I won't sugarcoat it. U.S. 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 (NASDAQ: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 – now mysteriously called 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? That’s what everyone seems to be saying, but I say, not so fast. Here's why I'm getting greedy instead.

You probably should still own stocks
I have to own stocks. I'm about as likely to start hoarding 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, we have to be "net buyers" of stocks over time. It's that simple.

Of course, we could sit this market out and wait for some sort of all-clear signal. 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 during bear markets.

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 can it prevent you from picking up bargains when stocks are cheap, it can keep you on the sidelines during the next bull market. 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. I was among those who believed we put in the bottom on March 9 -- though I believed that in October, too. If you'd have told me that Microsoft (NASDAQ:MSFT) and Dell (NASDAQ:DELL) would be trading at 11 and 10 times forward earnings – even after a 30% or so jump -- 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?
Not likely. Not even for the market-beating companies my colleagues Seth Jayson and Andy Cross are sharing with members of their Motley Fool Hidden Gems newsletter service. And here’s the thing:

Not long ago, just looking at the Hidden Gems scorecard had me kicking myself for missing the boat. So, I realize what a rare opportunity this is. Even the best of these stocks got caught up in the bear market and are giving us a second chance.

Awhile back, legendary fund manager Marty Whitman called 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. The Hidden Gems team is also putting its money where its mouth is. Right now, Andy Cross and Seth Jayson are investing $250,000 in real money. So far, the results have been impressive – their first four buys are up from 19% to 90%.

But don’t take my word for it. You can check it all out, along with every past pick and all back issues right now, in about five minutes. In fact, there’s no rush. You can use the service for a whole month free, 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 doesn’t owns any of the stocks mentioned. Apple is a Motley Fool Stock Advisor recommendation. Dell and Microsoft are Motley Fool Inside Value recommendations. The Motley Fool is investors writing for investors. You can check out the complete Hidden Gems scorecard and the new real-money portfolio instantly with your free trial.