Instead of offering cogent stock advice this evening, I will outline a time tested strategy that will insure market diversification and trading discipline, with regards to adding to or reducing positions.
Before you sit down and screen for ideas, understand what the 8 principal sectors of the market and what percentage of your money should be invested in them. If you are one of those guys who refuses to invest in “banks” or “oils” due to immediate adverse market conditions, you are missing the point. Being diversified is about participating in today’s hottest stocks and biggest losers. Unless you are a Godly market timer, being diversified is the way to go, mainly because it will offer dumb fuckers peace and prosperity (wholly dependent on the quality of the stock picks of course).
At any rate, let me offer an example of sector diversification, before your heads explode from confusion.
Basic Materials: 15%
Consumer Goods: 10%
Financial: 10%
Healthcare: 10%
Industrial Goods: 15%
Service: 10%
Technology: 15%
Utilities: 5%
Cash: 10%
Okay, now that the weighting have been established (hopefully after careful consideration), it’s time to select stocks. If your bullshit account at E-trade is low 6 figs, you should keep the number of stocks per group under 3. So, essentially, this means you will select a maximum of 16 stocks, and no less than 8. In an effort to avoid getting into a philosophical debate over: “what’s worse, rape or bad stocks?” I will select 16 random names, irrespective of quality.
Basic Materials: Endeavour International Corporation [[END]] , TETRA Technologies, Inc. [[TTI]]
Consumer Goods: Green Mountain Coffee Roasters Inc. [[GMCR]] , Skechers USA, Inc. [[SKX]]
Financial: Goldman Sachs Group, Inc. [[GS]] , KKR Financial Holdings LLC [[KFN]]
Healthcare: Wyeth [[WYE]] , Perrigo Company [[PRGO]]
Industrial Goods: Raytheon Company [[RTN]] , Gafisa SA (ADR) [[GFA]]
Services: The Finish Line, Inc. [[FINL]] , Bally Technologies Inc. [[BYI]]
Technology: Intersil Corporation [[ISIL]] , Texas Instruments Incorporated [[TXN]]
Utilities: Enersis S.A. (ADR) [[ENI]] , ONEOK, Inc. [[OKE]]
Okay, now you are officially diversified, at least amongst equities. Most of you should have some fixed income exposure. However, that would send many of you to an early sleep; so I’ll keep it straight gangster, 100% equities.
Once you’ve committed to this strategy, it’s important to stick with it. This means: avoid cashing in on winners abruptly, and sticking with losers—despite the insatiable desire to cut them loose and move on. Don’t get me wrong, if something materially changes in a name, you need to sell it and move the funds into a better name. However, if a stock is going down, only due to market weakness, real men buy said names on dips and build up positions, instead of blowing them out. When I used to adhere to the program, I’d review my weightings on a quarterly basis. Let’s say GMCR and SKX shot to the moon, sending my Consumer Goods exposure to 20%, I would force myself to sell off enough of GMCR or SKX, in order to get the weighting back in line, around 10%. On the other hand, if GS and KFN tanked, sending my financial weighting down to 5%, I’d force myself to buy more GS or KFN, to get the weighting back to 10%. The key to this strategy is having good weightings and stellar stocks picks. Unfortunately, many of you will fall short, in a most atrocious manner, attempting to invest like Le Fly.
Finally, there will be times when the market is not worth investing in, bringing the topic of cash reserves to the forefront. Generally speaking, one should have at least 5-10% of cash on hand, in order to buy severe dips or participate in short term trading opportunities. However, every once in awhile, like in 2008, the market is simply “too gay to buy”. Your cash reserves can be used to short sell stocks or invest in levered ETF’s (providing you are into asshole products of course). Or, you can simply bulk up on cash, just to reduce beta during market declines, in an attempt to time peaks and valleys.
Either way you slice it, investing is an art, not a science. There are thousands of ways to skin a cat; this is just one of them.
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