

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