Guess What? Harvard Says You're Dumb

"As stock markets slid in March, Judy Brady lay awake at night thinking about her portfolio. 'My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going,' she said. 'I thought: I can't afford to lose all this.' So the 70-year-old retiree in Schaumburg, Ill., sold most of her stocks."
 -- The Wall Street Journal, May 18, 2009

A sad story, no doubt. Because by the time the WSJ ran this article, the S&P had already reversed its slide. Stocks gained 36% from the market bottom in March through May 2009. It sure looked like Ms. Brady had "sold at the bottom," and missed out on the market's rebound. "Silly, silly her," implied the Journal.

And yet, as you may recall, I took issue with that story last year. I pointed out that while Ms. Brady -- and many investors like her -- missed the absolute bottom of the market, there were still gains to be had, and cheap stocks worth buying. And guess what -- I was right. Investors kept buying, the markets kept rising and ... fast forward 18 months, and here we stand, staring at an S&P 500 index that is up another 30%.

But how does the Journal react to our success? Do they give us a pat on the back, an "attaboy" for keeping the faith and recognizing value where we saw it? Nope. Instead, we're rewarded with a little gem headlined "'Dumb Money' Returns to Stocks," which ran just last weekend.

In it, the Journal laments the fact that "48% of investors surveyed are bullish on stocks" today, and quotes Harvard University lecturer Owen Lamont deriding small investors as the "dumb money" in stock investing -- selling at the bottom, only to flock back at the top.

Gee, thanks, Harvard
According to Harvard, individual investors "make suboptimal investment decisions." So the fact that investors have regained some measure of faith in the stock market (and we've poured about $2 billion in mutual funds over the last couple months), and the fact that we've been rewarded for doing so ... is actually a bad thing. It's reason for "caution," because retail investors like you and I are "a lagging indicator, reacting to past performance rather than predicting future gains."

In other words, we're dumb. Too stupid to be trusted with sharp instruments, much less financial instruments. I disagree.

Listen up, Harvard: We're sharper than you think
Whatever Harvard's opinion of individual investors' role as a contrarian indicator, and whatever the Journal's, I personally still think it's a fine time to invest -- so long as you're buying the right stocks.

You see, if you read past the headlines, Harvard actually makes some good points -- points I agree with. According to the study Mr. Lamont worked on, and the one to which the Journal refers, among the biggest mistakes we make is: "[Individual investors] hurt themselves by overweighting growth stocks. Second ... they pick growth stocks that do especially poorly."

For every Ford (NYSE: F) out there, which sells an essential product into a market that will never stop growing, there's a GM that's just as able to mess up a "sure thing." For every Sirius XM (Nasdaq: SIRI), hawking a product that no one thought they needed until they tried it -- and discovered they cannot live without it -- there's a Pets.com selling snake oil, which everyone can do without.

But here's the thing: Just because the market has run up doesn't mean you need to go running after the most overhyped, overpriced stocks in that market. You don't have to act like a contrarian indicator. So ... running a screen for companies that "cost" less than their growth rate (in techno-speak, stocks that have an price-to-free cash flow ratio that's lower than their five-year forward growth expectation, expressed as a percentage), I've pulled up a handful of potentially "buyable" stocks for your consideration:

Mind you, I'm not advocating running out and buying any of these stocks without doing additional research. While they certainly appear cheap, you need to keep in mind that while a company's price and its free cash flow are established facts, estimating its future growth is a pure guessing game. A little miscalculation here can hurt a lot. (Although, in the spirit of Fool disclosure, I should point out that we like 'em so much that we've already recommended four of the five in various Fool publications -- and I own iRobot myself.)

Foolish takeaway
For all the talk of the market's hitting a "new high," at 1,200 points and change, the S&P 500 is still nearly 30% below its old high, set in October 2007. Twice already, we've seen naysayers declare the market dead, only to see it rise 30% and more. What's to say it won't happen again?

For that matter, even if "the market" fails to rise, there's no law that says you have to take the bad stocks with the good, and buy the whole market. With 10,000 stocks to choose from, I still see an awful lot of bargains out there for the individual investor.

If you'd like more such bargain stock ideas, enter your email in the box below to get "Motley Fool Top Picks & Perspectives 2011," a new free report with stock recommendations and portfolio guidance for the year ahead. We'll also tell you more about Million Dollar Portfolio, our real-money portfolio service that buys the best of our investing ideas, opening for the last time this year. To get started, just enter your email in the box below.