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 $81 ...
We know the shtick. "If you liked Lucent at $81, you gotta love it at $50." I heard that one on New Year's Day 2001. Two years later, Lucent, now called Alcatel-Lucent (NYSE:ALU), was down another 95% to $2 and change. And it wasn’t alone.

Much the same thing happened to JDS Uniphase (NASDAQ:JDSU) and Cisco Systems (NASDAQ:CSCO), too. Could it happen to today’s battered stocks? Sure. Will it happen? I don’t think so.

Either way, in these historic times, we'd be nuts to ignore the harsh lessons we learned from the last bear market, 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 CDs 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, not just income.

And here's the catch: If we want to own stocks, we have to buy stocks. That is, unless we’re clever enough to borrow against our futures and gorge at the market bottoms. Otherwise, stock investors like us have to buy stocks, especially when they’re down. It's that simple.

Of course, that’s not to say we can’t sit this rough patch out. Investors who put off buying in 2008 are glad they did. But at this point, what are we waiting for? An all-clear signal? I assure you we won’t get one. The fact is, we can't know how today's prices will look one year from now -- just that great companies are cheaper than they were this time last year, And over the long haul, stocks of good companies go up.

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)








Prices are split-adjusted.

You read that right. Even after their stomach-turning initial plunges, every one of those former highfliers fell an additional 71% 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 in 1990 when U.S. Bank (NYSE:USB) and JPMorgan Chase (NYSE:JPM) "cratered," 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, it could have kept you on the sidelines, during the great bull market of the 90s. If you ask me, that's still worse than trying to catch a thousand falling knives.

So, where are we now?
I honestly don't know. I’m the first to admit that the severity of this correction surprised me. And, yes, I'm hearing sporadic predictions that this time it really is different, and stocks are never coming back. But I'm not buying it. And this is certainly not January 2001.

Remember, every stock in the table we just saw had run up many times in value before the crash. We didn't know for certain we were in a bubble in 1999, but we did know that stocks, especially tech stocks, were more expensive than they'd ever been before. Is that the case today? It doesn’t seem likely.

That’s why I’m trolling the market for bargains. I picked up a few shares of casual diner Buffalo Wild Wings, a stock that has doubled since I read about it in Motley Fool Hidden Gems. I may buy more. In fact, I have my eye on the Hidden Gems scorecard top to bottom. Unlike the Lucents of 2000, these are solid small businesses with strong balance sheets and top-quality management.

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 been up. That's why I say we have to own stocks for the long haul.

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 run -- no matter what happens to "the market" year to year.

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 a few myself. But I also know something better.

The team of small-cap value analysts at Hidden Gems is bargain-hunting, too. This month in Hidden Gems, in addition to his two new picks, Seth and Andy rank their 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 in about five minutes. Plus see every past pick and read all back issues -- at no cost and with no pressure to subscribe. You missed your opportunity to sell. Now, it’s time to get greedy! To learn more about this special free trial offer, 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. Buffalo Wild Wings is a Hidden Gems pick. JPMorgan and U.S. Bank are Income Investor recommendations. The Motley Fool owns shares of Buffalo Wild Wings. The Fool is investors writing for investors.