Obligate Yourself

I know a lot of investors who just buy a bunch of stocks, put them to bed, and think they are diversified. However, when you look closely, their portfolios are a mess, with too much exposure in one sector and nil in another. If you are serious about being an investor, not a trader, you must adhere to certain principals.

No matter how hot a sector is, DO NOT PUT YOUR EGGS IN ONE BASKET. That applies to both individual equities and sectors. Force yourself to buy stocks in different sectors; it will make your investment life a lot easier. When you do it this way, your task is defined and the goal is simple: find the best names in each of the 8 principal sectors.

Here is what I mean, as an example (top in sector, ranked by PPT):

Basic Materials: Teck Cominco Limited (USA) [[TCK]] Consumer Goods: Skechers USA, Inc. [[SKX]] Financials: Discover Financial Services [[DFS]] Healthcare: [[APT]] Industrials: Bucyrus International, Inc. [[BUCY]] Services: Genesis Lease Limited (ADR) [[GLS]] Tech: Compuware Corporation [[CPWR]] Utilities: Duke Energy Corporation [[DUK]]

Get it?

So, instead of taking your entire life savings and buying all Amazon.com, Inc. [[AMZN]] or all Whirlpool Corporation [[WHR]] , take a portion (10%ish) of it and buy your favorite stock in each sector. Granted, this will eliminate any chance of a 1,000% YTD return. However, it will also prevent a severe blowup, which is the top priority. Remember, if you merely grow your account by 10% per annum, over 30 years, you will be rich. However, if you blow it up, to the tune of 25% or more, in any given year, you are destined for blue collar mediocrity (no rib eye dinners), no offense to garbage men of course.

When picking stocks, it’s important to do homework. You do not need to be a business major to understand the basics. Listen to conference calls. Read research reports. Educate yourself about the businesses you are investing in. Remember, although the stocks on your screen have cute little ticker symbols with fancy charts affixed to them, they are real companies, with employees, expenses and legal issues. Before I invest in a stock, I ask myself, “if I had start up capital, would I want to enter this business right now?”

Because of that question, I rarely, if ever, invest in airlines, biotech or automobiles.

In short, quit being so damn lazy and stop using the mystical theories of technical analysis as a crutch to avoid putting in real work. As successful as you may be, gawking at charts, you will better yourself, as an investor and a trader, by knowing what the hell you are buying. Furthermore, never go “all in,” no matter how solid or tempting the idea is.

As for this market:

A bit disappointing, following stellar earnings out of Amazon.com, Inc. [[AMZN]] and Microsoft Corporation [[MSFT]] . I was impressed with numbers out of Whirlpool Corporation [[WHR]] too, which gives me greater confidence with my Jarden Corporation [[JAH]] position, going into earnings on the 28th.

I expect the market to stay down today, mainly because of the anti-climatic nature of the early morning reversal.

NOTE: Cramer is dead wrong about Equinix, Inc. [[EQIX]] . I will explain later.

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