Most pikers dream of buying the next [[MSFT]] or [[POT]], before anyone else, hit it big— then retire rich on an island, spending most of their days drinking queer pina coladas.
The reality is: most small investors, who gamble in the market, will be eliminated from the game. Wiped out. These are the people who “trade” from one momentum stock to the next, without rhyme or reason, often using leverage or options to “juice the returns.”
They’re just looking to make it fucking big.
Once again, this practice is asinine. If I were President, I’d arrest these people and force them to work in coal mines, or wash the windows of skyscrapers.
Everyone has their own asset allocation strategy. Some people believe having 200% of their dollars in POT, [[MON]], [[COP]] and [[AUY]] is diversification. Tragically, those people will fall victim to the “black lung” disease, under a Fly administration.
Just know, there are 10 principal sectors in the S&P 500, the benchmark for all investor performance.
Here are the sectors, broken down by weighting:
1. Financials: 17%
2. Technology: 16%
3. Energy: 14%
4. Industrials: 13%
5. Healthcare: 12%
6. Consumer Staples: 9%
7. Consumer Discretionary: 7%
8. Materials: 5%
9. Utilities: 4%
10. Telco: 3%
Now, if you only want to abide by the weighting of the S&P, go ahead. It’s not a bad weighting and will ensure proper diversification. However, when selecting the stocks, make sure to avoid overweighting speculative crap.
For example: Let’s say you have 100k to invest. Using recent S&P data, 14k will go into energy stocks. But, use your fucking head. Do not put the whole 14k in some bullshit ethanol play. Go mainstream with the bulk of it, think [[XOM]], [[COP]] or [[SLB]]. Then, with a smaller piece, buy speculation. Typically, I buy 3 stocks per group.
So, within energy, I might have 5k in [[COP]], 5k in [[CVX]] and 4k in [[NGS]], or some other spec play. In the event my NGS position blows the fuck up, losing 50% in one day, my losses will be minimized to a mere 2% of the entire portfolio. Hence, the reason why diversification is so important.
Also, when putting together the portfolio, be sure to properly identify companies and the sectors they belong in.
For example: [[FCX]] is a material stock and [[FWLT]] is an industrial. This is basic shit.
Personally, under normal market conditions, I’d deviate away from the standard S&P 500 weighting. Right now, my model weighting is the following:
1. Financials: 5%
2. Technology: 15%
3. Energy: 15%
4. Industrials: 15%
5. Healthcare: 10%
6. Consumer Staples: 10%
7. Consumer Discretionary: 7%
8. Materials: 10%
9. Utilities: 5%
10. Telco: 3%
11. Cash: 5%
However, because of what I deem to be “unusual market conditions,” I have suspended this allocation and have hedged with a multitude of inverse ETF’s and short positions—as you already know.
With experience, you can move away from a strict allocation and try to “scalp” gains, especially in a fast market. Nonetheless, for most novice investors, keeping a strict allocation is the way to go.
With regards to knowing when to sell:
I comb through my positions, once per quarter and make adjustments.
For example: With 100k invested, I have 15k wrapped up in tech. Of the 15k, 5k is in [[RIMM]]. Let’s say, over the past quarter, RIMM‘s stock price doubled, while my other tech positions were flat, bringing my tech weighting up to roughly 20%.
Under most circumstances, I will sell some RIMM, in order to bring my tech weighting back down to 15%. Or, I may elect to sell some of my other tech stocks. Either way, the weighting is coming down to 15%.
Conversely, if RIMM got cut in half, I may double my position, in order to bring my tech weighting up to 15%.
Essentially, the system is designed to help you lighten up on runaway sectors, in a measured way. And, it will prompt you to buy some of the weak ones (sectors), when warranted.
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Good post, but lets be honest, 100k is ‘walking around’ money.
and what type of return can i expect using your properly diversified/allocated strategy with my bullshit 100k online trading acct? trading as your sole source of income requires a much more agressive or as you put it asinine approach. what do u suggest? should one concoct an intricate scheme to intice ‘internet leeches’ to click on web ads therby creating
a grand fortune to invest correctly and bank mad coin with??
If the S&P 500 can return 11% per annum, a good investor should be able to double those returns, for example.
After all, they have 500 stocks, you only have 25-30.
Quite frankly, 100k is not even worth investing. You might as well go shoot yourself, if 100k is your fucking “nest egg.”
By the way, I don’t like your fucking tone. Say anything like that to me again, and I’ll be sure to track you down and have your mustache knocked off for you—using a whip.
i turned 100k into 500k last halloween with MA options. am i diversified?
yes.
what’s more funny is i think i sent you an e-mail around this time asking what you thought of MA, no bullshit. you called it a ‘financial’ and said it should be sold, adamantly. true story.
Fly thanks for taking this post back to late ’06 when you were still interested in helping us 15k scottraders. You may not remember but you kept me from going all in on CNXT and turning my 15k into 3k. I go back before Kidstock was guest starring on the weekends and before Snoopy infiltrated the ranks and tried to assasinate MVIS. By the way I got in @ 2.65 and out @ 4.53 thanks to you. Keep up the good work and much success.
Nice read!
Thanks.
hey, for you kids giving me the thumbs down bullshit. i agree this post by ‘the fly’ is beneficial for almost everyone. that said, it is not empirical. there are those that can ‘invest’ very aggressively and become mind bogglingly successful. however, i agree it is not for almost everyone and i would advise against it as well.
Fuck you for belittling my 200k nest egg [that I can’t seem to get under 70% cash]. I make my worthless greenbacks on the job – not cranking out trades.
