"Everybody wants to find something in the past that looked like this," investment guru Ronald Muhlenkamp says. "I don't see anything. I can only monitor the present."

Warren Buffett, often the contrarian, recognized early that the recession "will be deeper and longer than what many think."

Uh-oh. Now what?

The "new normal"
Management at Pacific Investment Management, or PIMCO, has used the phrase "the new normal" in referring to current economic conditions. They point out that U.S. Treasury bonds have outperformed U.S. stocks over the last 10- and 20-year periods. According to PIMCO, "it's time to recognize that things have changed and they will continue to change for the next -- yes, the next 10 years and maybe even the next 20."

True, as executives of a bond outfit, PIMCO has reason to paint a rosy picture for bonds and a bleak one for stocks, but still, they have a point. With a $2 trillion deficit sitting on the Fed's balance sheet, unemployment at 10%, and a possible commercial real estate bust looming, you may well be questioning what the stock market is so excited about.

Tough words for tough times
The manager of the world's largest bond fund, William Gross, recently told his clients, "If you are a child of the bull market, it's time to grow up and become a chastened adult."

Seems like a harsh comment -- but it probably makes sense to the thousands of people who got burned in the market this past year. Consider investors who were within just five years of retiring and had all of their nest egg in mutual or index funds. Take a look at the results from two prestigious funds set up for near-term retirees:


% Held in Equities

3-Year Annualized Return

Top Holdings

Vanguard Target Retirement 2015 Fund



Procter & Gamble (NYSE: PG), Verizon (NYSE: VZ)

Fidelity Freedom 2015



Visa (NYSE: V), Chesapeake Energy (NYSE: CHK), IBM (NYSE: IBM)

Although these (hypothetical) investors were due to retire within five or six years, more than 50% of their portfolios were parked in stocks. The funds themselves were adequately allocated, and despite having a slightly negative return, they performed quite well given such a challenging three-year time period. The problem was that some investors put all their money in these funds and expected to earn the 8%-10% on their equities that stocks have historically returned.

Or consider people who had substantial holdings in financials like American Express (NYSE: AXP) or Wells Fargo (NYSE: WFC) and sold shares at the bottom of the market in order to avoid further losses. Those people missed out on the March rally that would have netted them some 200%-plus gains.

If you abandoned your long-term investing strategy and sold too quickly, or if you were too overweighted in stocks in the first place, surely you're having a tough time getting through the bear market. Either way, the best we can do now is learn from our past blunders and move on to 2010.

The bottom line
I want to be careful here. By no means should you avoid stocks. By no means should you be overweighted in bonds. To the contrary: I firmly believe the stock market is the only place to achieve outstanding returns. Over the past 10 years, companies like Apple and Southern Copper have delivered returns of more than 500% -- obviously no bond fund can claim such gains.

The point is that we can't expect "normal" returns by investing solely in index or mutual funds -- we've got to be ready to do the work ourselves. This means doing the hard work and research in order to find companies like Apple that will ultimately bring you those outstanding returns.

My new philosophy for 2010 still incorporates some index funds, but now my portfolio contains many more carefully chosen individual stocks. I try to find companies that fit certain criteria. I look for businesses that (1) have a competitive advantage in their industry, (2) have limited or no debt, (3) have tenured and innovative management, and (4) are trading well below their intrinsic value.

David and Tom Gardner, co-founders of Motley Fool Stock Advisor, use the same criteria when evaluating prospective investments. They understand that holding particular stocks is the most lucrative investment you can make, and that's why they've been champion supporters of personal stock picking for the past 15 years. It's no coincidence that former SEC Chairman Arthur Levitt said "The Motley Fool comes as close to being an effective investor advocate as any organization in America."

David and Tom have experienced their fare share of adversity in the stock market, but even in this difficult environment, their average Stock Advisor pick is beating the market by more than 36 percentage points. Considering the last few years, that's a pretty amazing track record.

Stocks will always be volatile, but a few great investments right now can make all the difference. If you're interested in seeing David and Tom's recommendations for stocks to buy today, click here for a free 30-day trial. There's no obligation to subscribe.

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This article originally ran Oct. 30, 2009. It has been updated.

Fool editor Jordan DiPietro doesn't own any shares of the stocks above. Apple is a Motley Fool Stock Advisor selection. American Express and Chesapeake Energy are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of Procter & Gamble and Chesapeake Energy. The Fool's disclosure policy is ready to dominate 2010.