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I paid a lot of tuition in this market in 2001. Maybe you did too. Jubak's Picks was down 23% for the year. I hope that you did better.

But I think I may have learned something from 2001 that makes at least part of that pain worthwhile. The lesson goes beyond the usual tutorials on the cost of believing company management as a stock goes into free-fall (

Global Crossing


), or the dangers of market timing with volatile stocks (

Brocade Communications



Extreme Networks

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) or the costs of not cutting losses sooner (

Puma Technology




(BVSN) - Get BroadVision Inc. Report

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The bigger lesson of 2001 was that a style of market came to an end in the great blowout of March 2000. The investment strategies that worked for that style of market didn't exactly stop working, but they certainly became less optimal. Other strategies more suited to the new market that are emerging offered a better combination of reward and risk than the strategies born of the market just ended.

And if this is so, those new strategies will offer better returns for less risk going forward -- at least until the character of the current market also changes.

So Long, Glory Days

In other words, you ought to invest differently in the year ahead than you did in the glory days of 1999. And you should certainly not base your investment strategy on a blind hope that the market ahead will be just like that in 1999 -- if we can just get through this recession.

Let me explain what I mean and give you some of the "why" behind my reasoning.

The beginning of Jubak's Picks in May 1997 almost exactly coincides with an extraordinary period in stock market history. Starting in 1995, the

S&P 500

turned in five straight years of annual returns of 20% or better. (The index actually returned just 19.53% in 1999, but that rounds to 20%.)

Looking back through the annual returns in Ibbotson Associates data for stocks back to 1926, I can't find another period of this length with consecutive 20% returns. The closest is the four years from 1942 through 1945.

The nature of that "runner-up" market helps to put the extraordinary character of the 1995-1999 market into perspective. The second-longest period of 20% annual returns was created by an economy emerging from the Great Depression into an era fueled by the huge deficit spending and military effort of World War II.

Buy-and-hold was king during 1995-1999. Not only did everything an investor bought go up, but it went up quickly. Who needed a sell discipline?

Not only did buy-and-hold work like a charm, but the riskier your bets, the higher your returns. The


, for example, went up just as consistently as the S&P 500, but it went up even faster in most years. In 1995 the S&P climbed 34%, for example, but the Nasdaq rose 40%. Same in 1998, when the Nasdaq scored another 40% to the S&P's 27%. And, of course, there was the 86% recorded by the Nasdaq in 1999 before the bubble burst.

Investors in the period were faced with a tough decision. We all knew that this period couldn't last. How long could the market keep delivering 20% annual returns without any penalty for taking on extra risk? But while the period lasted, the rewards for playing by these new rules were hard to pass up.

A 71% Return for Jubak's Picks

In retrospect, I can't say exactly when I decided that the rewards from following a strategy that matched the character of this market were too enticing to resist. I know that like many investors, I didn't begin this period comfortable with owning stocks trading at price-to-earnings ratios of 600 and buying shares in companies with no record of profitability. But sometime along the way I decided that paying more attention to momentum, relaxing my standards on valuation, and taking on more risk than I had been comfortable with were the best ways to outperform the market.

And you know what? Even after the punishing losses of 2000 and 2001, that decision still turns out to have been a very profitable one. As of Dec. 31, 2001, the return on Jubak's Picks since its inception in May 1997 was 71%. That's better than the 39% returned by the S&P 500 during that period, or the 41% returned by the Dow, or the 46% of the Nasdaq. It even compares favorably to the 73% returned by the very volatile Philadelphia Semiconductor Index.

Should I have exited stocks like

Cisco Systems

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Nortel Networks




(NOK) - Get Nokia Oyj Report

earlier in 2000 with more of my profits intact? Not a doubt in the world. Should I have avoided going back into the market with risky picks like Brocade Communications in the first quarter of 2001? Of course. My decision to load up on stocks because the

Federal Reserve

was cutting interest rates was historically sound, but it utterly failed to recognize the potential depth of the looming recession.

