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 ...
Yeah, yeah. We know the shtick. "If you liked 3Com (Nasdaq: COMS) at $100, you gotta love it at $9.03." That was New Year's 2001. Two years later, we were down another 60%, to around $3.

And I don't mean to pick on 3Com (which, to fast-forward, is having a very nice day today). It was the same story for investors who bought 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. 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








Atmel (Nasdaq: ATML)




Xilinx (Nasdaq: XLNX)




*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers 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 the bears are growling. 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 my colleague Bill Mann is sharing with members of his Motley Fool Hidden Gems newsletter. True, more than a dozen of those picks have doubled. But that's just impressive, not bubblicious.

It is, however, enough to make you feel like you've missed out. I know I sure did. But over the past few months, even the best of Bill's small-cap gems finally pulled back.

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 beaten-up blue chip I recently confessed was my top holding. I also finally got some Buffalo Wild Wings (Nasdaq: BWLD), a casual diner with talented management and a strong balance sheet that's up nearly 90% for Hidden Gems members.

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

My buddy Bill Mann and his team are bargain-hunting, too. This month in Hidden Gems, Bill ranks his five favorite small caps for new money right now. It's all right there for you in the current issue and online. You can check those out, plus every past recommendation 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 33.5% vs.10.3% 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 owns shares of Buffalo Wild Wings and is investors writing for investors.