The Annoying Advice That You'd Better Follow

"Be fearful when others are greedy and greedy when others are fearful."
-- Warren Buffett

Oh for the love of a broken record! I would rather be strapped down and forced to watch Titanic on a loop for a week straight (sorry James Cameron, I wasn't a fan) than have to hear that darned investing proverb one more time.

But you know what's even more frustrating than the endless repetition of that line? The fact that it's 100% true.

Think about it: Back in 2000 every average Joe with two nickels to rub together was suddenly a stock trading genius. Meanwhile, stocks like Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) were trading at price-to-earnings ratios of 78 and 182, respectively, and the entire market was getting ready to plummet.

On the other hand, at the beginning of March of last year, many individual investors were feeling utterly defeated and looking at all of Wall Street as if it were one giant Madoff scheme. As we know now, the market was getting ready to make a huge rebound and individual stocks like Apple (NASDAQ:AAPL) and JPMorgan Chase were on the cusp of triple-digit gains.

How are investors feeling today?
Certainly investors aren't anywhere near as bearish as they were last year, but there's good reason to believe that many investors are still very unsure about stocks after the recent meltdown.

In fact, there have been a number of articles hitting the presses lately that have zeroed in on individual investors who claim to be almost completely washing their hands of the market. In a recent Wall Street Journal article, author Jason Zweig presents a typical case:

Having been burned twice in 10 years," says Mr. Eberlin, he now has about 80% of his family's assets "protected from the market" in certificates of deposit and fixed annuities. "I don't have trust in Wall Street to help the small investor in any way, shape or form.

A USA TODAY piece in the same vein describes how many individual investors have unknowingly subscribed to a "buy-and-fold" strategy similar to a case cited in the article:

Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.

He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.

Of course these are anecdotal reports, and it'd probably be easy enough to cherry-pick a few extreme cases to tell a good story. But data from the American Association of Individual Investors seems to corroborate the idea that investors are at least handling the market with a lot of caution. Check out the results from the AAII's sentiment survey over the past decade:

Source: American Association of Individual Investors.
All yearly data based on averages for that period.

I don't know about you, but I smell fear in the air.

Time to get greedy
Anyone that's even had half an eye on the market knows that many of the bargains that were available a year ago have dried up thanks to the market's big rally. But due to the pessimism that's still hanging in the air, there are plenty of large, well-known, high-quality companies out there that are selling at very reasonable prices.

Here are a few I was able to find with a simple stock screen:

Source: Capital IQ, a division of Standard & Poor's.

Of course while these stocks may deliver solid returns, getting greedy with smaller stocks could be even more profitable. Because major hedge funds and mutual funds have huge amounts of capital to put to work, they often ignore small-cap stocks because they can't invest a meaningful amount of money in them. That can often result in great opportunities from lesser-known stocks.

At the Motley Fool Hidden Gems newsletter, the name of the game is finding these unloved little guys. In the most recent newsletter, the investing team dug up a small, but mighty, company delivering a product that nobody can live without, and a tech up-and-comer that they called "the Elmer's glue of the software world." To find out what these mystery stocks are, you can take Hidden Gems for a free 30-day trial.

But if you leave this page with nothing else, just remember, as much as Buffett's over-used advice may make you want to upchuck, if you're greedy when others are greedy and fearful when others are fearful, you probably won't be on speaking terms with Mr. Market for very long.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Microsoft and UnitedHealth Group are Motley Fool Inside Value selections. Apple, eBay, and UnitedHealth Group are Motley Fool Stock Advisor recommendations. America Movil is a Motley Fool Global Gains selection. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of UnitedHealth Group. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...