Am I diversified?
Diversification doesn't seem all that important in the two kinds of markets that make the most impression on people: the raging bulls and the raging bears. Whenever we get one of those animals on the prowl, there is a lot of ink spilt about "correlation," which is a fancy way of saying that a rising tide floats or sinks all boats.
However, when the tide goes out, we get to see who's been swimming with lipstick on their pig. Most of the time, markets are not in a raging bull or bear mode, and the predominant force leading to outperformance in those other markets is not beta, but sector rotation.
I like to listen to Cramer play "Am I Diversified" because it was one of the things he learned from Karen Fischbach, his first wife whom he calls the "Trading Goddess." He speaks of her so fondly in his autobiography and you get the idea she is a competent, savvy lady.
Anyway, I recently, as I occasionally do, played the game in my portfolio. The idea is pretty simple: you name your top 5 largest stock holdings, and if they're all in different sectors, you are diversified. Otherwise, you "lose," and Cramer suggests something to sell and something else to buy to keep you diversified, largely to blunt the impact of these hard-to-predict sector rotations on your stock portfolio. Cramer knows that it takes an iron stomach to ride out the ups and downs and this is psychologically much harder in an undiversified portfolio.
So without much further ado, here's the results from today in my own portfolio: AAPL, BWLD, EEM, GHM, PM, CAT. (EEM is diversified by default - it's an index emerging markets ETF - and shouldn't really be counted here, except to quiet down the folks who will rightly point out that if your top five holdings are U.S. stocks, you aren't properly diversified by country. Now I won't talk about it any further.)
My AAPL holdings are about a quarter, in share count, of what they were at their highest. My portfolio is still staggering under the weight of AAPL's outperformance for the last 7 years and so it still makes up about 9% of my port. AAPL has shed talent like a duck sheds rain in the nearly 3 years since Steve's demise, and it has not introduced any new products. It has taken on a colossal debt load at very favorable rates and is paying a hefty dividend now. AAPL is a tech stock: a hardware, smartphone, tablet, and specialty software maker.
I am not interested in AAPL as a dividend stalwart widget manufacturer. If they have not introduced a revolutionary new product by the end of Oct 2013, I am going to exit this position. If the stock gets much above $500 per share before then, I will exit the position immediately.
BWLD was an exploratory stock pick; I bought a half-size position based solely on love for the concept and future growth prospects. It dropped 20% the week after I bought it and so I bought more, making it "one position size." It has since pulled a one-bagger and I have documented in the past month why I'm still bullish on it. This is one flower I have no intention of pulling out any time soon. BWLD is a restaurant stock, a consumer discretionary.
GHM is an industrial stock, a manufacturer of components used by the nuclear, oil and power/energy industries. It is a classic cyclical, is well managed, has good transparency to shareholders, and always outperforms during that part of the cycle. It has gone up 150% in the last couple years. I am holding it, but am becoming concerned that it is nearing fair value for the next cycle and am keeping a hawk eye on it. I have a stop-limit sell for it set at $38; it closed near $34 even today.
PM, Philip Morris International, sells the majority of the cigarettes consumed outside of the United States. I view the tobacco sector as a sector of its own, although it is usually classed as "cons disc" along with restaurants and so on. Tobacco consumers consume tobacco as a staple; there is some evidence that the average tobacco consumer prefers their smokes over food, liquor and housing.
I don't care what you say about PM. If I had to pick one stock from my portfolio to hold for the next 100 years without ever checking in on it, this stock is it. It is up about 80% from when I bought this position in April 2010; I first owned shares in the initial spin from Altria, long before that.
CAT is a recent addition to my portfolio. I bought some at 85, it dropped to 82 and I bought some more. It is also an industrial name and a lot of folks think it has already peaked for this cycle, especailly given China's recent industrial slowdown. If that's the case, I'm wrong to be holding it now. But I don't think so. I think it's well managed, has a good diversified base of operations, and I think people are underestimating CAT's importance in the continuing exploitation of shale sands for oil products worldwide - the same thesis, by the way, that I used to pick GHM (whose products are needed for efficient refining and processing of the increasingly sour feedstocks that are coming from such places).
So no, I guess I'm not diversified. GHM and CAT are basically the same bet. In addition, the next stock down, CMG, is essentially the same bet as BWLD.
In fact, I have never been diversified since I started playing Cramer's game. Looking further down my list, the next few holdings are MO, MGM, PCL, PSX, IAU, INTC, ITB, GCVRZ, C, and BAC - and that's my whole equity portfolio at this time.
Any suggestions? What juicy sector (transports?) am I missing that's ripe for a run?