I won't sugarcoat it. Investors are nuts. And now, they're nuttier than ever.

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 $109, you gotta love it at $53." That was New Year's Day 2001. Two years later, you were down another 94% to a few bucks and change. And Corning wasn't alone.

As you'll see in the table below, the same thing happened to CMGI (which later changed its name to ModusLink (NASDAQ:MLNK)) 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. In other words, 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 this market out and wait for better days. But what exactly are we waiting for? We can't know whether prices have bottomed, but we do know that stocks are a lot cheaper now than they've been in years. Also, we know that the long-term trend for stocks is higher, as hard as it is to believe in times like these.

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













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 a valuable lesson. Namely, once you get spooked by a market like this and sell, 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 during the bull market that followed. 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 brutal, 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 trading where they are now, I'd have said you were nuts.  

But this sure as heck 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?
No way. Not even for the market-beating companies Bill Mann and Seth Jayson are sharing with members of their Motley Fool Hidden Gems newsletter service. Six of those picks are still up more than 100% since they found them. Yes, even after the recent sell-off, to which they were not immune. That includes one 250%-plus gainer.

Not long ago, in fact, just looking at the Hidden Gems scorecard had me kicking myself for missing the boat. That's what makes this such a rare opportunity. Over the past few months, even the best of these stocks have come in a bit and given us a second chance.

Legendary fund manager Marty Whitman calls it, "the opportunity of a lifetime." I couldn't agree more. 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 July 19, 2006. It has been updated.

Fool writer Paul Elliott owns shares of Bank of America, which is an Income Investor pick. The Motley Fool is investors writing for investors.