But what we have here is a case of same headline, different story. Unlike the 1987 collapse, which affected almost all stock groups, the Nasdaq's recent tumble was only a virtual crash. Most of the damage was concentrated in a small group of stocks--dotcoms and other pricey tech issues. The rest of the market was largely unaffected, and some groups actually went up. And unlike the 1987 crash, which turned out to be a short-lived interruption in the market's long climb, the Nasdaq's virtual crash signals fundamental shifts in market dynamics, particularly for tech stocks.

Investors who focus only on the indexes may be expecting a replay of the simple rebound that followed the '87 crash. They may be tempted to buy on dips, assuming that the same big-cap tech stocks that were top performers going into the Nasdaq crash will bounce back the fastest coming out of it. But the more you examine the differences between this crash and the one in 1987, the more it looks as though a new stock market strategy is called for.

Boom and bust. The key difference is that the '87 crash was mostly a response to the overall economy, while the recent Nasdaq crash is about changes in technology. The broad stock boom that developed in 1986 and '87 because investors were enthusiastic about the robust economy was squashed when strong growth and inflation fears prompted the Federal Reserve to jack up interest rates. Most stocks participated in the October crash, but after the economy cooled down, stocks again climbed to all-time highs (until the 1990 recession began).

The boom--and crash--of the past six months has been fundamentally different. The central issue is technological change--specifically, what happens to an elite group of companies once their grip on powerful new technologies begins to loosen. As a result, stocks have not all moved together. In fact, different sectors have often gone in opposite directions.

SURGICAL STRIKE The Nasdaq crash didn't lead to a wider collapse. The charts show P/E ratios for stocks in three sectors at the start of the year, at the Nasdaq peak and after the April crash. Growth rates are in parentheses. Notes: Data as of April 24. P/Es are based on estimated 2000 earnings. Growth rates are projected for five years. Source: Baseline.

For much of this year, the Nasdaq soared as investors infatuated with the promise of endless growth bid dotcoms and the hottest tech stocks up to unprecedented levels. Meanwhile, Old Economy stocks stagnated or fell, undercut by worries about creeping inflation and the possibility that higher interest rates would slow the economy in the second half. By mid-March, the divergence between Old Economy and New Economy stocks reached a level more extreme than the two-tier market of the early 1970s. Then, when shareholders started to worry that first-quarter earnings would be disappointing, they started dumping the high fliers, which then came back closer into line with the rest of the market.

So it would be easy to dismiss the tech wreck as a case of what goes up must come down. That interpretation would lead you to believe that the market was simply restoring balance; now that it has worked off its excesses, it's ready for another two or three years of big gains. In this scenario, tech stocks would again lead the charge, with the most popular big-cap tech names reclaiming their positions at the forefront.

In my view, though, what's going on is a little more complicated. The evidence is in the chart on page 71, which shows changes in the price/earnings ratios of assorted stocks in three major market sectors. Almost all of the recent damage was done to Internet stocks and the fastest-growing tech stocks (there was also some spillover into telecommunications and health care). Yahoo!, for instance, fell 43% from its high, and some of the flimsiest dotcoms collapsed by more than 80%. Among big techs, Intel is down 16% from its recent high and Cisco and Oracle are both down 18%. Microsoft is down 40%, but that reflects legal problems as well as slower revenue growth in the first quarter.

Safe havens. Other groups, such as consumer growth and industrial stocks, not only suffered less--they often moved in the opposite direction from tech stocks. The biggest winners during the Nasdaq crash tended to be conservative consumer stocks that offer safe havens for investors fleeing chaos in the tech sector. Gillette and McDonald's, for instance, both enjoyed substantial P/E increases in April. One of the biggest winners was Berkshire Hathaway, the holding company of superstar investor Warren Buffett that I profiled in this column last month. Buffett is a confirmed believer in buying nontech growth stocks when their prices are reasonable and then holding these shares for years. Berkshire was selling at $42,000 a share on March 10, when I first wrote about it. Since then the stock has risen more than 40% to top $60,000.

In short, what we're seeing isn't a simple boom-and-bust like the one back in 1987 but intense shifts among major market sectors. And there's no reason to believe that these swings are over. Despite the recent drop in their share prices, many tech stocks are still overvalued by at least 30%.

When a new technology takes off, a relatively small group of stocks may develop a near-monopoly position. And that's exactly what's happened over the past five years. America Online, Yahoo! and a few other Net stocks now greatly overshadow the rest. The same goes for Cisco, Lucent and Nortel in hardware, Oracle and Microsoft in software, and Intel in microprocessors. And a few e-tailers like Amazon have captured much of the shopping traffic.

But that type of dominance rarely lasts. Established tech stocks end up being attacked from two directions. On one side, traditional businesses find ways to profit from the new technology. Once stellar retailing chains such as Home Depot and Wal-Mart get up to speed on the Net, it's hard to believe that any e-tailer will beat them. Eventually the Old Economy becomes the New New Economy.

On the other side, continuing technological change undermines the position of the elite. Microsoft and Intel, for instance, can no longer be sure that their Wintel standard will endure as personal computers become more integrated with the Net. Similarly, premier Internet-hardware makers such as Cisco are facing smaller, nimbler rivals (for more, see the story on page 58).

If you believe, as I do, that such fundamental changes are occurring among tech stocks, then several investing themes emerge. Old Economy stocks may perform better over the next few years than they have since 1998, particularly if they are able to use the Internet to enhance their existing businesses.

There's no reason to believe that many of the dotcoms that have been spectacular performers over the past couple of years will ever fully recover. There's also no guarantee that the most popular big tech stocks will be able to sustain their recent growth rates or their extremely high P/Es. The Nasdaq crash marks the end of a period in which you could make easy money buying the market's favorite stocks at any price and watching them get even more overvalued.

From here on out, stock pickers should make very conservative estimates of companies' core growth rates and then invest in those that carry the cheapest P/Es relative to those rates. In some cases, that may mean favoring less flashy tech stocks rather than the dozen top stars. And though tech should make up 30% to 40% of your portfolio, it's important to be well diversified with consumer stocks like Heinz or Hershey and inflation hedges like Exxon Mobil. The tech stars may still lead the market the next time there's a short-term rally, but buying solid core growth at the lowest price stands to give you the best return over the next five years or longer.