(MONEY Magazine) – Shareholders lost a lot of confidence as well as money in the August stock market rout triggered by Iraq's takeover of Kuwait. Saddam Hussein's tanks crushed such investment canons as the oil glut, the peace dividend and the economic soft landing. Even some Wall Street generals who initially counseled courage have begun to beat a retreat. Consider the agonizing August of Robert Salomon, 53. As Salomon Bros.' top stock strategist (and a third-generation descendant of the giant brokerage's founding family), he advises legions of money managers around the world. He deploys the $73 million Salomon Bros. Capital Fund (5% load; 800-221-5350), one of four stock funds that his firm bought last May from Shearson Lehman Bros. All told, he has a five-star record: Salomon's buy list of stocks outpaced the bull market's eight-year rise to July 1, gaining an average 25.1% a year vs. 20.5% for Standard & Poor's 500-stock index. On Aug. 1, the day before the Kuwait sheik-out, Salomon met with writer Junius Ellis and presented a strong case for owning growth stocks that would shine in a soggy economic climate. Don't be spooked by recent interest-rate hikes and inflation, argued Salomon. The aging bull market still has enough spunk to carry the Dow Jones industrial average above 3100 by year-end. Two tumultuous weeks later, the price of oil was up 23% and the Dow was down 5% to 2748. But Salomon gamely stood his ground. ''The worst news is probably out,'' he assured Ellis on Aug. 15. ''It would be unwise to restructure our recommended portfolio to protect against what has already occurred.'' Over the next six trading days, however, the price of crude climbed another 21% to $32 a barrel, and the Dow slid 10% to 2483. And Salomon? He made an about-face, urging clients to shed stocks in preparation for a bear market. ''The Dow could sink to 2100 in six months or sooner,'' he warned in a third interview on Aug. 23 (the index recently stood at 2593). Highlights: Q. What can investors learn from your about-face? A. A greater appreciation of how quickly today's markets dominated by professionals can penalize you for taking an extra week to make up your mind. On two occasions in recent years -- the October 1987 crash and the October 1989 mini-crash -- investors profited by buying or not selling into the panic. At the outset of the Middle East crisis, I believed that it once again would pay to sit tight. Now I don't. The risks are too high of a stalemate in the Persian Gulf, a recession in the U.S. and a bear market in stocks. Q. What's your strategy? A. Since Aug. 20, I've recommended that our clients substantially reduce their ^ stockholdings and invest part of the proceeds in energy stocks. The Middle East crisis has set in motion a transfer of wealth from consumers of oil to producers. We want to be on the right side of this transfer -- namely, in energy stocks -- and cut back our previously large exposure to consumer- spending sectors. Many widely held food, drug, retail and airline stocks are on the wrong side and appear overpriced. Q. What are you selling? A. A bunch of terrific growth companies that will probably come through a recession in great shape -- but their stock prices will be a lot lower. Names recently removed from our recommended portfolio include Abbott Labs, AMR Corp. (American Airlines), Anheuser-Busch, Delta Air Lines, Eli Lilly, Hilton, Humana, Johnson & Johnson, McDonald's, Nike, Pepsi and Procter & Gamble. Q. Which oil stocks are you buying -- and why? A. I'm focusing on refiners, as opposed to fully integrated oil companies. Historically, soaring crude prices shrink refiners' profit margins, and vice versa. But margins on gasoline and other refined products actually doubled in August and are unlikely to decline soon. The main reason is a capacity squeeze in the Persian Gulf. Kuwait refineries, which account for about 1% of world capacity, are closed. Additional Mideast capacity is being strained by the U.S. military build-up. My favorite refiner stocks ((both on the New York Stock Exchange)) are Ashland Oil (recently $32.50 a share) and Diamond Shamrock ($20.50), which have been trading at the low end of their 12-month price ranges. Q. What other stocks should go up in the down market that you foresee? A. Two backdoor energy plays have been largely overlooked. Ogden Corp. (NYSE, $18.75) owns 86% of spin-off Ogden Projects, a leader in the field of burning garbage to produce electricity. This business will continue to expand even in a recession and help the parent generate 20% annual earnings growth over the next five years. I'm also keen on Fund American (NYSE, $48), which owns a huge and increasingly valuable portfolio of domestic oil-and-gas stocks (see page 167 for details). I think Boeing (NYSE, $48.25) is an exceptional bargain based on its strong sales -- up 36% on 1990's forecast $27.5 billion -- and $91 billion backlog of plane orders. Q. Why do you expect the market to become more grisly? A. A buyer of stocks today is banking on one or two things. The first is that the sharp decline in stock prices already fully anticipates the market risks compounded by higher oil prices. The second is that the Middle East crisis will be quickly and favorably resolved. Both are poor bets at this time. Worse, the bearish trends in place -- higher interest rates, lower corporate profits and slower economic growth -- are gaining momentum. As a result, I believe the U.S. will enter a mild recession, beginning in this year's fourth quarter, that will extend through the first half of 1991. I also anticipate that 1991 earnings for the S&P 500 stocks will fall 7%, vs. a projected 3% decline this year. Q. How would your outlook change if Iraq bowed to pressure and began withdrawing from Kuwait? A. I'd look for a big sigh-of-relief rally in which the Dow regained at least half of its previous decline -- perhaps in one day! But that's a real long shot. Instead, I'd view the first bear-market rally as an opportunity to lighten up on stocks even further.