Diversification

I happen to think that diversification is important. I agree that over-diversification is dilutive. One strategy that I think makes terrific sense is where you own 2-3 leaders in 4-5 sectors (yeah, I know that gets you to 15 stocks or perhaps more!). As certain sectors outperform, you systematically move money into your lagging sectors (lagging sectors--not sick dog stocks that should be euthanized). As I was beginning my education (which I know will last a lifetime) on understanding investing, I naively thought that once I had mastered the understanding of cycles that all would be clear. Somehow I thought that the sector rotation signal would be like a Zen meditation bell ringing softly and clearly signaling it's time to switch. "Ting" --oh, it's time to move out of commodities and into financials. "Ting" oh it it's time to be in tech. "Ting" oh it's time to stuff everything in a mattress. Hah! Wrong again. The only "Ting" that I've come across is "Ting", Leisa you were a fool to think that it would clear at all. Okay, an initial fool in thinking it would be clear, but a wiser fool in understanding that the fuzziness is in the inflection points that that this sector rotational thing happens in fits and starts in that transition period.

My only certitude is that I do not know what is going to happen, and I'm confident that no one else does either. But like a wise Indian, I'll keep my ear to the ground, and I'll watch carefully for scatological evidence (no tasting though to determine if there are iron deficiencies in the beast that I'm tracking which is the market direction) and make the best decisions based on the empiricism before me. I think that reading quality publications and listening to respected voices (not pundits) and equipping yourself to discern probabilities will put you ahead. I don't wish to sound arrogant because I know (and admit) that I'm a complete dummy about much of this. Nevertheless, I did gain some singular confidence in questioning the moves in the bond market. I weighed the evidence, and while the bond market was betting on cuts as early as Spring of this year, I said that the other data did not support that based on my understanding. So the confidence that I'm talking about is individual investor confidence. And one gains confidence by stubbing his/her toe and scraping a knee or two.

My conclusion, then, is that if you maintain a presence in major sectors, appropriately weighted for your considered view on the economic cycle, then you will be exposed to the move when it happens, and you will shield your portfolio from undue sector risk, but you will expose yourself to the beneficial moves. If any wish to argue that making unduly weighted sector bets are smart rather than hazardous, I'd offer this years HMO and oil/oil service sector routs. One only has to see what happened to the HMO's in April when the buzz was that medical cost ratios would increase--an anathema for HMO's. The rout was swift and severe. Oh, it recovered, but these stocks (AET, WLP, CI, UNH) dropped 15 - 24%--in 2 days. You can keep your good stocks, just reduce your exposure when their sector is not shining.

George Dagnino (of Peter Dag) has great advice--"we move slowly". His model portfolio is comprised of leaders in each sector. As he sees sectors falling out of favor, he slowly reduces portfolio exposure--considered, measured moves. I believe that following this simple but powerful advice gives you appropriate diversification and ample stakes in your investment/econcomic thesis.