As late as a few years ago, there wasn't much question where a serious investor put his money. There were blue-chip stocks and long-term bonds -- IBM and AT&T, to name just two. The rest was for the speculators, thank you. Reliability was the watchword here. A good return was guaranteed.
Today, the stock market has been left largely to institutions and profit takers. Large-scale investors are shunning the broad market and even the most staid institutions are into such previously unlikely side ventures as real estate and oil- and gas-drilling operations.
The reason: The reality of prolonged, apparently permanent double-digit inflation. Over the past few years, the prospect that inflation is here to stay has prompted most institutional investors and wealthy individuals to make fundamental changes in their overall investment strategies.
Moreover, these shifts have profound implications, both for the nation's financial structure and for the overall economy. Because of them, the markets are far more volatile than before, money is more difficult to raise and inflation may be harder to slow.
"What all this has done is to increase the burden on both corporate and household financing," says Henry Kaufman, economist for Salomon Brothers, the New York investment house. There also may be another casualty: Many analysts believe the old fixed-rate mortgage finally may be dead.
The change actually began after the price surge of 1973, but accelerated sharply in 1979 when a second round of sharp oil-prices increases and forecasts of a continued 9-to-10 percent inflation persuaded investors that inflation wasn't likely to ebb soon. Panic over the budget deficit wasn't only added to the fear.
Burton G. Malkiel, former Ford administration economic adviser who is now a markets specialist at Princeton University, describes the turnaround as a virtual "sea-change in Americans' thinking" about the economy and about investment.
Before then, "there still was a sense that all wasn't lost," Malkiel says, that double-digit inflation was just a bubble that ultimately would pass. But the developments in 1979 sent investors scurrying for protection and away from traditional avenues. The rules of the game were changed dramatically.
The turnaround by investors presaged similar shifts by both corporate managers and individual consumers, who, in late 1979 and early 1980, also altered their own behavior in response to the new, more pessimistic inflation outlook.
Families, persuaded that the price surge wasn't likely to ebb, abandoned their traditional bent for saving in favor of a buy-now mentality that sent them dipping into bankrolls and taking on more and more credit-card debt. Some sent second earners to work.
At the same time, corporations, coming to essentially the same conclusions, profoundly changed their strategies, involving everything from pricing practices and contract terms, to product mix and financing-and-acquisition policies.
"What got our alarm clock running," says H. Kent Atkins, chief investment officer of Bankers' Trust Co., "was the explosion in federal spending in the latter years of the Carter administration. It became clear that the cost of providing what we already were providing was getting out of hand."
To Atkins, and a good many other knowledgeable investment analysts, the need to keep ahead of inflation hasn't killed off the more traditional investments, merely altered their role. "It doesn't mean we won't sell 30-year bonds for the telephone company," he says. "But certainly the mix has changed."
The list includes these developements:
Diversification. Wary of being caught in low-return transactions, investors have diversified beyond traditional stocks and bonds into a variety of more inflation-resistant ventures, from commerical and residential mortgages to money-market mutual funds. The bond market particularly has suffered a setback.
Shorter maturity. Concerned about constantly rising inflation, Wall Streeters have shunned 30- and 40-year bonds for shorter-term investments that will mature in six months to seven years. The few long-term securities still being sold now command interest rates as high as 14 or 15 percent.
Real estate and other tangibles. Because tangible assets do so well in keeping up with inflation, investors have turned to them as a hedge. Real estate has been the most popular, but there are also gold and other minerals. By contrast, a decade ago investment in these fields was mainly a European phenomenon.
Energy stocks. An if-you-can't-lick-'em-join-'em philosophy is fueling a strong push into energy-related investments -- both stocks and direct exploration or drilling projects -- in hopes that soaring oil prices will protect investors against inflation. High-technology firms also are an investor favorite.
New instruments. Wall Streeters also have devised a myriad of new financial devices designed to help protect themselves against real losses. Although some employ floating rates that adjust with inflation, others lure investors by offering them equity in the venture if inflation exceeds expectations.
