In the 1960s, investors did well in the stocks of fast-growing companies. In the 1970s and 1980s, they made money in undervalued stocks. In 1986 and 1987, takeover stocks offered big rewards. And after the 1987 market crash, "bottom fishing" made many investors rich.
But in 1990, investors found it difficult to make money no matter what strategy they used.
Gripped by recession fears and uncertainty about the Persian Gulf, the stock market ended the year below where it began for the first time since 1984. Blue-chip stocks lost the least, dropping about 6.5 percent. But stocks of small companies, which make up most of the market, took a heavy beating, falling more than 20 percent.
"The best thing you can say about 1990 is 'good riddance,' " declared Rob Brown, chief market strategist at the brokerage firm Ferris, Baker Watts Inc. in Baltimore.
The stocks of banks, savings and loans and real estate firms endured their own form of purgatory. The real estate lending boom of the mid-1980s continued to go bust, destroying the profits of many financial institutions and knocking down their stocks by 35 percent.
Investors also found that many of their favorite investment techniques did not work in the bearish mood of the market.
Value investors, who buy stocks selling for less than the resale or breakup value of the companies on a per-share basis, waited in vain for the prices of their undervalued shares to rise. Many of the stocks simply fell even lower.
Investors in utility stocks, normally regarded as steady, faithful performers, watched in dismay as those stock prices dipped in the face of rising interest rates early in the year. Utility stocks were down an average of about 10 percent for 1990, after retracing their steps in the last two months as interest rates began to fall.
Stocks in utility companies tend to move in the opposite direction of interest rates because the companies are often large borrowers for power-plant construction.
Nor did it prove wise to buy U.S. oil company stocks when the invasion of Kuwait sent oil prices soaring. Prices of major oil company stocks were lower on Dec. 31 than they were on July 31, just before the Iraqi attack.
Gold bugs, too, found that the old rules had changed. Although the precious metal is supposed to be the place to invest in troubled times, large gold sales by the Soviet Union and several Middle Eastern countries helped depress its price.
Thus, cash was king in 1990.
Investors who stuck to money market funds found themselves 7.8 percent richer at the end of the year. Then again, if you consider that inflation ended the year at about 6 percent, even cash delivered a marginal gain.
One of the leading advocates of sticking to cash is veteran money manager Charles W. Allmon, head of the Growth Stock Outlook Trust of Bethesda, an investment fund. For several years, Allmon has contended that the stock market was overpriced and, although he missed several rallies, he kept 70 percent to 85 percent of his assets in short-term Treasury investments. This strategy gave him a 4.2 percent gain in 1990.
"I just feel the market is no bargain," Allmon said.
The bargains that were around were few and far between. Health-related companies did well. Mutual funds that invest in health and biotechnology stocks gained 19.4 percent. In the technology area, although performance was mixed, the Hambrecht & Quist Growth Index rose by 3.9 percent and the Fidelity Select Technology Fund gained 13 percent.
Fixed-income investments produced varied results as interest rates gyrated during the year. Long-term government bonds achieved a total return of about 5.8 percent.
Mortgage-backed securities did best, gaining 10.4 percent. Municipal bonds also did well, returning a nontaxable 7.6 percent.
Bond expert James H. Patterson of Kahn Brothers Investment Management Corp. in Alexandria, said that one of the major developments in the credit markets in 1990 was that short-term interest rates and long-term rates moved back to a more normal relationship.
Normally, short-term rates are lower than long-term rates, to reward investors for tying up their money for longer periods of time.
A year ago, Patterson said, short-term and long-term rates were both at about 8 percent. Currently, long-term rates are still at about 8.25 percent, but short-term rates have come down to about 6.8 percent.
The shift has taken place as the Federal Reserve has lowered interest rates to help the ailing economy and as the Iraqi invasion of Kuwait sent investors fleeing to short-term Treasury investments.
With 1990 in the history books, the stock market is keeping a wary eye on the calendar and the expiration of the Jan. 15 limit set by the United Nations on military action in the Persian Gulf.
Question marks about what will happen in the Persian Gulf apparently have spoiled investors' chances to profit from playing the so-called "January effect."
Over a period of years, investors have learned that stocks that were depressed by tax selling in November and December tended to rise again in January. With the looming hostilities in the gulf, that strategy is less apt to hold true this year.
Professional investors said they believed that a shooting war would send stock prices broadly lower but that a quick end to the fighting would be bullish because it would remove the uncertainty that overhangs the market. Importantly, it would also bring down oil prices.
