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 $100 ...
Yeah, yeah. We know the shtick. "If you liked 3Com (NASDAQ:COMS) at $20, you gotta love it at $8." That was New Year's 2000. Three years later, we were down another 50%, to around $4.

And I don't mean to pick on 3Com. 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. Put another way, to be a successful stock investor, you have to bite the bullet and buy in markets like these. It's that simple.

Could we sit on our hands for a while instead? Sure, but what exactly are we waiting for -- another 50% drop? So we can pay more next year? That's nutty. Remember, we can't know how stocks look today relative to tomorrow. Only that they are a whole lot cheaper than when we loved them last year.

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




Red Hat












Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 52% to 93% 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 permanently, watching as everybody around you got wealthy. 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. But this is not March 2000 -- or even January 2001. 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 stocks, were more expensive than they'd ever been before.

Is that the case today? I don't think so. That's why I'm trolling the market for bargains. I recently re-upped on drug developer Cephalon (NASDAQ:CEPH) on a pullback. I also doubled down on Buffalo Wild Wings (NASDAQ:BWLD), a casual diner that's up nearly 100% since I heard about it in the Motley Fool Hidden Gems small-cap value newsletter.

In fact, I have my eye on the Hidden Gems scorecard from top to bottom. Unlike the 3Coms of 2001, these are rock-solid small businesses with proven business models, strong balance sheets, and top-quality management.

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 will 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 lot of pain 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.

The team at Motley Fool Hidden Gems is hunting for bargains, too. This month they rank their five favorite small caps for new money right now. Personally, I appreciate the extra help and guidance, if only to confirm my thinking.

If you like, you can check out the service for free, including every past and current recommendation and back issue. It takes about two minutes to get started -- at no cost and with no pressure to subscribe. To see how, click here.

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

Fool writer Paul Elliott owns shares of Cephalon and Buffalo Wild Wings. Buffalo Wild Wings is a Hidden Gems recommendation. The Motley Fool owns shares of Buffalo Wild Wings, and is investors writing for investors.