"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher

The market may have recovered a great deal since March 9 of last year, but it's still well off the highs of 2007. So it may be fair to ask ourselves: How can we avoid the mistakes that got us here, and how can we find the top stocks to buy today?

Consider this
The mistakes that led to 2008's downturn are reminiscent of the speculative frenzy known as the Dutch Tulip Craze. In 1636, Dutch citizens found themselves caught up in a tulip rampage, fueling skyrocketing orders and prices that grew by as much as 100% per week.

Eventually, one tulip bulb was selling for the equivalent of thousands of modern-day dollars! The market became overbought, and the frenzy bottomed. By 1637, the price of tulips was less than 1% of what it had been before the crash. Value was an afterthought to the tulip "day traders" who sought to profit from irrationally soaring prices.

Quickly fast-forward to the dot-com bust. The growth of Internet companies and an overinvestment in information technology caused the Nasdaq to rise more than 600% from 1994 to early 2000. If you were alive or breathing in the past 10 years, surely you remember what happened next:

  • In 18 short months, approximately $5 trillion was wiped out from the value of technology stocks.
  • Silicon Valley trendsetters Microsoft and Oracle experienced price depreciations of more than 60%. 

OK, let's talk the past year
Call 2008-2009 what you want. The housing horror. The derivative debacle. The commodity crisis. The securitization scare. There are too many explanations for the collapse to isolate only one aspect.

One thing is for sure though -- some companies lost tremendous value in 2009, whether it was because of fundamental deterioration or rampant speculation. And on the contrary, some companies went on a rollercoaster ride that took shareholders to extraordinary peaks and then to disheartening lows.

And 2010 is shaping up to be much of the same. For most of the year we've seen a tremendous surge in the market as corporate earnings stayed strong and mostly ahead of analyst expectations. However, the European sovereign debt nightmare became contagious, and over the course of the last month, the S&P has lost about 7% of its earlier gains.

What, if anything, have we learned?
We can be certain that there will always be ups and downs, booms and busts, good years and bad. So what can we do? One philosophy is to invest in companies with great competitive advantages, clean balance sheets, and a history of success in their given industries.

For example, robot designer and developer iRobot (Nasdaq: IRBT) has benefited tremendously from a growing demand for its products. It has managed to grow revenues and net income rapidly five years. It has over $85 million in cash and zero debt, and some of our analysts at the Fool think this is one groundbreaking company. But with a forward-to-price earnings ratio of 68, does it actually provide you with much value today?

Similarly, you might be excited about the prospects for Lennar (NYSE: LEN), one of the nation's largest homebuilders. After being beaten down with the rest of the residential housing industry, the company has finally rebounded, as exemplified by its 40% gain year-to-date.

But it's trading at more than 46 times forward earnings, so you really have to ask yourself whether or not the shares are worth your hard-earned dollars at today's prices?

It's hard to know the answers. That's why we focus not only on exciting companies, but on ones that are exuding value, as well.

Here's a place to start
In both bear and bull markets, value investing has provided people with a logical and methodical approach to investing. The general ideas: Don't speculate on questionable growth potential or companies with debatable revenue streams. Look at companies that may be trading well below their intrinsic value for unfounded reasons, seem cheap compared with their industry, and have strong records of returning capital to their shareholders.

Here are just a few companies that fit the bill right now:


6-Month Price Decrease

Price-to-Earnings Ratio

Return on Equity

Shanda Games (Nasdaq: GAME)




Dean Foods (NYSE: DF)




Diamond Offshore Drilling (NYSE: DO)




Telefonica (NYSE: TEF)




Net 1 UEPS Technologies (Nasdaq: UEPS)




Data from Capital IQ as of May 17, 2010.

Granted, in some cases these companies' P/Es are artificially low based on last year's higher earnings. But even if earnings decline, they're still pretty cheap.

More ideas
Our Motley Fool Inside Value team seeks out companies that not only have great competitive advantage and growth opportunities (iRobot and Lennar, for example), but that also trade at bargain prices. If you're looking for more cheap stock ideas, you can click here for a free stock report.

This article was originally published Aug. 7, 2009. It has been updated.

Jordan DiPietro owns shares of Telefonica. Microsoft is a Motley Fool Inside Value pick. iRobot and Net 1 Ueps Technologies are Motley Fool Rule Breakers selections. Net 1 Ueps Technologies is a Motley Fool Global Gains recommendation. The Fool owns shares of and has written puts on Oracle. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool's disclosure policy recently redeemed a coupon and received one free burrito. Now that's value.