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 80 bucks ...
Yeah, yeah. We know the shtick. "If you liked Nortel (NYSE:NT) at $800, you gotta love it at $330" (adjusting for the reverse split). That was New Year's 2001. Two years later, we were down another 95%, to less than a 10 bucks. And I don't mean to pick on Nortel.

It was the same story for investors who bought tech darlings Micron Technology (NYSE:MU) and Red Hat (NYSE:RHT), too. 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. If we want to own stocks, we have to buy stocks. That is, unless you borrowed against your future wages and stuffed 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 -- the big crash everybody's predicting? To pay even more next year? That's nutty. Remember, we can't know how stocks look today look relative to tomorrow. It's just that ... well, that's the point.

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

Fall to Bottom After

Micron Technology
















*Prices are split-adjusted.

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 glimpse of that table might have spared you some pain in 2001. But what if you'd 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 terrific bargains, it could have kept you on the sidelines, watching 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. It's been rocky, and I vaguely remember the bears declaring victory a few weeks back. But this is not March 2000. Remember, every stock in the table we just saw had run up tenfold. We didn't know we were in a bubble then, but we did know that stocks, especially tech, were more 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 is sharing with members of his Motley Fool Hidden Gems newsletter. True, two dozen of those picks have doubled. 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 summer, even the best of these Hidden Gems finally pulled back a bit and gave us a second chance. It could happen again.

Here's how we'll do it 
I'll continue to buy on any weakness. A while back, I re-upped on drug developer Cephalon (NASDAQ:CEPH) on a pullback. Same deal with Bank of America, a relative laggard I recently confessed was my top holding. I also finally got in on Buffalo Wild Wings (NASDAQ:BWLD), a casual diner that's up 195% 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 always head higher over the long haul -- no matter what happens to the "market."

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 is bargain hunting, too. This month in Hidden Gems, he ranks his 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 those out, plus every past pick and back issue, in about two 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 promises to keep you posted on Hidden Gems progress. As of this morning, the picks are up on average 61% vs. 25% for the S&P 500. Paul owns shares of Cephalon, Bank of America, and Buffalo Wild Wings. Bank of America is a Motley Fool Income Investor pick. Buffalo Wild Wings is a Hidden Gems recommendation. All picks and results can be viewed immediately with your 30-day free trial. The Motley Fool is investors writing for investors.