It's been a tough three and a half years for blue-chips. You know, the stocks of those super-solid companies with a huge edge over their competitors that were supposed to be havens even in a bear market.

What's happened? Blue-chip

WorldCom Group

(WCOEQ)

plunged from a high of $64.50 in 1999 to near 28 cents today and Chapter 11 bankruptcy.

Corning

(GLW) - Get Report

, the leader of the optical fiber market, plummeted from a high of $113.33 in 2000 to around $3.82 today.

And every industry has its poster boys.

Duke Energy

(DUK) - Get Report

, a safe utility stock, is down 61% from its 2001 high.

General Electric

(GE) - Get Report

, the best-run, most diversified blue-chip on the planet, is down 60% from its 2000 high.

Pfizer

(PFE) - Get Report

, the safest of the safe drug stocks, is down 40% from its 2000 high.

That leaves two important questions:

Why didn't blue-chips provide the safety investors expected in the bear market?

What place should investors give these stocks in their portfolios going forward?

I'm going to draw on my

50 Best Stocks in the World, a somewhat tarnished blue-chip list, to answer both of these queries.

What Went Wrong With Blue-Chips?

If you want to understand how a safe blue-chip can produce a 40% loss, look at how Pfizer's or General Electric's shares performed in 2000. The technology bubble on the Nasdaq peaked on March 10, 2000, when the composite closed at 5048.62. And certainly blue-chips like Pfizer and General Electric had run up in price as the market got frothier and frothier.

But these stocks actually didn't hit their highs until well after the Nasdaq bubble burst. Pfizer's top came on July 11, and GE's on Aug. 28. These stocks actually surged in price as investors looked for a safe place to put money in what then looked like a technology sector correction.

GE, for example, surged from $41.71 on Feb. 18 to $60 on Aug. 28 on a flood of money looking for a place to ride out the storm. That's a jump of 44% in a little over six months, as the Nasdaq was tumbling -- in fact, because the Nasdaq was tumbling. Pfizer shows the same pattern. The stock climbed from $30 in March 2000 to $49 on July 11, a 63% increase in about four months.

In other words, blue-chips had their own bubble, which pushed these stocks to unsustainable levels -- in many cases after the Nasdaq had peaked, fueled by the gains produced by the Nasdaq bubble.

But these blue-chip stocks weren't merely passive victims of bubble cash seeking another home. Management at many of these supposedly conservative companies produced their own stories of endless growth at ever-accelerating rates that were told by Nasdaq technology companies. So Duke Energy became an Enron with substance.

Citigroup

(C) - Get Report

and

AOL Time Warner

(AOL)

and

Walt Disney

(DIS) - Get Report

would be able to grow even faster in the future, thanks to synergy.

Intel

(INTC) - Get Report

and Corning had bought their ways into new fast-growth markets.

Regrettably, these stories seemed more plausible coming from established companies than from the mouths of untested newcomers such as

Amazon.com

(AMZN) - Get Report

or

JDS Uniphase

(JDSU)

or

Qwest Communications

(Q)

. I certainly didn't bring enough skepticism to the numbers and projections coming out of Duke Energy and WorldCom and AOL Time Warner. I wasn't sufficiently skeptical about the acquisition strategies -- or their timing -- at Corning or

Schlumberger

(SLB) - Get Report

. I didn't look hard enough at signs of slowing growth at

McDonald's

(MCD) - Get Report

or

Home Depot

(HD) - Get Report

. Or pay enough attention to new emerging competition to

Hewlett-Packard

(HWP)

or

Boeing

(BA) - Get Report

.

That's what happens in a bubble, of course. You don't get a market bubble unless enough investors forget essential discipline, throw out fundamental skepticism and convince themselves not to ask too many messy questions. But to say that others got the pricing of these stocks wrong too -- enough "others" to drive the prices to bubble levels -- is an explanation, but it's certainly not an excuse.

Bad Valuations or Bad Companies?

That sets up my second question. Granted, we got the valuations wrong on blue-chips. But did we also get the companies wrong too? Are the stocks on my 50 Best Stocks in the World blue-chips with solid businesses and sustainable advantages over competitors -- or are they impostors that looked great while the party was raging but look tired and shopworn in the light of day?

I think the answer to that is a general but qualified yes -- these 50 stocks do with a few exceptions deserve the moniker of blue-chip and deserve consideration for the long-term core of an investor's portfolio. But to understand why I say that and to understand the few exceptions and all the qualifications, I'm going to have to create a simple six-group scorecard for grading these stocks.

Group 1:

I simply got these wrong. It's a small group but a painful one. WorldCom, Enron and

Asia Pulp and Paper

(APUUY)

should never have been on this list. The first two never had the competitive advantage that I assigned them, because they lied and lied massively about their business. At WorldCom, the total of false profits uncovered so far is more than $7 billion and looks likely to top out around $9 billion. In the case of Asia Pulp and Paper, I overestimated how much I could really tell about the company's financial position from its corporate filings.

Group 2:

Companies that are showing signs of an eroding competitive position -- these should probably come off the list now, even though their stock prices are depressed. If you want to own them as short-term turnaround plays or for a post-tax selling bounce, fine, but long-term investors with a buy-and-hold bent can do better elsewhere. At the top of this group I'd put Hewlett-Packard, which is in for the fight of its life to keep its massive market share in the computer printer business. I don't think the company will be able to defend against

Dell Computer

(DELL) - Get Report

and a host of Asian competitors.

