Time to Get Greedy

I won't sugarcoat it. Investors are nuts.

And not just on Wall Street. I mean you and me. We're all nuts, and I'll prove it.

If you liked it at $130 ...
Yeah, yeah. We know the shtick. "If you liked Level 3 Communications  (NASDAQ:LVLT) at $130, you gotta love it at $35." I heard that one on New Year's 2001. Two years later, we were down another 80%, to five bucks and change.

It was the same for investors who followed the hot money into Cypress Semiconductor (NYSE:CY) and RF Micro Devices (NASDAQ:RFMD), plus a few others you'll see in the table below. Could the same thing happen today? Sure. Will it happen today?

Who knows? Either way, given the damage already suffered by investors, you'd be nuts to ignore the lessons we learned from the last market crash, right? Not so fast. Here's why I'm getting greedy instead.

You probably should own stocks
I have to own stocks. I don't care what Ben Stein or anybody else says. It's not different this time. I'm about as likely to switch to CDs and money markets as I am to take up competitive bridge -- at least for the next 20 years or so. I've been over and over it, and I'm convinced this is still the way to go.

And here's the catch for folks like you and me. If we want to own stocks, we have to buy stocks. Now, could we wait out the volatility? I guess. But what exactly are we waiting for? Another wash-out down day? I'm OK with that.

But a more prolonged or robust rally? For someone to blow the all-clear whistle? So we can pay even more, but with confidence? That's plain nutty. We simply can't know how today's stock prices will look relative to tomorrow's -- just that stocks are cheaper today than they were a year, even 18 months ago.

How to catch a falling knife
OK, it's time I showed you that table. But I warn you -- it's scary. Scary enough to prevent you from having gotten burned in 2001? Yes, but it's even scarier for another reason.

*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 80% to 86% between January 2001 and their respective bottoms somewhere in 2002 or early 2003. I told you it was grim.

Now it gets really scary
A glimpse of that table might have stayed your hand and spared you some pain in 2001. But what if you had seen it when the market plunged 39% in 12 days back in October 1987? Or when stocks "cratered" in 1991 ... or the dozens of other times over the years when stocks have pulled back 20% or more?

You see where I'm going with this, right? That one little table could have kept you from picking up some terrific bargains in down markets. Worse, it could also have kept you on the sidelines, though the greatest bull market in history – and the next one.

I've seen it happen with my own eyes. If you ask me, that's worse than trying to catch a thousand falling knives.

So, where are we now?
I honestly don't know. I've enjoyed the recent rally, but I vastly underestimated last year's sell-off. But this sure isn't March 2000, or even January 2001. Remember, every stock in the table you just saw had run up tenfold before heading south. We didn't know for certain we were in a bubble then, but we did know that stocks were way more expensive than they'd ever been before.

Is that the case today?
I don't think so. Not even for the market-beating small-cap value companies my colleagues Seth Jayson and Andy Cross are sharing with members of their Motley Fool Hidden Gems newsletter service right now.

That said, I'll be frank with you. Over the past few months, even the best of these stocks came down a bit, giving us a second chance to buy -- at prices I never thought we'd see again. Famed money manager Marty Whitman calls this the buying opportunity of a lifetime. I think he's right.

That's also why the Motley Fool Hidden Gems team is putting its money where its mouth is. They're building a real-money portfolio, buying their favorite picks from their scorecard. And you can get the names of six stocks they've just bought, plus the one they're going to buy next, right now -- and get in before they invest.

That's also why I say it's time to get greedy
Among the familiar names, Johnson & Johnson (NYSE: JNJ) -- a stock I already own -- is looking darn interesting right now. But I'm really eyeing the small caps. I already took advantage of a pullback to pick up a few shares of Buffalo Wild Wings (NASDAQ:BWLD), a pick that's still up 179% for Hidden Gems members.

Going forward, I have my eye on the Hidden Gems scorecard, top to bottom. But that doesn't mean stocks can't go still lower from here. A lot of folks think they will. Then again, a lot of folks always think stocks are going lower.

Finally, a word of caution
That table I showed you earlier is real. The lesson, however, isn't that you should avoid stocks. It's that you have to be selective and/or diversify. There's certainly no shame in buying a low-cost exchange-traded fund (ETF) -- I own a number of them myself. But what if you're looking to beat the market?

Well, here's something to think about. This month in Hidden Gems, Seth and Andy are offering up their two new top picks, as usual. But they've also ranked their five favorite small-cap value stocks for new money in this market. It's all spelled out for you right in the new issue and on the member website.

You can check it all out, along with every past pick and all back issues right now, in about five minutes. Best of all, the complete service is free for a whole month, and there's no pressure to subscribe. To see how easy it is to accept your free trial, click here.

This article was originally published on July 19, 2006. It has been updated.

Fool writer Paul Elliott owns shares of Buffalo Wild Wings and Johnson & Johnson. Buffalo Wild Wings is a Hidden Gems pick -- all picks and results can be viewed immediately with your 30-day free trial. Johnson & Johnson is an Income Investor recommendation. The Motley Fool owns shares of Buffalo Wild Wings and has a disclosure policy.