Diversification is preached by most "professional" money managers. For the record, it is not right to use the term "professional" in conjunction with the term "money manager" unless the word "professional" is in quotes. Although our dealings with Wall Street have unwillingly forced us to accept that crime pays as long as it's white collar crime, we have a hard time accepting that any criminal deserves to be called a "professional". The crazy part of it all is that if they name their firm "Bradstreet Wharton Wellington Financial, LLC", somehow it makes them feel as if what they're doing is "professional". Some of the more brainwashed among them have even been able to convince themselves that what they do is legal. But we digress.
Here at "Snotwheel Financial", our advice is different. If you look into studies about diversification, you'll find that owning just 3 or 4 stocks removes such a large component of the risk of not being diversified, that there's really no need to own more than that. We don't believe in diversifying amongst sectors at all. We like to buy 3 or 4 stocks in the hot sector and that's it. The reason we diversify within the sector is to remove company specific risk, which is always present. These risks vary from uncontrollable events such as natural disasters to creative accounting. The reason most "professional" money managers own dozens of stocks is because they have little choice. They have billions of dollars to invest, and do not want to own more than 10% of any given company. If you're a small investor, you're not bound by these requirements, and can therefore beat the "professionals" at their own game.
19 comments:
are you really managing 26.5m?
We don't discuss dollar amounts, all that matters in this game is percentages. If you make 10% one year, and it yields a profit of $20, you've destroyed a fund manager who made 6% with a profit of $890M. No one on the street is competing in terms of dollar amounts.
$20 destroys $860 million, what a joke.
If you do not discuss numbers why you are showing off your grand fake number???
There is no grand fake number, we started the year at 33.63 and are now at 35.65.
And, yes, 10% destroys 6%.
I'm a daily reader of your blog but rarely posted anything. I'm a beginner of this game but have learned a lot from your posts, starting back from the LDK board. Just want to say thank you. I would be very happy if one day my account grows to a size even a fraction of yours. Please keep up the good work.
Thanks JD. We're not after the 50% gain in 3 weeks like some traders are. Instead, we try to make 20% to 25% a year on average, but do it with consistency. Over the years, this really adds up! If there's a point in a year where we are up more than 25%, it makes us nervous because that's an unsustainable rate of return.
snotwheel i appreciate your hard work and i am trying myself to get to next level.. i just try to go for too many homeruns which causes big drawdowns.. i know you been all over the led sector.. any other sectors you think can be the go to sector soon? i also belive if you can find a hot sector and just play the stocks in that sector you can make a huge return. please advise if you think an up and coming sector is ready to move
Anon,
The whole point of this blog is to create a group of people that are all looking out for the next hot sector. Your question is the 64 thousand dollar question!
We will focus on LED until the next great thing comes along. We don't know what it'll be yet. All we know is that we probably won't find it in the market. It'll be right under our noses in everyday life. Then a lightbulb will go off, and we'll wonder why we didn't see it sooner. "Why aren't we invested in this? This is huge!" In that way, Peter Lynch was totally right.
Snot,
I have been following your post for a long time although did make a mistake by not pulling out of LDK. What are your thoughts on Lightning Science Group Corporation. Also if you are looking at the Biotech space CYCC might peak your interest based on fundamentals.
RS
Why do you think 25% is unsustainable? You lose money when the channel breaks, but that only happens once per cycle. From what I've seen so far, it looks like you're spending half your time waiting for a new channel, and the other half riding and trading that channel. So your overall sustainable gains should be around half of what they are when you're in the channel.
snot,
would you be a buyer of veco right here at these prices close to 40? resting for 3 days.. maybe leg starting to 42 area?
thanks
Anon, VECO is at the center of the channel, so it's in neutral territory. The time to buy was when it was in its ascending triange, near the bottom of its channel. Our gut feeling is that VECO will rally again, perhaps to the top of the channel before correcting. But that's just a gut feeling, not technical analysis. The technicals say that VECO is neither a buy nor a sell on a short term basis. Longer term (6 to 9 months), we still feel it's a buy.
How about shorting PALM? 100% profit potential? Anyone have shares to short? Fidelity doesn't. Rats. Snot, wouldn't the PALM chart show a good entry point and a bail out point very clearly. Would you have been able to see the stock getting ahead of itself and have been able to get out before the break in the channel if you were only studying the charts? And not P/E, growth %s, etc.
Joe,
Wow! Haven't looked at a chart of PALM in a while... that must be hurting a lot of portfolios. You could definitely tell back in late Oct that something was very wrong without looking at any fundamentals. Its correction at that time was disproportionate to the market's correction... a sign of relative weakness.
It's good practice to lighten up on shares (and lock in some profits) whenever the stock hits the top of the channel, as PALM did in late June and mid Sept.
By selling when PALM surged to the top of its channel in late June, you wouldn't have missed much upside at all. We are usually more aggressive about lightening up on positions near the top of the channel than we've been lately. This is because we're still about 2/3rd's in cash, and unless we get a really good surge at the top, we're reluctant to go to a lesser stock allocation given the strength of the broader market.
PALM's chart shows the importance of lightening up on positions in stocks that reach the top of the channel, and in selling when they make a simultaneous and decisive break of both their trend channel and moving average. The real reason for a stock's breakdown is typically not divulged to retail investors until well after the insiders are out, so the chart is always the first indication that's something's amiss. Investors that rely solely on fundamentals hold the stock much longer than technically oriented investors. Pure fundamentalists get stuck in positions, eventually having no choice but having to convince themselves that each day the stock is becoming a better value. They continue to buy more (average down) on the thinking that someday they'll recoup their losses. Instead, they are commiting financial suicide. It is our belief that it is never acceptable to hold shares of any stock trading below a downtrending moving average because they are headed to zero. Fifty years ago, you could buy a share of stock and it had some intrinsic value. You actually owned something. Today, with billions of shares outstanding, the actual value of just about any company's shares is that of a coupon... a tenth of one cent. It's only hope and promise that makes stocks worth more than this, and in the end, these are always temporary phenomenons. (This is not entirely true, but you have to think this way if you want your portfolio to ever reach 7 figures).
I see that now, In late June it started showing a little comparative weakness. If you sold then, you would have missed out on 15% of 115% at most. In late October it started showing serious comparative weakness. Time to bail.
http://finance.yahoo.com/q/ta?t=1y&s=PALM&l=off&z=m&q=c&c=aapl&c=^GSPC
Another question: If health care bill goes through, which health stocks will benefit? Go long hospitals? Which will lose? Short health insurance companies? I bailed on my health care mutual fund 2 or 3 weeks ago after holding for one year and one day.
Forgot to make link active:
PALM Apple and S&P
Joe,
Wish we had an answer for you on the health care bill, but we don't invest in healthcare or biotech at all. It's like investing in the airlines. They're always losing money or are on the verge of losing money.
We try to stay apolitical, but can't help recognizing that when you take a step back, Bush was a disaster. Obama inherited a real mess. The republicans lost major points in our eyes by blaming the mess on Obama after just a couple of days in office. Obama has been doing pretty well at getting things back on track after years of destructive behavior. Kudos to him for giving Americans hope for a better tomorrow. All Bush gave us was hope for higher oil prices, which we still believe was a much larger factor in the downfall of the economy than most people think.
Snot, since you love analysts so much, you will love this link:
link
Thanks for the link, Joe... got a laugh out of it!
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