Time to Get Greedy

I won't sugarcoat it. Investors are nuts.

And not just the wise guys on Wall Street or the blowhards on CNBC. I mean you and me. We're all nuts. I'll prove it.

If you liked it at $60 ...
Yeah, yeah. We know the shtick. "If you liked Sirius Satellite Radio (NASDAQ:SIRI) at $60, you gotta love it at $30." That was New Year's 2001. Two years later, you were down another 98% to less than a buck a share. And Sirius was just for starters.

As you'll see in the table below, it was a similar story for investors who bought market darlings Qualcomm (NASDAQ:QCOM) and mighty Intel (NASDAQ:INTC), too. Ouch. Could the exact same thing happen today? Sure. Will it happen today? Who knows?

Either way, you'd be nuts to ignore the harsh lessons we learned from the market crash, right? Not so fast. Here's why I'm about to get greedy, instead.

You probably should own stocks
I have to own stocks. I'm about as likely to switch to bonds and money markets as to take up competitive bridge. Every shard of evidence I've collected over 20 years confirms it. At least for the next 20 years or so.

And here's the catch for folks like you and me. If we want to own stocks, we have to buy stocks. That is, unless you borrowed against your future wages and overstuffed your portfolio at the market bottom in 2003. Otherwise, to be a stock investor, you have to keep buying stocks. It's that simple.

Now, could we sit on our hands for a while instead? Sure, but what exactly are we waiting for? For this summer "sale" to end, so we can pay full retail with confidence in the fall? That's nutty. Remember, we can't know how today's stock prices will look relative to tomorrow's -- just that stocks are cheaper today than when we loved them in May.

How to catch a falling knife
OK, it's time I showed you that table. But before I do, 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.

You read that right. Even after their stomach-turning initial plunges, every one of those former highflyers fell an additional 54% to 94% 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 stocks have pulled back 20% or more. You see where I'm going with this, right?

Not only would that one little table have kept you from picking up some once-in-a-lifetime bargains, but it could also have kept you on the sidelines, watching helplessly as the greatest bull market in history made everybody around you wealthy. And you'd probably still be out of the market now. 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, but it sure isn't March 2000. Remember, every stock in the table we just saw had run up 10-fold or more. We didn't know for certain we were in a bubble then, but we did know that stocks, especially tech stocks, were more ridiculously expensive than they'd ever been before.

Is that the case today? I don't think so. Not even for strong businesses like the small caps Tom Gardner is sharing with his partners in his Motley Fool Hidden Gems investing service. True, a half dozen of those picks doubled since the team found them. But that's impressive performance, not bubblicious -- especially given the relative lack of institutional funds flowing into these stocks.

It is, however, enough to make you feel you've missed the boat. I know I sure did. But over the course of the summer, even the best of these Hidden Gems have finally pulled back a bit and given us a second chance. It's time to exact our revenge.

Living well is the best revenge
That's why I'm taking this summer sell-off as an opportunity to buy. I recently re-upped on Cephalon, a drug developer that's been pummeled by old news and seems awfully reasonable at about 16 times forward earnings. I'm also looking at First Marblehead (NYSE:FMD), a company that does private education lending, and China online travel agent Ctrip.com (NASDAQ:CTRP) -- two picks that are up more than 50% for Hidden Gems subscribers.

In fact, I have my eye on the Hidden Gemsscorecard top to bottom. Can stocks go lower this summer? A lot of folks think so, but a lot of folks always think stocks are going lower. Which is strange, given that the long-term trend has always been higher. That's why I say we have to own stocks.

Moreover, while nobody can predict where the markets are headed, it's certain that the stocks of America's very best companies will always head higher over the long haul -- no matter what happens to the "market." For the life of me, I can't see why we wouldn't want to buy them when they're on sale.

Finally, a word of caution
That table I showed you earlier is real and represents a world of hurt for investors. 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 two small-cap ETFs myself. But I know something better.

Tom Gardner and Bill Mann are bargain hunting, too. This month in Hidden Gems, they rank their five favorite small caps for new money at today's prices. It's all right there for you in the current issue and online. You can check it out, plus every back pick and issue, at no cost and with no obligation to subscribe. To see how, click here.

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

Fool writer Paul Elliott owns Cephalon. Intel is an Inside Value recommendation. Ctrip.com and First Marblehead are Motley Fool Hidden Gems recommendations. All picks and results can be viewed immediately with your30-day free trial. The Motley Fool isinvestors writing for investors.