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comfortable. 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.
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
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
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,
, 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.
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
, 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
, 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.
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