What’s a poor piker like me to do…. I think I’ll give it to you to short LEH with.
Great post Fly, finally something useful instead of just random outbursts of anger against us internet leaches!
Mr. Fly:
As a newbie to the group (courtesy of Uncle Howard), your investing manifesto is superb.
I see a book in your future. “Investing The Fly Way: How Not to be a Fucktard and Lose All of Your Money In Stocks.”
Cramer should give you a weekly segment.
BTW: Is Stupidty a Fly term?
Excellent post.
soooooo what you’re saying is the 40K I have in HMGP as my primary energy play is not such a good idea?
Hello IBC, you may all know me from the Farrell bottom. I just wanted to reiterate my AIG position. AIG trades at a market multiple, and it is indeed the best insurance company in the world, in my opinion. AIG will also have write ups not write downs!
Fly,
Diversification is for loosers. I have half my 401k in PAL and the other half in SWC. I will doubly leverage twice over 2 folds today, because SWC’s earnings miss is just due to the hoarding of palladium. they have more to sell and are waiting for palladium to 10 folds in price. the palladium bull super duper cycle is just beginning.
why you not listen to what i say fly? all the other internets doo
Vince, come clean; you’re a perma bull & you know it! I learned my lesson the hard way in the spring of 2000 – I was left holding the strategist bullshitters bag. Now I feel much better being one of the few bears on Kudlows program.
Who was it that shorted USO at $100? Read my prior posts, when will you learn?
There’s Money Out There
Some have been saying there’s money out there to invest. If there wasn’t, where is all the money that buys these deals from companies issuing stock coming from?
The real answer is it’s being manufactured by hedge funds.
The hedge fund industry is going through a correction for sure. Those that don’t run the risk properly have been paying the price. But there are really good ones, those that do run risk properly and are growing in capital and access to leverage.
Let’s take a recent deal like Fannie Mae (FNM). Hedge funds know the company needs to raise capital and is thus willing to pay an egregious cost to get it done. When the broker-dealer comes to call for FNM it’s with a derivative structure called a mandatory. It’s a little more complicated than this, but essentially the mandatory is stock (convertible into) paying a very high dividend. The hedge fund is able to buy this derivative at a price yielding much more than the common stock, which it then shorts in the open market as an almost perfect hedge.They get a great return for very little risk. This is all at the expense of the current diluted common stock shareholders. Hedge funds borrow the money to do this. This is the one area where credit creation is being accomplished: the hedge fund is willing to borrow because of the great return and the broker-dealer is willing (and able) to lend because of the great collateral (no risk).
One gets the feeling that the powers are getting stock prices up so companies can raise capital by selling stock to hedge funds who sell it to the general public first.
For what it is worth we just went contango on the jun/jul crude oil spread. July crude is 125.74 with a high of 126.19. This is where you can make good money playing USO off of the spread.
Your making me feel uncomfortable about putting 200% of my money into stock piling rice in my newly built barn.
At least I won’t starve.
Well at least until they foreclose on my barn.
Shit.
Good advice for most people. You’ll never blow yourself up with a properly allocated/diversified portfolio.
I’ll never forget a Richard Rainwater inverview I saw on Louis Rukeyser many years ago. He said diversification is how to preserve capital, but to GET rich from stocks requires concentration. It was antithetical to everything you read from academics and finance professors who have never managed money. The Bass family gave Rainwater his first grubstake to invest, and he proceeded to lose it all. Lucky for him the Bass family had more money than brains and gave him another $50 million which he turned into $500 million in about 10 years – by being heavily concentrated in a handful of stocks (mostly Disney back in the ’80s).
Warren Buffett and Charlie Munger say excessive diversification is a surefire way to guarantee you achieve average returns.
WTF is happening to OME? this is bullshit
Everyone wants to buy tech and financials. Looks like the bulls will win today.
Warren says most people should be in the SP 500 Index. He is correct. Stay long oil until it pulls back 7%.
i think for a 100k accont.. 7-10 postions is about what you need.. any more and its too much.
Warren says most people should be in a Vanguard passively managed index fund, because it is the most cost effective way to get exposure to the entire market, which by definition means you are excessively diversified guaratees you get the average return.
Where is all this strength in financials coming from?
Costanza trading at its finest
Hows that LEH short?
strength in financials is coming from all the money pulling out of commodity plays.
Looks to me financials are getting a bounce off of the 50 day average.
ener – can go either way? shorts got their downgrade goonies out? is this bullsheet stock or the real deal? is this time the “charm”??? used to own it – yuck.
i don’t think ENER will ever be a real company. Even now in PV they’re relegated to some low-efficiency flexible substrate micro-niche. there’s no money there.
1. Good post
2. This methodology would lead you to be a multi millionaire by the time you retire in 60s not a Dan Zanger
3. get out of the internet leeches, I know more than you fucktards mentality already.
right on woodshedder,
i’d love to see it break through that 50 day ma on the downside.
hey dead short..
Similar bursts to the upside have happened in 2000 and 2005. In each case there was follow through to a higher high. …connecting the high dots of 1996, 2000 and 2005 the current run up can keep going to about US$62; That’s about 24% higher than it closed yesterday. not too shabby…no?
I think we soften significantly now to close. Why be long over the weekend? MBIA releases earnings premarket Monday with a conf call mid day. Get ready for the housing crisis chapter two.
I think I followed your advice correctly.
Today I sold some of my rice, from Chinese takeout last night (strong sector) and bought a Hummer (weak sector).