Betting Against the Market? Good Luck

Be suspicious of the bear case. It's the most dangerous to your financial health when it makes the most sense. Why? Though it is counterintuitive, the best time to own equities is in the midst of problems because "known" problems are priced into the market. When all is well with the economy and there is no major problem on the horizon, that's the time to worry (because problems are not known, they are not priced into the market).

As an investor that has been consistently on the long side, my hurdle is demonstrably lower than my friends that are short this market. I only have to be right on valuation. I can be dead wrong on timing. If I'm wrong on timing, I simply sit on my hands and wait for the market to provide some decent bids. You can't sit on your hands with short positions that have unlimited loss potential and heavy carrying costs.

Where Are the Bargains Now?

I'm finding as many companies in the bargain bin as ever, though they are all smaller companies now. While I owned Home Depot (HD - commentary - Cramer's Take) and Merck (MRK - commentary - Cramer's Take) last year, for example, the most compelling opportunities are now in smaller companies. I highlighted a $500 million small-cap in my last Turnaround Report issue, for example. And I recently mentioned Monaco Coach (MNC - commentary - Cramer's Take), with a market cap of $500 million, recently in RealMoney's Columnist Conversation.

If I'm right, that means that market-weighted index funds, such as the S&P 500 index funds, which were a popular and workable investment in the prior cycle, are less compelling in this small-cap driven cycle.

---

At time of publication, Alsin was long Liz Claiborne and Monaco Coach, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.