Assessing the Damages on Wall Street Battleground.

WELCOME, new investors, to the field of battle!

The misery of recent declines is what real investing is all about. It is what the late Gerald Loeb called "The Battle for Investment Survival." It isn't pretty. It's not the same as the parades of wealth and enrichment that you're used

You will notice that some of your friends are no longer with us. They were early casualties. All I can say is that it was mercifully quick. They probably never knew what hit them. One day they were proud shareholders, marching in the incredible army of Priceline or Amazon, purchased on margin, and suddenly they were gone. Obliterated. Wiped out.

You yourself may be wounded and wondering why you volunteered in the first place. You may even be feeling a deep urge to drop everything and flee. I don't blame you.

It's been tough. Now, between the sharp drop in Internet stock prices and the broad volatility of recent weeks, you may have an inkling of how those who had been through the campaign of '62, the war of '73-'74 or the revolution of '87 have felt about the current market. They knew that the victories were too easy. They knew that the biggest casualties always occur when the overconfident make their last rush on the citadel of wealth. This may be a good time to regroup.

Such thoughts occurred in recent days as I watched stocks, including the handful I own, fall at a brutal pace. If your portfolio has become an embarrassment since spring, let me assure you that you are not alone. Millions of Americans are discovering that stocks go down as well as up. They are also discovering that their brave assertions of being "risk tolerant" were wrong. What they could tolerate was the risk that a stock might not rise very fast. What they weren't prepared for was a stock that toppled like a body off a samurai's blade.

So let's examine the battlefield and assess our options:

This army isn't trained. Unlike virtually all other bull markets in history, this one is truly a "people's market" Given freedom from high brokerage commissions and the opportunity to trade our own accounts, we've become Chumers R Us. Most of us think a long-term investment lasts a week.

This market takes no prisoners. A lot more damage can be done if you are in Internet stocks. As money manager Martin Sosnoff observed in a recent issue of Forbes, if Amazon grew to $10 billion in revenues by 2003 and developed Wal-Mart's after-tax profit margin, it would still be selling at 70 times its possible future earnings, while Wal-Mart, which is developing its own Web site, is selling at 20 times its likely 2003 earnings. Yahoo sells at 122 times revenues, a multiple usually considered impossibly high as a multiple of earnings. Internet stocks may have fallen sharply, but the bottom is probably a lot further down.

There is room for an orderly retreat. Money that was taken from professionally managed mutual funds because it couldn't keep up with the S&P 500, let alone AOL, can go back to mutual funds so that it can be invested in a more disciplined way. Many individuals should take this road.

Safer ground is starting to appear. Market strategist Steve Leuthold points out that the valuation gap between large- and small-capitalization stocks is at record levels. While the largest 100 companies sell at 30.8 times trailing earnings, small-capitalization companies sell at 16.8 times trailing earnings. He believes there is now less risk in small companies than in large companies.

Very safe ground is visible. Cash, largely forgotten in the rush for supernatural returns, is a good haven for at least a portion of your portfolio. A recent survey by Pensions and Investments, a trade publication, found that even pre-retirees had 85 percent of their 401(k) plan assets in equities.

This means there is plenty of room to raise cash, reduce risk and still have a good long-term investment plan.

Scott Burns is a syndicated columnist.

Understanding Valuations

There are four commonly used measures of relative value that relate the operation of the company to its market price:

* Price-to-earnings ratio, or P/E

This measures how much investors are willing to pay for a dollar of earnings. It's now at a record high for the market as a whole.

* Price-to-book value

The book value of a company is the value of its assets according to generally accepted accounting principles. In periods of great optimism, investors are willing to pay a large premium over book value for popular companies. Many dismiss this indicator because they believe book value is no longer an accurate measure of the capital employed by a company, primarily because so much is embodied in the knowledge capital of the work force. That capital walks out the door every night and is not on the corporate balance sheet.

* Price-to-cash flow

Add depreciation to earnings and you get a measure of the cash available to a corporation. Many analysts feel this is a better measure of corporate capability than simple earnings per share.

* Price-to-revenues

This measure compares the total market value of the company to its revenues. Like the notion that the box of manure under the Christmas tree must have a pony in it, some investors feel that profits will eventually be found in a large box of revenues and price the stock accordingly. This is a very popular measure for Internet companies. Yahoo, for instance, was recently selling at 120 times revenues.