Debunking the Risk/Reward Principle By Arne Alsin Special to TheStreet.com 7/16/01 12:58 PM ET

Most investors believe that to earn high returns you have to take high risk. And if you take low risk, you'll generate low returns -- the risk/reward principle. But like a lot of the gibberish spouted on Wall Street, that's nonsense.

If I can buy a stock at 75 cents on the dollar, relative to the underlying business value, my risk is low and my reward is ample to the extent the stock returns to fair value. And if I can buy the same company at 50 cents on the dollar, my risk is even lower, and happily, my potential reward is higher -- in direct contravention to this supposed truism, the risk/reward principle.

My theory on risk and reward is backed up with real-world evidence, below, as I update all 21 recommendations posted in prior columns.

Every equity below represents, in my opinion at least, a low-risk position. There are no tech companies, big-caps, or high price-to-earnings stocks (based on normalized earnings). All of the market favorites from the last cycle -- Intel, Microsoft, GE and Sun Microsystems, to name a few -- are excluded.

Even if some positions are arguable in terms of risk, in the aggregate I don't believe there is a question that the positions are lower in risk than the average growth stock. And, of course, the reward speaks for itself.

Tracking the Picks From Year's End
Stock	Date of Column	Symbol	Cost	Current	GAIN
Whirlpool	12/19/00	WHR	$40	$68.66	71.65%
Circuit City	12/28/00	CC	10.80	18.19	68.43
United Airlines	12/28/00	UAL	35.88	35.58	-0.84
E Trade	12/28/00	ET	7.34	6.11	-16.76
J.C. Penney	12/28/00	JCP	10.25	27.39	167.22
Raytheon	12/28/00	RTN	27.50	26.11	-5.05
TRW	12/28/00	TRW	36.38	42.45	16.68
Georgia Gulf	12/28/00	GGC	15	16.24	8.27
Hasbro	12/28/00	HAS	10.06	14.52	44.33
Office Depot	12/28/00	ODP	6.94	10.20	46.97
HB Fuller	12/28/00	FULL	40.31	50.84	26.12
				Return	38.82%

This Year's Recommendations
Stock	Date of Column	Symbol	Cost	Current	GAIN
Safeco	1/26/2001	SAFC	$24.00	$28.83	20.13%
Delta Airlines	3/30/01	DAL	39.50	45.70	15.70
Centennial Bank	3/30/01	CEBC	7.75	9.35	20.65
Northwest Airlines	4/17/01	NWAC	23.50	24.66	4.94
Liz Claiborne	4/24/01	LIZ	44.50	49.90	12.13
Kmart	5/2/01	KM	10.40	11.36	9.23
Ameritrade	5/9/01	AMTD	7.55	6.47	-14.30
York International	5/10/01	YRK	30.44	31.39	3.12
Textron	6/5/01	TXT	58.97	54.79	-7.09
Continental Airlines	7/12/01	CAL	50.00	51.00	2.00
				Return	6.65%

With nary a sell recommendation, turnover of the portfolio is zero, though I have made it clear that I believe United Airlines, a unit of UAL (UAL:NYSE - news - commentary), is the worst-managed airline in the sector and that Northwest (NWAC:Nasdaq - news - commentary) and Continental (CAL:NYSE - news - commentary) are better alternatives.

Investors should not run out and buy all 21 recommendations because the run-up in a number of names has altered the risk profile. Because I am not close to recommending a sale of any of these issues, I'll highlight the best buying opportunities as of today.

Year-End Recommendations -- Favorites

It is difficult to choose among recent picks, but I continue to believe Northwest Airlines and Continental will gain at least 50% over the next year or so as business gains momentum off of a multiyear cyclical low. And Kmart (KM:NYSE - news - commentary)? See my face-off later Monday with Chris Edmonds where we go toe-to-toe on the topic.

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