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Dow Jones S&P 500 NASDAQ 10-Year Note
10,270.47 1,093.48 2,167.88 34.29
Oil *
75.55
UP
73.00
UP
6.24
UP
18.86
DOWN
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10 Yr
3.43%
SPDR Gold
109.74
+0.72%
+0.57%
+0.88%
-0.49%
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RealMoney.com : The Turnaround Artist


Never Mind the S&P 500

By Arne Alsin
Special to TheStreet.com
01/03/2002 10:44 AM EST

Get uncomfortable. I know that people are generally more comfortable investing with the consensus. But that isn't what great investing is all about.

Great investing is about seeing things that other people don't see. But to get into the position where you can do that, you have to get uncomfortable with conventional wisdom.

Related Stories
Near Misses for New Year
Turnaround Picks -- and Pans -- of 2001
Top 10 Turnaround Candidates for 2002, Part 5

Seeing things that other people don't is important when selecting individual stocks. For example, none of my stock picks last year were popular. None were highly touted by brokerage analysts, and not one was considered a "must own" by institutional investors.

But of the 11 stock picks that were in place at the beginning of 2001, all of them beat the market, with seven returns in excess of 50%, including two above 150%.

The Index's Irrelevance

Seeing things that other people miss also applies to the market as a whole. In my view, for example, market-weighted indices like the S&P 500 are irrelevant in this cycle.

I realize that view is outside the bounds of conventional wisdom. Here's why I think it's true: The average stock started a bull market back in December 2000. The S&P 500 has completely failed to reflect that fact. Take a look at the chart below, one that I used in my recent Face-Off column:



As you can see, the S&P 500 doesn't reflect what is happening to the average stock (represented by the advance-decline line). That's because the S&P 500 is a market-weighted index, meaning that each company's impact on the index is proportionate to the company's market capitalization.

Because we're in an era when big-caps are overvalued relative to smaller companies, market-weighted indices like the S&P 500 have little, if any, meaning to individual investors.

Investors don't market-weight their portfolios, so why should they pay attention to a market-weighted index? If the typical investor decides to buy, say, Wal-Mart (WMT:NYSE - news - commentary - research - analysis) and Office Depot (ODP:NYSE - news - commentary - research - analysis), then he or she will generally invest similar amounts of capital in each.

If an investor uses a market-weighted system, though, a $5,000 investment in Office Depot would have to be balanced against a $230,000 investment (46 times $5,000) in Wal-Mart, because Wal-Mart's $260 billion market cap is about 46 times the size of Office Depot's $5.6 billion.

That's why the S&P 500 index is meaningless (maybe even misleading) to the individual investor. A 10% move in Wal-Mart will have 46 times more impact on the S&P 500 than a 10% move in Office Depot. The advance-decline line, giving equal weight to each equity, is much more meaningful than the S&P 500 to the typical investor's portfolio.

Let the parade of pundits pontificate about the S&P 500's potential gain or loss in 2002. The smart investor knows it's just nonsense. The S&P 500 doesn't represent the "market" for average investors. But to understand that, you'd have to see something that the pundits don't.

Favorite Turnaround

I've received a number of emails inquiring about my favorite stock for 2002. Of my Top 10 Turnaround Candidates for 2002, several stocks could make a significant move upward this year, such as York (YRK:NYSE - news - commentary - research - analysis), Phillips-Van Heusen (PVH:NYSE - news - commentary - research - analysis), Textron (TXT:NYSE - news - commentary - research - analysis) or Manpower (MAN:NYSE - news - commentary - research - analysis), among others. If I have to single out one name as a favorite, though, I'll go with one of my safer bets, Toys R Us (TOY:NYSE - news - commentary - research - analysis), which I think is a good bet to trade north of $30 a share in 2002, or more than 50% higher than Wednesday's close of $19.96.


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Dow Jones S&P 500 NASDAQ 10-Year Note
10,270.47 1,093.48 2,167.88 34.29
Oil *
75.55
UP
73.00
UP
6.24
UP
18.86
DOWN
0.17
10 Yr
3.43%
SPDR Gold
109.74
+0.72%
+0.57%
+0.88%
-0.49%
Data delayed 20 minutes

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM was long Office Depot, York, Phillips-Van Heusen, Textron, Manpower and Toys R Us, although holdings can change at any time. 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 arne@alsincapital.com.
Read our conflicts and disclosure policy.
Order reprints of RealMoney.com articles. Top


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Sorry, the page you requested could not be found

Sorry that you couldn't find the page you wanted.

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Content Search:

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TheStreet Directory

Dow Jones S&P 500 NASDAQ 10-Year Note
10,270.47 1,093.48 2,167.88 34.29
Oil *
75.55
UP
73.00
UP
6.24
UP
18.86
DOWN
0.17
10 Yr
3.43%
SPDR Gold
109.74
+0.72%
+0.57%
+0.88%
-0.49%
Data delayed 20 minutes