INVESTMENT OUTLOOK : BEYOND THE TRADITIONAL : Crystal Ball for ‘80s Proved a Bit Cloudy : Predictions May Come True, but Don’t Bank on the Forecasts

December, 1979: Jimmy Carter was president, the Iranian hostage crisis had just begun, oil prices were soaring, and inflation seemed unbeatable. Some Americans began stocking up on canned goods in anticipation of the second Great Depression. Others were putting money into solar energy as an alternative energy source. Few people had heard of Michael Milken, junk bonds or merger mania.

What were the pundits saying was in store for investors in the ‘80s? More inflation, higher oil prices and continued lethargy in the stock market.

“As we started the ‘80s, the main investment strategy was to fight yesterday’s battle, which was inflation,” says Alfred Goldman, director of market analysis at the St. Louis investment firm A. G. Edwards & Sons.

Indeed, it seemed that there was no end in sight to the economic muck known as “stagflation”--the combination of high interest rates and slow economic growth. Investors were putting their money into traditional inflation hedges such as gold and real estate; stocks and bonds were out of favor.

“Little did we know that the 1980s was going to be the decade of financial assets,” says Glenn Cutler, publisher of the Market Mania newsletter in San Francisco.

And there lies the point of this little history lesson: Don’t believe everything you hear. Or, as Michael Metz, chief market analyst at Oppenheimer & Co. in New York, puts it, “When a strategy is accepted by everyone, it’s usually wrong.”

Yes, predictions can come true, delighting the investor who has chosen correctly. But in today’s fast-changing financial markets, forecasts can flip-flop and investors can suffer. So, although investors should consider long-range trends and forecasts when selecting a strategy, they should realize that these prognostications are sometimes no more accurate than horoscopes or palm reading.

As evidence to support this piece of wisdom, consider the following investments and what the experts were saying--or not saying--about them a decade ago.

Stock Market

For more than 15 years the Dow Jones industrial average had worn a monotonous path, rarely breaking the 1,000 mark, and in December, 1979, the Dow hovered in the high 800s. “People didn’t think it would go much above 1,000,” says Peter Eliades, publisher of the Stockmarket Cycles newsletter in Los Angeles.

So what happened? In 1982 an unprecedented bull market began, which carried the Dow to 2,722.42 before a decline that culminated with the 508-point crash on Oct. 19, 1987--another event that took almost everyone by surprise.

The stock market in the ‘80s was driven in large part by the takeover craze known as merger mania, which got an additional boost from the proliferating use of high-risk, high-yield junk bonds. And the growth of computerized program trading contributed to the gyrations in the market. None of these phenomena were widely foreseen at the end of the last decade.

Oil

By late 1979, “uppermost in people’s minds was what in the world are we going to do with $100-a-barrel oil,” says Robert Kirby, chairman of Capital Guardian Trust Co., a Los Angeles money management firm. But oil, which cost refiners an average of $28 a barrel in 1979, peaked in 1981 at about $35. In 1986 the price bottomed at about $11. Oil company stocks, which had once traded at 20 times earnings, plummeted.

No one had believed that consumers would fight higher oil prices by car-pooling, driving less and buying fuel-efficient cars, says Michael Mayer, energy analyst at the brokerage of Wertheim Schroder & Co. in San Francisco. But they did. Nor did anyone expect that sources of oil from outside the Organization of Petroleum Exporting Countries would be developed so quickly, Mayer adds. But they were. In 1979, the demand for oil in the free world was 54 million barrels a day, and non-OPEC production was 22 million barrels. By the mid-’80s, demand fell to 46 million barrels a day and non-OPEC production was nearly 30 million barrels.

Real Estate

The collapse in oil prices also led to some nasty surprises in the real estate market, namely the plunge in Texas real estate. By the late 1980s, vacancies in Houston office buildings topped 30%, foreclosures were commonplace, and real estate losses helped trigger the current savings and loan crisis that promises to cost taxpayers billions of dollars in bailout money.

Perhaps the biggest shock of the ‘80s, says Anthony Downs, senior fellow at the Brookings Institution in Washington, was that commercial real estate would lose its appeal as an inflation hedge because the building boom in the late 1970s and early 1980s had left most major markets glutted. Also, he says, no one expected the rapid influx of Japanese investors, who began snatching up billions of dollars of commercial properties in big cities.

“Practically nothing was anticipated when you get right down to it,” Downs says.

Gold

High inflation typically makes investors run to tangible assets such as gold, diamonds, art and antiques. The average price for gold in 1979 was $305 an ounce, but by January, 1980, it hit $875, “and a lot of soothsayers were saying $1,000 was just around the corner,” recalls Bernard Savaiko, senior precious metals analyst at PaineWebber Inc. But as inflation cooled in the ‘80s, so did investors’ fervor for the metal. The 1985 average price was $317; it recently has been trading just above $400.

Art

In the ‘80s, did the slowing inflation rate dampen enthusiasm for art? No way. Record prices were paid for masterworks by French Impressionists and modern painters. The sale of Vincent Van Gogh’s “Irises” in 1987 for an unheard-of $54 million astonished the world.

What was behind the sudden fervor? The main factor was the tremendous wealth accrued by acquisitive investors through the stock market during the 1980s, said David Hessney, vice president of Citicorp Private Bank, which runs an art advisory service.

And who would have guessed:

* That biotechnology would emerge as the hot industry of the early 1980s, only to fall from grace when miracle drugs didn’t quickly come to market;

* That cable television, which was considered an interesting but limited technology in 1979, would reach 56% of all TV households by the late 1980s and threaten the long-term viability of the big boys on the block, the three networks;

* That cellular phones, which came on the scene early in the decade, would fuel growth stocks such as Lin Broadcasting that have since run circles around the rest of the market;

* That scores of computer-related companies would go public in the early ‘80s, backed by unprecedented amounts of venture capital, and then suffer an industrywide shakeout.

That these developments were not foreseen in 1979 doesn’t surprise weary veterans such as Downs. “That’s why I don’t make 10-year forecasts,” he says.