There isn't a single portfolio strategy that is superior to all others. Great investors like Michael Price (special situations and restructurings), Peter Lynch (growth) and Marty Whitman (value) each have employed different strategies in building impressive, market-beating, long-term records.

While there is no single methodology that every investor should embrace, there are some basic investing principles that you can use to build your portfolio.

Stocks Are Assets

Ignoring the fundamental fact that stocks are assets is the main reason investors are notorious for selling low and buying high. Investors do not treat their stock holdings in the same way they treat other valuable property. Instead, many view stocks as speculative pieces of paper, meant to be traded in the casino known as the stock market.

Investors turn to nonsensical portfolio strategies that result in irrational behavior, such as buying stock after and because the price has increased, or selling stock after and because the price has declined. Owners of other types of assets don't engage in this irrationality. An owner of a $100,000 home, for example, isn't going to sell his or her asset because offers decline from $95,000 to $85,000 from one week to the next. But selling because of a declining bid is endemic to the stock market.

You can't get any more basic than this: A stock represents an ownership interest in a business entity, a legally enforceable claim on the net assets of that corporation. It follows, then, that the central preoccupation of an investor should be putting a value on this asset known as stock.

Value vs. Price

Knowing and understanding the value of a stock is of paramount importance. This is what great investors think about: What is the cost (price of the stock) and what is it worth (the value of the business)? Answering this simple question makes buy and sell decisions easy. And it cuts emotions and other irrational influences out of the equation.

For example, my calculations indicate that the minimum current business value of Commerce Bancorp ( CBH) is $80 per share. And I think Commerce's value will move north, toward $90 per share, over the next year. With Commerce's current share price around $60, taking a position is an easy decision.

Coca-Cola ( KO) has oscillated between $39 and the high $80s over the last few years. The business is worth at least $55 per share, in my opinion. A price near the current quote of $40 per share makes it a compelling buy. On the other hand, a stock quote anywhere near the old highs makes it a compelling sale.

Many investors buy a stock simply because they are enamored of the product or the service that the company renders. That's a wholly inadequate method for selecting stocks. Liking the coffee at Starbucks ( SBUX) or the shopping experience at Home Depot ( HD) can be a starting point in equity selection, but it's only a starting point. Much more important is a thorough understanding of the relationship between price (what is the price of the stock?) and value (what is the value of the business?).

All Stocks Are Mispriced

Forget the academic contention that stock prices are efficient. Look at the price oscillation of virtually any stock and compare it with the change in the underlying business, and you'll quickly conclude that prices change much more than businesses change.

This construct is useful for the investor in managing his or her portfolio: Every stock, without exception, is mispriced. Some are mispriced by a little, some are mispriced by a lot. But all are mispriced.

At their current prices, I think Starbucks (trading around $55) and Home Depot (around $43) are "mispriced by a little." But over the last couple of years, these two stocks have been "mispriced by a lot," as both have traded near $20, less than half of the current quote for each. For more on this, see my favorable column on Home Depot when it traded below $25.

Following the construct that every stock is mispriced forces an investor to evaluate critically each one of his portfolio positions. Because of factors such as taxes and (one hopes) a growing business value, it does not follow that an investor should liquidate a stock simply because it is "mispriced by a little" or slightly overvalued. But it does follow that portfolios containing companies that are very undervalued offer high potential return coincident with low relative risk.
At time of publication, Alsin and/or ACM was long Commerce Bancorp, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. 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.alsin@thestreet.com.

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