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 $80 bucks ...
Yeah, yeah. We know the shtick. "If you liked Nortel (NYSE:NT) at $80, you gotta love it at $33." That was New Year's 2001. Two years later, we were down another 99%, to less than $1. And Nortel wasn't the exception.

As you'll see in the table I'm about to show you, a similar fate awaited investors who bought tech darlings Micron Technology (NYSE:MU) and RedHat (NASDAQ:RHAT), too. Ouch. Could the 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 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'm about as likely to switch to bonds and money markets as I am to take up competitive bridge -- at least for the next 20 years or so. Every shard of evidence I've collected confirms I have to own stocks.

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.

So, could we sit on our hands for a while instead? Sure, but what exactly are we waiting for? So we can pay even more in January? That's nutty. Remember, we can't know how today's stock prices will look relative to tomorrow's -- just that stocks are still cheaper today than when we loved them in 2000.

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 high-fliers fell an additional 50% to 91% 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 prophetic glimpse of that table in March 2000 might have spared you some pain in 2001. But what about 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 an obsession with that one little table have kept you from picking up some terrific bargains, it could have kept you on the sidelines, looking on as everybody around you got 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. I'm hearing sporadic murmurs of another crash. But this is not March 2000. Remember, every stock in the table we 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, 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 that Tom Gardner and Bill Mann are sharing with members of their Motley Fool Hidden Gems investing service. True, more than half a dozen of those picks have 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 like you've missed the boat. I know I sure did. But over the course of the summer, even the best of these Hidden Gems finally pulled back a bit and gave us a second chance. There's still time to exact our revenge.

Living well is the best revenge
That's why I'll continue to buy on weakness. Last week, I bought the SPDR Homebuilders (XHB) for quick exposure to Toll Brothers (NYSE:TOL) and DR Horton (NYSE:DHI), plus a handful of others that were recently cut in half. I also re-upped on satellite equipment maker Radyne, a stock that has pulled back but is still up more than 40% for Hidden Gems members.

In fact, I have my eye on the Hidden Gems scorecard top to bottom. But that doesn't mean stocks can't go lower from here. A lot of folks think they will. Then again, 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 it 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 past pick and back issue, in about five minutes -- at no cost and with no pressure 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 Radyne, which is a Motley Fool Hidden Gems recommendation. All picks and results can be viewed immediately with your30-day free trial. The Motley Fool isinvestors writing for investors.