But after the debacle of the first quarter of 2001 -- Jubak's Picks fell 21% for the three-month period -- I played defense reasonably well. My total loss for the rest of the year was only an additional 2%. I ended December roughly where I'd been at the end of March.

It's looking at my year in this kind of quarter-by-quarter fashion that raises the most intriguing questions about the best investing style for the future. Yes, continuing to follow the "old" style of 1999 didn't work well in the first quarter of 2001. I would have been much better off with something like the more fundamentally conservative and lower-risk portfolio that I moved toward over the summer.

But that portfolio didn't work well in the last quarter of 2001. Sure it showed a positive return during the market recovery from the Sept. 21 low. Jubak's Picks showed a return of 15% for the fourth quarter. But just because it was a more risk-averse portfolio that paid more attention to limiting its downside exposure, this style of portfolio underperformed the riskier part of the market when it rallied in the quarter. Sure, I beat the


13% return for the fourth quarter and the 10% return on the S&P 500, but I badly trailed the 30% recorded by the Nasdaq Composite.

A Strategy Crossroads

So once again, as in 1998 (to the best of my recollection), I find myself at an investing strategy crossroads. Do I keep to the style I used so successfully from 1997 through 1999, believing that the market in 2002 and 2003 and so on will resemble that of the extraordinary period of 1995-1999? Or do I apply a new strategy -- the one that limited my losses for much of 2001, but that limited my returns as well during the hottest rally of the year -- in the belief that protecting against downside risk deserves more attention?

The evidence is that the market as a whole (and most investors) is struggling with this question. On some days the market seems to be in a "let's go for it mood" reminiscent of 1999. On these days, no one cares about valuation again, and investors even bid up the same stocks from the glory days before the bubble burst. On these days investors seem to believe that once the market gets past the current rough spot, we'll be off to the races again, a la 1999.

On other days, everyone frets about stocks being too expensive. Analysts recommend selling shares of


(WMT) - Get Walmart Inc. Report



(INTC) - Get Intel Corporation Report

on valuation -- and investors even follow through. In this mood, investors seem to be saying that a new bull market has begun, but that it will be very different in character from the one that dominated 1995-1999. Gains will be much more modest and real money will be lost by investors who don't protect their profits.

Which will it be?

No Return to the Late '90s

It's hard to make a case for a return to 1995-1999. The extraordinary gains in corporate profits -- some of which turned out to be only on paper -- that fueled the stock market during that period don't seem likely to rematerialize. The relatively limited nature of the current recession certainly suggests a muted recovery. And it's hard for me to believe that the amount of capital wiped out in 2000 and 2001 won't put a damper on growth for a few years at least. Too much money went into assets that are unlikely ever to turn a profit for their owners.

So the facts argue for a shift in investment strategy from what worked in 1995-1999. I outlined the elements of this strategy in my

last column, and that's the strategy of growth at a reasonable price that I'll be using for Jubak's Picks as 2002 unfolds.

I recognize that any shift in style comes with risks. That's why some experts say investors should stick with one style in all markets. I understand that point of view: I risk winding up with egg on my face if the 1995-1999 bull market suddenly roars back to life. And in any sharp rally like that of the last quarter of 2001, I will be tempted to shift styles again, leaving me open to getting whipsawed by a shifting market that always leaves me one step behind.

But I think I've minimized the dangers by shifting to a well-established and historically successful style like growth at a reasonable price. And I believe that I'll be able to avoid the costs of excessive style shifting by focusing on the long-term trend in the market. My shift isn't an attempt to catch a quarter's rally or to time market sentiment but is instead based on economic patterns with good longevity.

Financial markets don't have to revert to the mean, and I don't think that just because such an extraordinarily profitable period has just ended that we're doomed to a period of underperformance. But I do think the evidence suggests that it will be different this time. The odds are that the market ahead will be very different from the one just ended.

No one knows exactly what the character of that difference will be and we're not likely to know until enough time passes to reveal the nature of this market. But I think my shift in styles gives me the best shot at making some money while the weather settles.

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: Global Crossing, Intel and Nokia.