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. I'll prove it.

If you liked it at $62 ...
We know the shtick. "If you liked Lucent at $62, you gotta love it at $12." That was New Year's Day 2001. Two years later, you were down another 90% to a pitiful $1.50 per share. But let's not pick on Lucent.

As you'll see in the table below, it was the same story for JDSU (NASDAQ:JDSU) and mighty Cisco Systems (NASDAQ:CSCO), too. Ouch. Could the exact same thing happen to today's highfliers? Sure. Will it happen? 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: 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, stock investors 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 later? That's nutty. Remember, we can't know how today's stock prices will look in hindsight -- 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.



Jan. 2001

Fall to Bottom After





Cisco Systems












*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 67% 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 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 bubbles and 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, about a dozen of those picks doubled since the team found them. But that's strong 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, from time to time, even the best of these Hidden Gems finally pull back a bit and gave us a second chance. I think there's still time to exact our revenge.

Living well is the best revenge
That's why I'll continue to buy on any summer weakness. Last month, I doubled down on the SPDR Homebuilders (XHB) exchange-traded fund (ETF) for exposure to a badly out-of-favor but irresistible long-term demographic trend -- and to exact my revenge on battered Pulte (NYSE:PHM) and D.R. Horton (NYSE:DHI), which I missed on the last cycle up.

Now, it's about time I pulled the trigger on Buffalo Wild Wings (NASDAQ:BWLD), one of the stocks I mentioned earlier that have doubled for Hidden Gems members. I've waited long enough for this fast-growing casual dining chain to pull back -- and it hasn't happened. 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 up. That's why I say we have to own stocks.

Moreover, while I can't predict where the markets are headed near-term, it's certain that the stocks of America's top companies will head higher over the long haul -- no matter what happens to the market. For the life of me, I can't see how we can avoid buying them.

Finally, a word of caution
That table I showed you earlier is real, and a lot of investors got hurt. The lesson, however, isn't that you should avoid stocks. It's that you have to be selective and diversify. When it comes to small caps, there's certainly no shame in buying a low-cost ETF -- I own two myself. But I also know something better.

Tom Gardner and Bill Mann are bargain hunting, too. This month in Hidden Gems, in addition to their two new picks, they each rank their five favorite small-cap stocks for new money right now. It's all spelled out for you in the new issue and online. You can check it out, plus see 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, 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. As of this morning Tom and Bill's Hidden Gems picks are up on average 62.7% vs. 27.3% for the S&P 500. You can see them all immediately with your 30-day free trial. The Motley Fool is investors writing for investors.