I guess you can say that you are your own worst enemy almost at any point in the investing cycle. After all, psychology is half the question. As intelligent as he is, Warren Buffett is not the best investor due to his mental prowess; rather, it is his ability to block out human emotions.
One of the popular things right now is the tendency for investors to call the bottom. I know it's a problem because even I am tempted to do something on the belief that we are near a 'bottom' and don't want to miss any big rally. The risk is that you will make a sudden, rash, decision rather than thinking it through. This risk isn't that big if you are a value investor that is bottoms-up; but if you are macro-inclined, like I am, making the wrong call is disastrous (because my bottoms-up stock selection is neither great nor my focus.)
From a valuation point of view, I think stocks--this applies to almost the whole world--are attractive but not extremely appealing. This is nothing like 1974. Some markets, and some stocks, are likely worth buying but the whole market is not cheap. I ran across a post by Henry Blodget--yes, who would have thought he would ever be bearish :)--showing a chart of trailing P/E ratio (I believe a 15 year ratio) and interest rates by Robert Shiller (thanks to The Big Picture for original mention):
Two things pop out for me.
The chart shows how out of whack valuations were in the last 25 years. Who knows if history will repeat but if it's anything like the past, it is possible for the bear market to decline further or for it to stay flat for a decade or more. Remember that 1974 was a big bottom (Dow never hit that level since) but the market didn't go anywhere until the early 80's. It is prudent to invest as if that were the case. The implication of this thinking is that one can't rely on the high P/E multiples of the last two decades. It might be lethal to invest in high P/E stocks (without high growth) and expect the market to place a high valuation.
This might also be a time to almost think of stocks as if they were bonds. What I mean is, perhaps one should assume that prices may not rise much and hence returns will be dependent on dividends that you receive. In the last 25 years, investors were always bailed out by high prices--someone would pay higher than you did. That may not be as likely in the future. (Note: this is just a general view and one should change the view based on the circumstance. For instance, if you pick up something at a ridiculously low price with no dividend, that's fine.)
The other thing to note is that it is hard to make a call on interest rates right now--at least compared to history. Rates are sort of at the level where they can move either way. If you look at the chart, you'll see that rates can drop further and end up like the 40's. But it is also possible for rates to rise since they have been declining for two decades. I remember a reader in one of the comments was looking at making a bearish bet on US interest rates. Well, this chart shows how difficult that call is (if you just look at history and don't look at current economic environment.) There is nothing to stop rates from hovering around the 4% level that it is at now, for the next 15 years.