I won't sugarcoat it. Investors are nuts.

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

If you liked it at $100...
We know the shtick. "If you liked Corning (NYSE:GLW) at $109, you gotta love it at $56." That was New Year's Day 2001. Two years later, you were down another 97% to a buck and change. And Corning wasn't alone.

As you'll see in the table below, it was the same story for Juniper Networks (NASDAQ:JNPR) and CIENA (NASDAQ:CIEN), too. Ouch. Could the exact same thing happen today? Sure. Will it happen today? Who knows?

Either way, we'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 must own stocks. I'm about as likely to switch to bonds and gold 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 must own stocks.

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

Of course, we could sit on our hands for a while instead. But what exactly are we waiting for? So we can risk paying even more next month? That's nutty. Remember, we can't know how today's stock prices will look relative to tomorrow's -- just that the long-term trend for stocks is usually higher.

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? Sure, but it's even scarier for another reason.



Jan. 2001

Subsequent fall to bottom

Juniper Networks












Time Warner (NYSE:TWX)




*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 70% to 96% 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 psychic 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? They say that stock markets climb a "wall of worry." Forget for a moment that nobody knows what that means. It sounds plausible. And somewhere in there is the notion that once you get spooked by the market and run to the sidelines, it's hard to get unspooked.

That's why obsessing over that table I just showed you is so dangerous. Not only would it have prevented 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 murmurs that we're due for another "correction." Fair enough. But this isn't 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 way expensive than they'd ever been before.

Is that the case today? I don't think so. Not even for the strong performers Tom Gardner is sharing with members of his Motley Fool Hidden Gems newsletter service. True, about a dozen of those picks have doubled or more since the team found them. But that's just great 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 did. But occasionally even the best of these Hidden Gems finally pull back a bit and gave us a second chance. So, don't be surprised if we get another chance to exact our revenge.

Living well is the best revenge
That's why I'll continue to buy on weakness. Recently, I doubled up on the SPDR Homebuilders (XHB) ETF for broad exposure to what looks like a short-term blip in an unstoppable long-term demographic trend -- and to exact my revenge on Centex (NYSE:CTX) and Pulte Homes (NYSE:PHM), which I sold too soon, like a dope.

Meanwhile, I'm still waiting for a pullback in First Marblehead, a company that arranges low-cost loans for graduate and undergraduate students. However, I may be waiting in vain -- FMD is one of the stocks I mentioned earlier that have doubled for Hidden Gems members, and it keeps going higher.

No worries. 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 -- but that's just the "wall of worry" talking.

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 also know something better.

Tom Gardner and Bill Mann are out bargain-hunting, too. This month in Hidden Gems, they give you two new top picks, as usual. But they also rank their five favorite small caps for new money right now. It's all spelled out for you in the new issue and on the member website.

In fact, you can check it out, plus every past pick and all back issues, in about five minutes -- at no cost and with no pressure to subscribe. To see how easy it is and accept your free trial, click here.

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

Fool writer Paul Elliott owns shares of the SPDR Homebuilders ETF, but no other stocks mentioned. All picks and results can be viewed immediately with your 30-day free trial. Yahoo! and Time Warner are Motley Fool Stock Advisor recommendations. The Motley Fool is investors writing for investors.