Get Positive About Buying Negativity

Do you think you're safe? Is your portfolio immune from disturbance because you own the safest, highest-quality companies? You aren't safe, of course. There is no discrimination among publicly traded companies. All businesses eventually suffer a cycle of problems.

You only have to think back a few years to recall when market-leading, best-in-class, number-one-in-their-sector-type companies such as Lucent (LU - commentary - Cramer's Take), EDS (EDS - commentary - Cramer's Take) and Xerox (XRX - commentary - Cramer's Take) each endured steep falls. Other leading companies suffered less-pronounced declines a couple of years ago, but their struggles were noteworthy nonetheless: Citigroup (C - commentary - Cramer's Take), Home Depot (HD - commentary - Cramer's Take) and General Electric (GE - commentary - Cramer's Take) each struggled mightily in 2002. Most recently, former stalwarts Coca-Cola (KO - commentary - Cramer's Take) and Colgate (CL - commentary - Cramer's Take) have been hampered with operational issues.

Get the point? You can't hide. It doesn't matter if a company is lucky enough to put together several consecutive years of success. At some point, every company struggles. As I've said repeatedly in columns for RealMoney, there are only two kinds of companies: companies with problems and companies that are going to have problems.

It follows, then, that the investor who subscribes to a "problems are inevitable" mantra should look to allocate capital to problem-plagued companies and industries. Buying into negativity is a prudent investment strategy for several reasons:

1. The bad news is discounted. Stocks are risky because of what is unknown, not because of what is known. Once the bad news is out, it is generally discounted into the share price, and then some. Additional bad news often does not result in further price depreciation because the stock already has been heavily discounted. Further bad news is expected.

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At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, 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].