"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher

Despite the recent gains in the market, current economic data suggests we shouldn't expect a full recovery anytime too soon. So it may be fair to ask ourselves: How can we avoid the mistakes that got us here, and how can we find the top stocks to buy today?

Consider this
The mistakes that led to this downturn are reminiscent of the speculative frenzy known as the Dutch Tulip Craze. In 1636, Dutch citizens found themselves caught up in a tulip rampage, fueling skyrocketing orders and prices that grew by as much as 100% per week.

Eventually, one tulip bulb was selling for the equivalent of thousands of modern-day dollars! The market became overbought, and the frenzy bottomed. By 1637, the price of tulips was less than 1% of what it had been before the crash. Value was an afterthought to the tulip "day traders" who sought to profit from irrationally soaring prices.

Quickly fast-forward to the dot-com bust. The growth of Internet companies and an overinvestment in information technology caused the Nasdaq to rise more than 600% from 1994 to early 2000. If you were alive and breathing during the last 10 years, surely you remember what happened next:

  • In 18 short months, approximately $5 trillion was wiped out from the value of technology stocks.
  • Silicon Valley trendsetters such as 3Com (NASDAQ:COMS) and Intel (NASDAQ:INTC) experienced price depreciations of more than 70%.

As with the tulips, it seemed as though everyone was confident in the price of the next "big" stock. The classic example of the overhyped company of the time was Pets.com. After trading for more than $14 per share, it liquidated in less than 270 days at $0.22 per share. Everyone supposedly knew the right price -- but what was the value?

OK, let's talk 2008
Call last year what you want. The housing horror. The derivative debacle. The commodity crisis. The securitization scare. There are too many explanations for the collapse to isolate only one aspect.

For the sake of argument, I'll arbitrarily choose crude oil to illustrate my point. The Commodity Futures Trading Commission recently announced that it will release a report suggesting that speculators played a role in driving last year's wild swings in oil prices, which spiked at $145 a barrel for crude in July before collapsing to $33 a barrel by December, representing a 77% decline in value over a six-month period.

Pride International (NYSE:PDE) and Atwood Oceanics (NYSE:ATW), two of the larger offshore contract drilling companies, lost more than 70% of their value between 2008 and early 2009 ... and though they reaped substantial gains over the last year, they’re still well below their 2008 highs. I don't mean to sound repetitive here, but from these numbers, it appears that many investors didn't evaluate these companies' competitive positions but were instead making bets on oil prices.

What, if anything, have we learned?
We can be certain that there will always be ups and downs, booms and busts, good years and bad. So what can we do? One philosophy is to invest in companies with great competitive advantages, clean balance sheets, and a history of success in their given industries.

For example, Baidu (NASDAQ:BIDU), the Chinese Internet search provider, has emerged as the clear leader in search in the world’s largest market. With more than 300 million users and about 60% of market share, in addition to recent announcements that Google may exit the country, Baidu is in a great position to dominate. And taking a look at its balance sheet only improves the outlook --  the company boasts zero debt, three-year revenue growth above 80%, and a return on equity that is consistently in the double digits.  Baidu certainly seems like a good investment. But at more than 45 times future earnings, does it actually provide you with much value today?

Similarly, you might be excited by the many prospects for Intuitive Surgical (NASDAQ:ISRG). Having established itself as a pioneer in providing da Vinci surgical systems for a variety of medical procedures, Intuitive is in a great place to continue as a market leader. Accordingly, many investors have jumped on the bandwagon -- and the stock has reaped the benefits, more than tripling over the past year.

But it's trading at more than 40 times its future earnings and more than 8 times its book value. Does that provide value to someone buying shares today?

It's hard to know the answers. That's why we focus not only on exciting companies, but on ones that are exuding value as well.

Here's a place to start
In both bear and bull markets, value investing has provided people with a logical and methodical approach to investing. The general ideas: Don't speculate on questionable growth potential or companies with debatable revenue streams. Look at companies that may be trading well below their intrinsic value for unfounded reasons, seem cheap compared with their industry, and have strong records of returning capital to their shareholders.

Here are just a few companies that may fit the bill right now:


% Below 12-Month High

Price-to-Earnings Ratio

Return on Equity

Cryolife (NYSE:CRY)




Jack in the Box




Life Partners Holding




Data from Capital IQ as of Jan. 25, 2010.

Granted, in some cases these companies' P/Es are artificially low based on last year's higher earnings. But even if earnings decline, they're still pretty cheap.

More ideas
Our Motley Fool Inside Value team seeks out companies that not only have great competitive advantage and growth opportunities (Baidu and Intuitive Surgical, for example), but that also trade at bargain prices. If you're looking for more cheap stock ideas, you can click here for a free stock report.

This article was originally published Aug. 7, 2009. It has been updated.

Jordan DiPietro doesn't own any of the shares mentioned above. Intel is a Motley Fool Inside Value choice. Baidu, Google, and Intuitive Surgical are Motley Fool Rule Breakers recommendations. Atwood Oceanics is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a buy calls position on Intel. Motley Fool Options has recommended writing covered calls on Jack in the Box. The Fool's disclosure policy recently redeemed a coupon and received one free burrito. Now that's value.