GlaxoSmithKline's

(GSK) - Get Report

major advantage that got it on the list -- the second-largest sales force in the drug industry -- is increasingly less of an edge as the industry consolidates.

Reuters Group

(RTRSY)

just doesn't seem able to turn its huge news-gathering presence into a competitive edge in other profitable businesses.

Group 3:

Cyclicals that are showing their normal up-and-down patterns. Knowing the history of the aluminum, steel, airline, heavy equipment and semiconductor equipment sectors, you'd expect stocks such as

Alcoa

(AA) - Get Report

,

Nucor

(NUE) - Get Report

, Boeing,

Caterpillar

(CAT) - Get Report

and

Applied Materials

(AMAT) - Get Report

to behave as they have during what are real recessions in their industries. These stocks will come back when business picks up, and there's nothing wrong with these companies at all.

Group 4:

Still dominant but dominant in a mature or maturing sector. That dominance doesn't bring the rate of growth that it once did. McDonald's, for example, is still the dominant franchise in fast food, even if earnings growth in the future is likely to be closer to 3% than to 10%. Intel belongs in this group, as the PC industry is definitely mature. So does GE, in my opinion, along with

Gillette

(G) - Get Report

and

Coca-Cola

(KO) - Get Report

. But these companies will still grow earnings -- investors just shouldn't pay traditional multiples for lower growth. These stocks can still be solid investments -- if you buy them at the right price.

Group 5:

Management came close to doing the impossible -- sinking an unsinkable business. Corning, Duke Energy, AOL Time Warner,

Sealed Air

(SEE) - Get Report

and

Nortel Networks

(NT)

are all struggling to dig themselves out from under liabilities piled on by bad timing. In most cases the liabilities are debt built up to finance acquisitions that made sound strategic sense at the time (and will again in the future), just before revenue went into a tailspin, making it hard to pay off the debt. But overall, these companies stand a good chance of regaining their blue-chip designation. (Sealed Air is a special case. The company faces a fraudulent transfer lawsuit brought by creditors of the now-bankrupt W.R. Grace who claim that Sealed Air's purchase of Cryovac from Grace in 1998 was an attempt by Grace to leave itself without assets to pay asbestos claims. This is a very tough one to handicap, and Sealed Air, if it loses, could wind up with a big asbestos bill.)

Group Six:

Nothing wrong with these that the end of the bear won't cure. Companies such as

Johnson & Johnson

(JNJ) - Get Report

,

Lear

(LEA) - Get Report

,

Mattel

(MAT) - Get Report

,

American International Group

(AIG) - Get Report

, Pfizer and

Microsoft

(MSFT) - Get Report

just keep on doing what they do best. Their stock price may not reflect it, but in these instances, the low price is the sign of a bargain rather than an indication of trouble at the company.

So what do you do with this scorecard? Remember that the 50 Best Stocks in the World isn't a list of 50 recommendations. It's a universe to use in constructing the conservative core of an equity portfolio. Not all these stocks are equally attractive at all times. Duke, for example, while cheap in historical terms, still faces a year of paying down and restructuring debt before its balance sheet is reasonably solid again. Next year could be a very volatile year for these shares. Applied Materials doesn't look like a buy until the semiconductor-equipment market shows clearer signs of stabilizing.

On the other hand, Pfizer at a recent price of $33, Nucor at $46,

PepsiCo

(PEP) - Get Report

at $45 and Microsoft at $57 seem near good entry or add-to-position prices. On any pullback below $64 I'd look at American International Group, and at $30 or below I'd add to positions in

Sysco

(SYY) - Get Report

.

How much should you buy? That depends on your own individual portfolio. The purpose of blue-chips like these is to add a core of steady appreciation to the equity portion of a portfolio. Once that core is in place, an investor can surround it with riskier equities -- what I call the edge -- from a group like my Future 50 list and from asset classes such as foreign equities. The exact proportion of core and edge depends on your risk tolerance and the risk tolerance of your financial goals. The classic tradeoff applies: increasing the proportion of edge to core increases the volatility of your portfolio, which is a good thing when the stock market is going up but a bad thing when the market is going down. And it's a very bad thing if the market is going down and you're close to the time when you need to cash in your equities.

And remember, in this column, I've only talked about the equity portion of your portfolio. Whatever your core and edge equity positions, they need to be part of a larger portfolio that includes fixed-income assets -- bonds, for example.

This column marks the belated annual update on the 50 Best Stocks in the World list. Once a year I get to add and subtract stocks from this otherwise totally passively managed list -- passive because I expect you to make your own decisions on what and how much to buy.

I try to keep the drops and adds to three stocks or less to keep turnover in the list to a minimum. So at this time, I'm dropping three of the stocks I put in Group 2: Hewlett-Packard, GlaxoSmithKline and Reuters. To replace them I'm adding

ExxonMobil

(XOM) - Get Report

,

IBM

(IBM) - Get Report

and

Nokia

(NOK) - Get Report

.

And as part of my regular update of the timing recommendations on this list, I'm putting "buys" on Microsoft, Nucor, PepsiCo and Pfizer.

Jim Jubak appears Wednesdays on CNBC's "Business Center" at 6 p.m. EST. At the time of publication, he owned or controlled shares in the following equities mentioned in this column: Eli Lilly, Pfizer and Johnson & Johnson.