I won't sugarcoat it. Investors are nuts.

And I don't mean the wise guys on Wall Street. I mean you and me right here on Main Street. We're all nuts, and if you don't believe me, I'll prove it to you.

If you liked it at $81 ...
I bet you've heard some variation of this hilarious shtick: "Well, if you liked Lucent at $81, you gotta love it at $50."

I remember hearing that one sometime around New Year's Day 2001. Two years later, Lucent, now called Alcatel-Lucent (NYSE:ALU), had plunged another 95% to $2 and change.

And Lucent wasn't alone. Much the same thing happened to former tech highfliers JDS Uniphase (NASDAQ:JDSU) and Cisco Systems (NASDAQ:CSCO), too. Could today's "fallen angels" be headed for the same fate?

Sure. Will they be cut in half again – or worse? I don't think so. Either way, after all we've been through the past 18 months together, 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 about as likely to stock up on gold 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 be, I need capital gains, not just income.

And here's the catch I can't seem to work around: If we want to own stocks, we have to buy stocks. That is, unless we we're clever enough to borrow like mad and gorge at the market bottom -- say, in March. Otherwise, stock investors like us have to buy stocks, especially when they're sitting at 30% off their all-time highs. It's that simple.

Of course, that's not to say we can't sit tight and wait for things to "calm down." But what are we waiting for? An all-clear signal? I assure you we won't get one. We certainly didn't get one on March 9, 2009.  By now, I imagine a lot of folks are getting nervous sitting out the recent rally.

The fact is, we can't know how today's stock prices will look one year from now -- just that great companies are cheaper than they were this time last year, even after the stunning rally. 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

JDS Uniphase




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, the last time 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 over the years, it could have kept you on the sidelines during the great bull market of the ’90s. And it could keep you from profiting from the next one. 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'm the first to admit that the severity of the bear market surprised me. But I never bought the argument that it was different this time, and that stocks were never coming back. And while I don't know if we've come too far, too fast, it certainly isn't 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 still greedy. 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 -- the types of companies that historically lead us out of recessions.

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" from 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, you not only get their two new picks -- you can also see exactly what top analysts Seth Jayson and Andy Cross are buying for their real-money portfolio.

That's how convinced they are that now is the time to buy. You can check it all out in about five minutes, plus see every past pick and read all the back issues -- at no cost and with no pressure to subscribe. To learn more about this special free trial offer, click here.

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

Fool writer Paul Elliott and The Motley Fool both own shares of Buffalo Wild Wings, which is a Motley Fool Hidden Gems pick. The Fool is investors writing for investors.