Investing Against the Grain - TheStreet

Investing Against the Grain

Sometimes, challenging conventions can help investors avoid mediocrity.
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It's fun to go against the grain. Particularly when investing in the stock market, it's good to shake things up, to challenge conventional thinking. The alternative is not good: Marching in lockstep with the consensus is a certain prescription for mediocrity. Do you want to beat the market? Then think outside the box and challenge any and all conventions. Be outrageous!

Here are a few personal predilections that have worked well for me. In contrast to the staid methods on Wall Street, they are certainly unconventional.

Get in Front of Change

The crowd likes to wait until it's safe before taking a position. Analysts and many investors like to see evidence of improvement or a cycle turn before investing. I don't think waiting for evidence of a turn in business conditions equates with safety at all. In fact, I think safety is reduced.

The sooner I get positioned in front of a cycle turn, the cheaper the stock price. And with a lower stock price, the wider the divergence between stock value and business value, so the wider the margin of safety. If I wait, I'll have to pay up for the stock, reducing the disparity between stock price and value, thereby increasing risk.

Don't Diversify Too Much

Stock market experts always preach diversification. I'm all for spreading out the bets a bit -- but not beyond the bounds of reason. As I said in a

prior column on mutual funds, holding 100 or 150 stocks is excessive and unnecessary to achieve the benefits of diversification. I don't believe investors get value paying anyone for his or her 150th best idea.

Also, the more stocks you buy, the more closely performance will mirror the market. If you want performance that parallels the market, buy an index fund!

Buy Unpopular Companies

I don't have a lot of competition in this area, as the crowd has been overly focused on popular growth companies for a long time. But I like cheap stocks, and you generally get companies more cheaply when they have problems. As I've said, there are only two kinds of companies: those with problems and those that are going to have problems.

The margin of safety is wider when you can buy stocks at a large discount to underlying business value. Companies with problems are generally heavily discounted, often on the assumption that the problems will around for a long time.

The higher-risk proposition, in my view, is to pay a premium price for a company without problems. Because I can't acquire shares of a popular growth company at a significant discount to value, the margin of safety is narrow. When problems eventually occur at that company, the resulting price decline can be severe.

(For more background on investing in companies with problems, please

see

some of my

previous columns.)

Don't Invest in Equity Mutual Funds

The crowd -- even relatively sophisticated investors -- is obviously enamored with mutual funds. Not me. In an

earlier column, I listed 10 reasons why investors should avoid actively managed equity funds. In the aggregate, performance of actively managed equity funds always has lagged behind the market. With the performance of funds so embarrassingly low, consider being mediocre on your own, and save yourself the fees.

Top-10 Update

For the six-month anniversary of my

Top-10 Turnarounds column, posted back in December, I'll have a two-part update next week, exclusively at

RealMoney.com

. As usual, I'll be blunt and unequivocal in my review of each turnaround. To date, the list has returned about 30%, easily outpacing the

S&P 500

, which has declined by 7% in the same time period.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. 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. 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

arnealsin@home.com.