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Betting Against the Market? Good Luck

They often fail to recognize the asymmetry of being long vs. short.

To me, there's no such thing as a balanced long and short portfolio. A portfolio with an equal number of longs and shorts is not balanced. Investors who are long equities not only enjoy the overwhelming advantage of time, but also don't have carrying costs, such as margin interest and dividend reimbursement. Also, longs have limited liability (they can lose only their investment), while shorts have unlimited liability.

The key to this asymmetry, though, is that longs have profitability on their side. In the aggregate, business always has been and always will be profitable. And profits add to equity value. You can't ignore history: Given enough time, stocks always go up because businesses make money.

Maybe you can make the case that Wal-Mart (WMT - commentary - Cramer's Take) or Coca-Cola (KO - commentary - Cramer's Take) is overvalued by 20% or 30%. That doesn't mean they should be shorted or that their stock prices have to drop. Because they're profitable quarter after quarter and year after year, their business values can catch up to -- and eventually even pass -- their stock-market values. All it takes is time.

They try to read economic tea leaves.

Many investors buy stocks during a strong economy and avoid stocks when the economy is poor or struggling. This often-followed rule is dangerous to your financial health. Look at each and every recession over the past 100 years. The best time to buy equities is when times are tough.

The only exception was the double-dip recession in 1982, when the Fed embarked on an aggressive interest-rate-increase program to stave off inflation. In 2002 and early 2003, we read and heard -- ad nauseum -- about a looming double-dip recession and/or the onset of Japanese-style deflation, both of which I argued against in column after column for RealMoney.

Instead of wasting time trying to divine the economic future, you could instead enhance your financial health by concentrating on finding undervalued stocks or, alternatively, in finding a smart money manager or two who can do it for you. Even if you can't get past your angst about the economy, that doesn't mean you should avoid owning equities. For example, I've included several health care stocks, such as Bristol-Myers (BMY - commentary - Cramer's Take) and Tenet (THC - commentary - Cramer's Take), in The Turnaround Report. In these names, the economy is irrelevant because health care is not sensitive to economic cycles.

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Look for Part 2 of this column Thursday, when I'll discuss a few more ways in which investors can sabotage their pursuit of wealth accumulation.

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At time of publication, Alsin and/or ACM was long Hasbro, Bristol-Myers and Tenet, 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.