Market watchers said that even after Persian Gulf problems are resolved, the market will continue to face a recession that may produce a growing number of bankruptcies as companies find themselves unable to cope with the debts piled up during the era of mergers, acquisitions and buyouts.
Closely tied to recession worries is the expectation that corporate profits sagged badly in the fourth quarter and will again in the early part of 1991, depressing stocks even further.
James Dunton, executive vice president of Capital Research Co. in Los Angeles, which manages $60 billion in pension fund and mutual fund money, said he was looking for an "extended recession," one lasting at least a year and a half, if not longer. Previous recessions have lasted from seven to 17 months.
"The recession is going to be much longer than most people believe," said Dunton, who helps manage the investments of Washington Mutual Investors Fund, a $5.6 billion fund based in Washington.
However, the wide divergence in opinion on the recession was evident in the recent remarks of Edward Yardeni, chief economist for Prudential-Bache Securities Inc. in New York, who wrote in a report to investors, "It may be wishful thinking, but we believe that the worst is over for the economy. ... We still expect a modest recovery starting early next year with real GNP up about 2 percent during the first quarter."
For investors who watch the stocks of smaller companies, 1990 was a particular disappointment.
The schism between the blue chips and small stocks is apt to grow, said Dunton. One reason, he said, is the interest of foreign and domestic investors in the relative safety provided by the blue chips.
The other reason, he said, is that about $300 billion has been poured into so-called index funds. The job of these funds is to mirror the performance of the Standard & Poor's 500, a popular blue-chip index. Since the $300 billion just sits in the funds and is not traded, the money tends to prop up the price of the blue-chip stocks.
Smaller stocks do not have this advantage, and the result is clear. The S&P 500 index lost 6.6 percent in 1990 while two measures of smaller stock performance, the Russell 2000 and the Value Line group of 1,700 stocks, lost 21.5 percent and 24.3 percent respectively.
Meanwhile, the Dow Jones industrial average of 30 stocks lost 4.3 percent, while the New York Stock Exchange composite dropped 7.5 percent, the Nasdaq composite was off 17.8 percent and the American Stock Exchange fell 18.5 percent.
Dunton said that value investors had gone wrong by depending on computer screens, which ferret out the cheapest companies but do not provide the in-depth research on the companies that investors really need.
"Sometimes those stocks are the cheapest because they belong there" -- on the bottom of the list, Dunton said.
Rob Brown of Ferris, Baker Watts suggested that the value of many company assets had been inflated during the merger and acquisition era but as the buyout fever subsided, those values had fallen and so did the prices investors would pay for the stocks. After that, corporate earnings began to fall, and stock prices dropped again.
Like most investment managers who must continually invest new money from clients, Dunton said he is happiest when stocks are cheapest. But, he added, investors should seek only the highest quality stocks. "This is no time to be speculating," he said.
For professional traders, 1990 offered several major opportunities for speculation. These included speculating on the future prices of crude oil and "short-selling," the art of profiting from declines in stock prices.
Crude oil prices skyrocketed in the weeks after the Iraqi invasion, hitting a record of $41.15 a barrel on Oct. 15, up from $20 before the invasion. Prices then receded as it became clear that oil supplies were sufficient and demand was declining. Crude oil leveled off at about $27 a barrel in December.
Short-selling is the flip side of buying a stock and waiting for the price to rise. In short-selling, an investor borrows shares of stock from his or her broker, sells the stock and waits for the price to fall. If it does fall, the investor can then buy an equivalent number of shares at the lower price, return them to the broker and pocket the difference.
Thus, if an investor sold borrowed stock short at $25 a share and the price dropped to $15 a share, the investor's profit would be $10 a share.
The shock felt by many mutual fund investors who watched their stock funds decline sharply in early fall, prompted some fund executives to try to assure their investors that what goes down will someday go up again.
Edward C. Johnson III, president of Fidelity Management & Research Co. of Boston, which runs the nation's largest mutual fund organization, told Fidelity shareholders recently, "Stock market declines and economic contractions are a fact of life."
Johnson said that while no one can predict when the current bear market will end, "History teaches us that the greatest opportunity for gain can come immediately after the bottom, with about 60 percent of the gains coming within the first eight months of a rise."
But, he added, "Investors who wait for economists to declare the end of a slowdown or call the beginning of the next bull market may miss the best opportunity for gains."
Thus, Johnson suggested that investors should take advantage of the slide, scary as it may be, to buy mutual fund shares as prices fall, as part of a program called "dollar cost averaging." This strategy calls for investing equal amounts of money each month, buying more shares when they are cheaper, fewer shares when they are dearer. The effect is to average out the cost of the investor's shares.