(FORTUNE Magazine) – IT HAS BEEN A CONFUSING YEAR FOR INVESTORS. Interest rates were supposed to go way up. Oil prices were destined to fall. Investors were going to reward so-called high-quality stocks and shun tech stock IPOs. Right? Wrong, wrong, wrong, and wrong. As we all know, the markets defied expectations this year.

Despite the surprises, readers didn't suffer--that is, if they invested in the stocks that FORTUNE recommended. With 2004 winding to a close, we decided to, um, take stock of our own performance. The results: We had a good year, if we do say so ourselves. But don't just take our word for it--take a gander at the numbers. Some 69% of our picks beat or equaled their relevant benchmark for total return. Of the 72 stocks we recommended through the third quarter, 31 topped their yardsticks over the equivalent period by more than five percentage points (13 of this group outperformed by 20 points or more). Another 19 basically matched their peer group. And 22 lagged comparable stocks by five points or more. Our stars included oil and housing picks, which soared. The laggards were our tech selections, such as Cisco competitor 3Com (COMS, $5), which sank 41% after we touted it in January.

We typically choose investments based on a combination of valuation research, earnings potential, and stock screens, along with wide-ranging interviews with analysts, money managers, and market strategists. (In other cases, we simply feature the favorites of Wall Street's best and brightest; we've summarized the performance of those picks in the box on the next page.) Here are some of the highlights--and lowlights--of our year.

In March, we renovated our opinion on retailer Home Depot (HD, $43). After telling readers in 2003 to avoid the stock, we took note of positive signs for Home Depot and rival Lowe's (LOW, $57). Lowe's was on track to post double-digit sales growth. And under CEO Bob Nardelli, Home Depot was starting to exceed Wall Street's earnings expectations. Since our plug, Lowe's has done okay--the stock is up 5%--but Home Depot shares have delivered a healthy 16% gain. That trend may continue. Even with its recent run-up, Home Depot trades at 19.5 times the past 12 months' earnings, vs. Lowe's 22 P/E ratio. Home Depot's disarray before Nardelli's arrival in 2002 actually helps the stock now. "We continue to believe that HD has more leverage relative to expectations [than Lowe's] due to the many problems Nardelli inherited and has been fixing," UBS retail analyst Gary Balter wrote recently. His price target on Home Depot: $52.

If Home Depot has benefited from the recent real estate boom, real estate investment trusts, or REITs, have gone through the roof. The Morgan Stanley REIT index roared ahead 23% for the year, and REITs are on track to outperform the S&P 500 for the fifth year in a row. Two names FORTUNE highlighted in March, LaSalle Hotel Properties (LHO, $31) and AvalonBay Communities (AVB, $69), have gained 55% and 39%, respectively. But don't expect the good times to continue, says Steve Sakwa, REIT analyst at Merrill Lynch. He's worried the stocks have gotten too expensive--an average price-to-cash-flow ratio of almost 18. He thinks mall REITs such as Simon Property Group (SPG, $60) may still have some upside but he's unenthusiastic now about apartment trusts such as AvalonBay. "We're cautious," he says. "Of course, we were cautious in 2004, and look what we got."

We know what he means. Throughout the year we advised steering clear of investments that reminded us too much of 1999--stocks that were hyped to gravity-defying valuations. As a result, readers may have missed out on a couple of glorious rides. After we pooh-poohed Deckers Outdoor (DECK, $40), maker of fashionista favorite Ugg boots, in April, the stock climbed another 57%. More recently we raised questions about e-tailer Overstock.com (OSTK, $56), and in just a few weeks the stock floated up another 47%. (Misery loves company: Roughly 40% of Overstock's float is held by short-sellers.) We're sticking to our story. Overstock still hasn't shown it can make money, and Decker still trades, inexplicably, at a premium to peers with similar margins.

We also recently cautioned readers to avoid the stock--Google (GOOG, $165)-- that has created a '90s-style frenzy. In mid-November, after the shares had flown all the way up to $185, we said stay out. Sure, the company is profitable and trades at a discount to dot-com brethren eBay and Yahoo. But insiders have begun selling--another 227 million restricted shares could come on the market in the next few months--which could dilute the value of existing stock and tamp down prices. Since we issued our advice, the shares edged over $200 before sliding back to $165. (For another view of Google, see cover story.)

At the start of the year, we endorsed a blue-chip strategy. The Dow had just hit 10,000 (again). Aging baby-boomers, we predicted, would be casting about for dividend-paying investments. Investors would be looking to take profits from overvalued small-cap names in favor of undervalued big caps.

As things turned out, small caps have continued to perform, and the market hasn't awarded an across-the-board premium to large-cap, higher-quality stocks. But many blue chips did deliver strong returns in '04, including two that won our blessing: EOG Resources (EOG, $74), which returned 47%, and Norfolk Southern (NSC, $34), which is up 50%. (We advise not putting new money into either now.)

As part of our blue-chip approach, we also endorsed advice from Charles Carlson, editor of the DRIP Investor newsletter. He recommended a basket of the five worst-performing Dow stocks of 2003. The five's results varied wildly. Eastman Kodak (EK, $33) climbed 20%, and Johnson & Johnson (JNJ, $61) rose 21%. But telecom companies SBC (SBC, $26) and AT&T (T, $18) continued to struggle, and Merck (MRK, $27) plunged 40% on Vioxx troubles. Carlson is undeterred and thinks investors should pursue the same strategy in '05. "You have to have some patience," he says. "But you have to buy a basket of them; the strategy has to be part of a broader portfolio mix." Sometimes the best advice is the least surprising.