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 $130 ...
Yeah, yeah. We know the shtick. "If you liked Level 3 Communications  (Nasdaq: LVLT) at $130, you gotta love it at $35." We heard that on New Year's 2001. Two years later, we were down another 80%, to five bucks and change.

It was a similar story for investors who bought tech darlings Cypress Semiconductor (NYSE: CY) and RF Micro Devices (Nasdaq: RFMD), plus a few others you'll see in the table below. Could the same thing happen today? Sure. Will it happen today? Who knows?

Either way, you'd be nuts to ignore the 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. I've been over and over it, and I'm convinced this is the way to go.

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 maxed out your credit 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 wait out the market turmoil? I guess. But what exactly are we waiting for? Another down day? I'm OK with that. A surprise rally, so we can pay even more with confidence? That's nutty. We simply can't know how today's stock prices will look relative to tomorrow's -- just that stocks are cheaper today than when we all loved them last year.

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

Subsequent Fall to Bottom

Cypress Semiconductor




RF Micro Devices




Citrix Systems (Nasdaq: CTXS)




Conexant Systems (Nasdaq: CNXT)




*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 80% to 95% 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 over the years when 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, but it could also have kept you on the sidelines, watching helplessly as the greatest bull market in history made everybody around you wealthy.

I've seen it happen with my own eyes. Even worse, 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 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 the strong performers Tom Gardner is digging up for his Motley Fool Hidden Gems newsletter subscribers. True, nearly a dozen have doubled since the team found them. But that's just strong 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. Or at least it was. But we just caught a break. I know that sounds crazy if you own small caps, but hear me out. You see, in this brutal market, even the best Hidden Gems have pulled back a bit and given us a second chance. Now's the time to take it.

Living well is the best revenge
That's why I'll continue to buy on any weakness. I've always wanted to own Apple, for example, and it's looking tasty. I already took advantage of a pullback to pick up a few shares of Buffalo Wild Wings (Nasdaq: BWLD), a pick that's still up 79% for Hidden Gems members after getting dropped by recent volatility.

In fact, I have my eye on the Hidden Gems scorecard from top to bottom. But that doesn't mean we don't go lower from here. A lot of folks think we 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.

And 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 is bargain hunting, too. This month in Hidden Gems, he ranks his five favorite small caps for new money at today's prices. You can check it all out online, including every back pick and issue, 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 shares of Buffalo Wild Wings. Buffalo Wild Wings is a Hidden Gems pick -- all picks and results can be viewed immediately with your 30-day free trial. The Motley Fool owns shares of Buffalo Wild Wings and has a disclosure policy.