Particularly in recent years, investors have flocked to money-market mutual funds and six-month money market certificates, which offer high yields without fear of getting locked in.
International. Americans also have been dabbling more and more in international markets, from increased currency trading to ventures in Japanese stocks and dollar-denominated foreign securities. Other new offerings are tied to commodities, whose value analysts figure is almost certain to rise.
Tax shelters. Even though the 1976 Tax Reform Act tightened up substantially on the attractiveness of tax-shelters, investors are rushing back to them, this time as a hedge against inflation. The idea is, if you can't boost the return with a higher interest rate, at least you reduce the tax bite.
These trends are backed up by some striking statistics:
Figures compiled by Salomon Brothers show short-term paper now commands a substantial 5.3 percent of the nation's outstanding financial instruments, compared to a scant 2.9 percent a decade ago, while mortgages have grown to 22.1 percent, up from 18.6 percent in 1970.
At the same time, stock holdings have shrunk to 27.2 percent of the total, from 37.2 percent in 1970, with bonds dwindling to 9.1 percent from 10.5 percent in 1975. The bond market still totaled a substantial $524 billion last year, but much of it involved earlier maturity dates or floating rates.
Perhaps the most dramatic shift of the past few years has been the frenetic flight of investors from the inflation sick bond market and the simultaneous proliferation of substitute money-market instruments designed to protect investors from "real" losses.
Holdings in money-market mutual funds, high performers under inflation, have surged to $95.7 billion, up sharply from a relatively scant $10.8 billion at the end of 1978. During the same period, six-month money market certificates have swollen to $430 billion, compared to $78.6 billion in late 1978.
Besides the increased use of floating rates, there are so-called participation plans that guarantee investors a share in the equity of a venture if inflation persists, often by giving them a percentage of sales or leasing revenues or shares of common stock.
Also in this category are warrants, which guarantee the investor the right to buy another bond later, and "puttable" bonds, which purchasers may send back if they prove to be low yields after five or 10 years. p(Traditionally, only the lender has had the right to recall poor performing bonds.)
At the same time, borrowers have developed protective arrangements of their own: One is to offer new financial futures -- opportunities for investors to commit money now in return for a contractual guarantee that they will receive today's high interest rates on inestments they may make in coming years.
Meanwhile, investors have fled the bond market in droves, forcing would-be bond-issuers to agree to adjust interest rates for inflation or else to pay extraordinary rates of 14 to 15 percent, effectively locking themselves in to high business costs for years to come.
Jay O. Light, economics professor at Harvard Business School, says: "The old-style, fixed-income bond has been hurt tremendously. Fixed-income buyers have gone on strike. There have been incredible losses in this portion of the market." Analysts estimate almost half the bonds sold today are either floating-rate or medium-term.
The flight of investors from the bond market has raised the cost of corporate financing, inhibiting plant modernization and heightening inflation. Harvard economist Benjamin M. Friedman frets: "The ability of corporations to raise long-term funds is eroding, and that's what those markets are there for."
The move to shorter-term maturities and the proliferation of new variable-rate investment ventures have made the financial markets more volatile and more vulnerable to inflationary pressures. As a result, interest rates have soared even further. And market uncertainty feeds on itself.
As in the case of the shifts in corporate behavior that have been spawned by inflation, the changes in investment patterns effectively remove some of the previous discipline that existed in the markets and create a new constituency of investors who actually benefit from continued inflation.
Finally, on an individual level, the changes have brought about what Light calls "the death of the fixed-rate mortgage" in the United States -- making home-ownership even more difficult than it previously had been under soaring prices and high interest rates.
Even so, while the move to exotic new forms of investment has been substantial, it still represents only a fraction -- 5 percent or less -- of the holdings of the large institutional investors, most of whom have stuck to more traditional forms and may be about to return in force to buying stocks.
Wesley G. Wadman, research chief for Investors Diversified Services Inc., points out that stocks have gotten such a bad name over the past few years that many now are undervalued compared to the worth of the firms that issue them. "I think you make money by investing in areas that are not high-profit," he says.