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 $81 ...
We know the shtick. "If you liked Lucent at $81, you gotta love it at $50." I heard that New Year's Day 2001. Two years later, we were down another 90%. But let's not pick on Lucent.

It was much the same story for JDS Uniphase (Nasdaq: JDSU) and mighty Cisco Systems, too. Ouch. Could the exact same thing happen to today's highfliers? Sure. Will it happen? 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 have to own stocks. I'm as likely to hold bonds and money markets as I am to take up competitive bridge -- at least for the next 20 years or so. To get where I want to go, I need capital gains.

And here's the catch: If we want to own stocks, we have to buy stocks. That is, unless you borrowed a ton of cash and gorged at the market bottom in 2003. Otherwise, stock investors like us have to keep buying. It's that simple.

Of course, we could sit on our hands for a while instead. But what exactly are we waiting for? The next market crash? So we can pay more later? That's nutty. The fact is, we simply can't know how today's prices will look one year from now -- just that over the long haul the trend is higher.

How to catch a falling knife
OK, it's time I showed a 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.



January 2001

Fall From January 2001 to Bottom





Cisco Systems




Sun Microsystems (Nasdaq: JAVA)




Oracle (Nasdaq: ORCL)




Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 69% 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 glimpse of that table in March 2000 might have spared you some pain. But what about when the market plunged 39% in 12 days in October 1987? Or when Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) "cratered" in 1991 ... or earlier this month ... or any other time stocks pulled back 10% 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 also 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. Housing is grim. Oil is killing us. Credit is tight, and Ben Bernanke is walking on eggshells. And, yes, I'm hearing sporadic predictions that this time it really is different, and stocks aren't coming back. But I'm not buying it. This is not even 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 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 my colleague Bill Mann is sharing with his Motley Fool Hidden Gems subscribers. True, more than a dozen of those picks have doubled since Bill and his team found them. But that's just strong performance. Many of the best small caps have since pulled back.

Living well is the best revenge
That's why I'll continue to buy on weakness. I've been nibbling on casual diner Buffalo Wild Wings (Nasdaq: BWLD), one of the stocks I mentioned that had doubled for Hidden Gems members before recently pulling back. I might buy more. 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, even if I can't predict where the markets are headed near-term, it's almost certain that 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 warning
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 patient. When it comes to small caps, there's certainly no shame in buying a low-cost exchange-traded fund -- I own two myself. But I also know something better.

Bill and his team are bargain-hunting, too. This month in Hidden Gems, in addition to his two new picks, Bill ranks his five favorite small-cap stocks for new money right now. All five are listed for you in the new issue and online.

You can check it out, plus see every past pick and read 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 Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings, too. As of this morning, Hidden Gems picks are up on average 29.2%, versus 5.9% for the S&P 500. You can see them all immediately with your 30-day free trial. Buffalo Wild Wings is a Hidden Gems pick. JPMorgan Chase is an Income Investor recommendation. The Motley Fool is investors writing for investors.