Needless to say, these are not the best of times for most investors in stocks. But they don't have to be the worst of times, either.

The ride for stock investors has been bumpy for an awfully long time. Just take a look at some particularly hard-hit stocks over the past month.

Stock

1-Month Return

Wells Fargo (NYSE:WFC)

(17%)

ArcelorMittal (NYSE:MT)

(19.6%)

General Dynamics (NYSE:GD)

(30.2%)

FedEx (NYSE:FDX)

(25.9%)

Valero Energy (NYSE:VLO)

(26.7%)

Source: Motley Fool CAPS, Yahoo! Finance. Return Feb. 12 to March 12.

But before you rush en masse for the exits and sell off everything, take a step back and make sure you're not falling victim to one of Mr. Market's perilous traps.

Hindsight is 20/20
Ask yourself the following:

  • How many times have you invested in a company, only to see the stock drop 10% to 20% or more?
  • How many times have you sold because you couldn't "suffer" any additional price declines?
  • If you sold, how many times did you witness the stock price go back up to your purchase price, and maybe even higher?
  • If you didn't sell, how often have you had the conviction to buy more at a lower price?

Be honest with yourself. The first question is easy. Every investor, including guys like Buffett, has invested in businesses only to see the price decline. In today's market, that's par for the course.

It's very easy to second-guess yourself -- thinking that you moved in too quickly. This thought process is simply the brain looking at the world through a rearview mirror. Thinking about your investment decisions with the benefit of hindsight is often a recipe for disaster.

Most investors -- at one point or another -- have likely surrendered to question two. It's not easy to watch your money vanish, even if it's only on paper. And if taking a loss didn't damage your confidence enough, taking a loss only to witness the price go back up is even worse. Now you really feel dumb.

But if you've taken the time to understand the business, and you make your investments based on fundamental reasons, you shouldn't be alarmed by short-term stock price movements. As investing icon Warren Buffett has remarked, "In the short run, the market is a voting machine. In the long run, it is a weighing machine." If the market continues to vote against you, have the conviction to take advantage of sale prices on your favorite businesses.

Don't crave instant gratification
If your analysis is sound, and you don't overpay for the business, you will eventually be rewarded. Currently, not many investors are being rewarded, as everyone waits to see what will happen with the financial crisis. In the meantime, consumers are tightening their belts, and many businesses are suffering -- some sectors more than others, of course.

So, while this might not be the best environment for high-end consumer stocks like Best Buy (NYSE:BBY) or Starbucks (NASDAQ:SBUX), if their share prices fall to a point that makes the business a good investment going forward, seize the opportunity. It doesn't make sense to think that a good business can grow sales by 50% forever, but it's equally ridiculous to assume that a great business with good management will always report declining sales and profits.

Admit mistakes
All investors make mistakes. But learning from them can help you become a better investor.

That doesn't mean you should try to make mistakes. Too many blunders will kill you in this business. But if you stick to a simple business-oriented investment philosophy, you'll be able to limit your errors, and maximize your gains.

Further Foolishness:

Starbucks and Best Buy are Motley Fool Inside Value recommendations. Learn more about avoiding big blunders in down markets with a free 30-day trial.

This article, written by Sham Gad, was originally published on March 7, 2008. It has been updated by Dan Caplinger, who owns shares of Starbucks and ArcelorMittal. Starbucks, Best Buy, and Apple are Stock Advisor selections. The Fool owns shares of Starbucks and Best Buy. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.