This is spot on, and mainly what I do myself.
One thing I will add though:
1) Relevant links are best
2) But it's possible to rank on totally non-relevant links, I have done it many times.
Following on from this, you should follow not only your competitors but also any spammer site you find. Look at their backlink profile (I prefer backlinkwatch) and pick out the best sites. It gets much faster and easier with experience, as you learn what a likely quality candidate will look like just from the URL (e.g. avoid urls with dates like 03/03/2009 as they will be WP and nofollow, blogspot, homepages etc).
I would say you (OP) are pretty obviously experiencing the sandbox effect, as happens when Google does not trust a new site which has received a flurry of linkbuilding activity. Build strong links using the method outlined and you will be back in no less than 3 months.
One of my competitors disappeared from the serps 3 months back after blasting the web with manual, high powered spam (10 links per comment etc) and I breathed a sigh of relief. They had something like 4000 backlinks at this time. Three months on, now they're back and stronger then ever. They have been building links all the while and they now have 10,000.