I won't sugarcoat it. Investors are nuts.

And not just on Wall Street. I mean you and me. We're all nuts, and I'll prove it.

If you liked it at $100 ...
You know the shtick. "If you liked Corning (NYSE: GLW) at $110, you gotta love it at $50." That was New Year's Day 2001. Two years later, you were down another 97% to a buck and change. And Corning wasn't alone.

As you'll see in the table below, the same thing happened to CMGI (Nasdaq: CMGI) and Ciena (Nasdaq: CIEN), among others. Could something similar happen today? Sure. Will it happen today? Who knows?

Either way, we'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 gold as I am to take up competitive bridge -- at least for the next 20 years or so. And here's the catch for folks like us.

If we want to own stocks, we have to buy stocks. That is, unless you tapped out your credit and stuffed your portfolio at the market bottom in 2003. Otherwise, to be a stock investor, you have to be a "net buyer" of stocks over time. It's that simple.

Of course, we could sit on our hands and wait out the summer instead. But what exactly are we waiting for? We can only guess how today's prices will look to us tomorrow, but we know that stocks are cheaper now than they were when we loved them in October. And that the long-term trend for stocks is higher.

How to catch a falling knife
OK, it's time we looked at that table. But before we 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

Subsequent Fall to Bottom









Yahoo! (Nasdaq: YHOO)




Time Warner (NYSE: TWX)




Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those stocks fell an additional 70% 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
If you could have looked into the future and glimpsed that table in March 2000, it 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 pulled back 20% or more?

You see where I'm going with this, right? Stock markets climb a "wall of worry." Forget for a moment that nobody knows exactly what that means. It sounds good, and somewhere in there is the lesson that once you get spooked by a market like this, it's hard to get unspooked.

That's why obsessing over that table I just showed you is dangerous. Not only would it have prevented you from picking up some terrific bargains during the sell-off, it could have kept you on the sidelines while 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. The past few months have been rocky, especially in the financials. If you'd have told me a year ago that Bank of America (NYSE: BAC) and Wachovia (NYSE: WB) would be yielding 6% or more right now, I'd have said you were nuts.

But this isn't March 2000 or even January 2001. Remember, every stock in the table you just saw had run up tenfold 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 way more expensive than they'd ever been before.

Is that the case today?
I don't think so. Not even for the market-beating companies Bill Mann and Seth Jayson are sharing with members of their Motley Fool Hidden Gems newsletter service. More than a dozen of those picks have doubled since they found them, including one 500% gainer.

But that's not necessarily a bubble. It's just strong performance -- especially given the 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 did. But over the past few months, even the best of these stocks finally came in a bit and gave us a second chance.

In fact, I have my eye on the Hidden Gems scorecard top to bottom. But that doesn't mean stocks can't go still lower from here. A lot of folks think they will. Then again, a lot of folks always think stocks are going lower.

Finally, a word of caution
That table I showed you earlier is real. 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 a number of them myself. But what if you're looking to beat the market?

Well, here's something to think about. This month in Hidden Gems, Bill and Seth have their two new top picks, as usual. But they also rank their five favorite small-cap value stocks for new money. It's all spelled out for you right in the new issue and on the member website.

You can check it out, along with every past pick and all back issues right now, in about five minutes. The service is free for a whole month, and there's no pressure to subscribe. To see how easy it is to accept your free trial, click here.

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

Fool writer Paul Elliott owns shares of Bank of America, which is an Income Investor pick. All Hidden Gems picks and results can be viewed immediately with your 30-day free trial. Time Warner is a Motley Fool Stock Advisor recommendation. The Motley Fool is investors writing for investors.