Swing for the Fences

I don't care how smart you are. If you own stocks, you've been pasted over the last few weeks. It's been a brutal, crushing, take-no-prisoners decline.

Now we're at a particularly dangerous juncture in the market. We're about to split and go our separate ways. Recent homogenous performance (uniformly ugly) will go to the wayside, to be replaced by unusually wide performance spreads.

Flash back to the 1980s, to after the bear market ended in 1982. Anybody with a pulse made 10% to 20% a year from 1982 to 1987. You could have let a blindfolded monkey pick your mutual fund -- it wouldn't have mattered. You still would have made piles of money. Because of a monster rally in bonds, you made 15% a year whether your stock/bond allocation was 80/20 or 20/80. You could have sworn off stocks from 1982 to 1985 and still made a 10% return in CDs and money market funds.

We're on the cusp of a cycle that is the polar opposite of 1982 to 1987. Blindfolded monkeys won't get the job done in 2009 and 2010. Make the wrong stock/bond allocation and the difference in performance in two years time could easily be 50% or even 100%. The decision of whether to hide out in T-bills or invest in a well-crafted stock portfolio will likely affect your capital by 100% or more.

Even if you make the right capital allocation -- away from the lousy risk/reward proposition in cash, bonds and mattresses, and into equities -- you're still in a perilous position. The inevitable retracement in stocks will be far from uniform. A debt destruction cycle is a ruthless sieve. It's certain to punish the weak and overleveraged. The net result will be diminished end market supply, which in turn means the winners will be big winners.

Value investors like Charlie Munger and the late, great Bill Ruane (a disciple of Ben Graham) were ravaged like everybody else in the last mega-bear market in 1973-1974. In the years subsequent, though, they soundly beat the market. Munger was up 73% in 1975 vs. an S&P return of 37%. Ruane was up 62% in 1975; if that wasn't enough, he threw in a 73% performance in 1976, easily outpacing the 24% return in the S&P.

How did they do it? They owned companies for which the price-to-value gap was wide, and they avoided companies for which the spread was narrow. You need the same strategy and then some in 2009-2010 -- you've got to assess a company's staying power. That requires an analysis of both balance sheet strength and competitive position.

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At time of publication, Alsin and/or ACM was long Men's Wearhouse, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.