Its not stupid, its excellent strategy. Balon's goal is to conqueror the North. Knowing the aforementioned limitations of the Iron Born, there lack of skill in mounted warfare and siege craft. Knowing that there is a decent chance that they won't win no matter who they attack. And still wanting the seize the opportunity of a divided realm. Balon attacks the side with the least ability to strike back at him. The goal is not to carry loot back to islands. But the worst case scenario against the North is that you get in your ships with all of their shit and go back home. The Worst case against Tywin Lannister is he stays on the Throne gains access to a fleet and come to Pyke to shove his boot up your ass. Why would Balon except Robb's offer as presented? There's no way Balon should respect Theon's battle prowess or expect that Robb would be able to best Tywin Lannister. Sending Theon to treat with Balon is evidence of poor judgement on Robb's part. The thing everyone seems to be forgetting here is that when Balon dies the Captains and Kings all leave with the better part of their force to go to the Kings Moot. And even then Roose is only able to win North using Theon to trick the unsupported and unreinforced remnants of the army to surrender. Based on the plan Balon lays out. He's planning to add forces over time not subtract them. Asha, Theon and Victarion are only the first wave.
The real failing is Robbs. Had he sent a better envoy . (He may not have had one) and a more carefully worded treatise, he could have won Balon's support and smashed the Lannisters for once and for all. I think he Robb had a Davos type person in his employ he could convinced Balon to take Lannisport. Maybe even the Great Jon. Theon was certainly a poor choice.
“When I require your counsel I shall ask for it,” his father said. “We have had a bird from Old Wyk. Dagmer is bringing the Drumms and Stonehouses. If the god grants us good winds, we will sail when they arrive... or you will. I mean for you to strike the first blow, Theon. You shall take eight longships north-”
“Eight?” His face reddened. “What can I hope to accomplish with only eight longships?”
“You are to harry the Stony Shore, raiding the fishing villages and sinking any ships you chance to meet. It may be that you will draw some of the northern lords out from behind their stone walls. Aeron will accompany you, and Dagmer Cleftjaw.”
“May the Drowned God bless our swords,” the priest said.
Theon felt as if he’d been slapped. He was being sent to do reaver’s work, burning fishermen out of their hovels and raping their ugly daughters, and yet it seemed Lord Balon did not trust him sufficiently to do even that much. Bad enough to have to suffer the Damphair’s scowls and chidings. With Dagmer Cleftjaw along as well, his command would be purely nominal.
“Asha my daughter,” Lord Balon went on, and Theon turned to see that his sister had slipped in silently, “you shall take thirty longships of picked men round Sea Dragon Point. Land upon the tidal flats north of Deepwood Motte. March quickly, and the castle may fall before they even know you are upon them.”
Asha smiled like a cat in cream. “I’ve always wanted a castle,” she said sweetly.
“Then take one.”
Theon had to bite his tongue. Deepwood Motte was the stronghold of the Glovers. With both Robett and Galbart warring in the south, it would be lightly held, and once the castle fell the ironmen would have a secure base in the heart of the north. I should be the one sent to take Deepwood. He knew Deepwood Motte, he had visited the Glovers several times with Eddard Stark.
“Victarion,” Lord Balon said to his brother, “the main thrust shall fall to you. When my sons have struck their blows, Winterfell must respond. You should meet small opposition as you sail up Saltspear and the Fever River. At the headwaters, you will be less than twenty miles from Moat Cailin. The Neck is the key to the kingdom. Already we command the western seas. Once we hold Moat Cailin, the pup will not be able to win back to the north... and if he is fool enough to try, his enemies will seal the south end of the causeway behind him, and Robb the boy will find himself caught like a rat in a bottle.”
Theon could keep silent no longer. “A bold plan, Father, but the lords in their castles-”
Lord Balon rode over him. “The lords are gone south with the pup. Those who remained behind are the cravens, old men, and green boys. They will yield or fall, one by one. Winterfell may defy us for a year, but what of it? The rest shall be ours, forest and field and hall, and we shall make the folk our thralls and salt wives.”