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 $60 ...
You know the shtick. "If you liked Sirius Satellite Radio (Nasdaq: SIRI) at $60, you gotta love it at $30." That was New Year's Day, 2001. Two years later, you'd have lost another 90%-plus, leaving your holdings at roughly a buck a share.

And Sirius was just for starters. As you'll see in the table below, it was the same story for Qualcomm (Nasdaq: QCOM) and Intel. Pain. Could the exact same thing happen today? Sure. Will it happen today? Who knows?

Either way, you'd be nuts to ignore the lessons 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 cash as I am to take up competitive bridge -- at least for the next 20 years. At my age, I just don't see any other way around it. And here's the catch for folks like us.

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, to be a stock investor, we have to keep buying stocks. It's that simple.

So, could we wait out this volatility? Sure, but what exactly are we waiting for -- some sort of all-clear signal? So we can pay more later? That's nutty. Remember, we can't know how today's stock prices will look relative to tomorrow's -- just that stocks are still a better deal than when we loved them in October.

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

Subsequent Fall to Bottom









Brocade (Nasdaq: BRCD)




Broadcom (Nasdaq: BRCM)




*Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 54% to 94% 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 premonition of that table in March 2000 might have spared you some pain. 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 that one little table have kept you from picking up some terrific bargains over the years, it could have kept you on the sidelines for the entire bull market, 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. Investors are certainly skittish. But this is not March 2000. Remember, every stock in the table we just saw ran 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 the strong smaller businesses Bill Mann is sharing with members of his Motley Fool Hidden Gems newsletter service. True, 18 of those picks have doubled in value or more, including two I'm about to show you. But that's strong performance, not bubblicious -- especially given the lack of institutional funds parked in these stocks.

It is, however, enough to make you feel like you've missed the boat. I know I sure did. But the past few months, even the best of these Hidden Gems have pulled back, giving us a second chance to strike. Heading into the summer, don't be surprised if we get more chances.

I'll continue to buy on weakness
Nuance Communications 
(Nasdaq: NUAN), a company that develops speech recognition and transcription software, is on my buy list, despite gaining some 200% for Hidden Gems members. Meanwhile, my recent trip to Beijing got me even more excited about Chinese travel agent Ctrip.com (Nasdaq: CTRP), a three-time pick that's up more than 300% since I read about it in Hidden Gems.

In fact, I have my eye on the 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 will go lower. Which is strange, given that the long-term trend has always been that they go higher. That's why I say we have to own stocks.

Moreover, while I can't predict where the markets are headed in the near term, it's certain that the stocks of the world's 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. There's no shame in starting out with a low-cost exchange-traded fund -- I own two small-cap ETFs myself.

But I know something better. Bill and the team at Hidden Gems are bargain-hunting, too. This month, they give you their two new top ideas, as usual. But they also rank their five favorite small caps for new money right now.

You can check out the entire service, plus every past pick and all back newsletter issues, in about five minutes -- at no cost and with no pressure to subscribe. To see how easy it is and to accept your special free trial, click here.

This article was originally published on July 19, 2006. It has been updated.

Fool writer Paul Elliott doesn't own any stocks mentioned. Ctrip and Nuance are Hidden Gems recommendations. All picks and results can be viewed immediately with your 30-day free trial. Intel is a Motley Fool Inside Value recommendation. The Motley Fool is investors writing for investors.