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Am I diversified?



August 09, 2013 – Comments (17) | RELATED TICKERS: AAPL , BWLD , GHM

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? 

17 Comments – Post Your Own

#1) On August 09, 2013 at 8:07 PM, constructive (99.97) wrote:

Good post, interesting.

I mainly look for long term holdings in 5 areas: technology, media, consumer brands, financial and healthcare. Over the business cycle, I think those areas offer more potential than capital intensive utilities, real estate, mining, industrials, etc.

My top 5 stocks are AAPL, SYA, GNW, APO and DTV.

Regarding Caterpillar, it's on my watchlist but Deere is higher. DE's business is less cyclical and I think brand name is more significant for consumers than it is for construction companies.

At this point I would look at moving from C and BAC to higher quality banks like PNC, JPM, GS or LUK. The valuation premium for higher quality banks versus lower quality banks has shrunk dramatically over the past year.

The valuation gap for insurers has also shrunk some, but it's still very big for Symetra and Genworth. At some point I may start moving towards higher quality insurers like Fairfax and Aflac. 

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#2) On August 09, 2013 at 10:59 PM, rd80 (95.68) wrote:

I also like "Am I Diversified."

As far as juicy sectors, it's pretty tough to find much that's trading at prices that make me want to buy.  Financials are still at decent valuations, I see you've got that covered with C and BAC.  Big energy has run some but valuations are still ok there.  Same with housing / construction supply.

As far as CAT and GHM being related, if you only had five stocks, it might be something to worry about. But with the broader portfolio, I don't think it's a problem - especially if you recognize it and have made a concious decision to concentrate in that area.

My five largest stock holdings:  WFC, RPM, CVX, MCD, and BDX.  Can you tell I'm a dividend fan?

Largest single holding is an S&P500 index fund in my 401(k).

Kind of interesting to watch over the course of the year.  At the start of the year I think the top five order was CVX, MCD, T, RPM, WFC.  I made some small buys to Wells and Becton, but the change in order was almost all market price driven.  

We've got a little bit of overlap, INTC and GHM both have homes in my portfolio.

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#3) On August 10, 2013 at 12:54 AM, awallejr (38.34) wrote:

Actually I don't like "am I diversified." Why? because if you have been following this market, pretty much every sector has fallen or risen in tandem. You want to minimize LOSSES then Cramer is theoretically right.  You want to make a fortune, ignore that rule.

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#4) On August 10, 2013 at 10:47 AM, robotclo (68.94) wrote:

My top 5 are GE, LO, WFC, F, RDSB.  Guess I am diversified, even across countries.  Although I have 0% in bonds and about 5% in preffered's, so absolutely not diversified across asset classes.   

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#5) On August 10, 2013 at 11:38 AM, HarryCaraysGhost (84.23) wrote:

Hey Kirk, Harry from Chicago here.

bababababababooyah!!! too ya.

I got

(V) Visa

(KO) Coca Cola

(GE) General Electric

(MTGE) American Capital Mortgage Investment Corp

(SLW) Silver Wheaton

Am I diversified?

Love the blog and I'll log off and wait for my response.

Cheers ;)

(note: not too long ago bud was one of my largest holdings so the answer would've been no. I sold because I thought my original thesis for buying had run it's course. Not really caring whether I was diversified or not)


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#6) On August 10, 2013 at 4:16 PM, awallejr (38.34) wrote:

Yup Harry looks diversified to me.

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#7) On August 10, 2013 at 4:17 PM, HarryCaraysGhost (84.23) wrote:

This actually brings up another question, do you put equal weight on all your stocks? I surely don't as there's a steep drop off of my allocation of V and KO to third place GE.

Just wondering if everybody likes a balanced portfolio. Personally I think that's for the birds and just a way to rack up commission fees.

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#8) On August 12, 2013 at 5:19 PM, ikkyu2 (97.93) wrote:

Harry, I'm not sure I'd bless that port.  Visa and MTGE are both financials, and GE has a surprisingly large amount of its revenue derived from GE Capital Services, also a financial company.  Cramer would tell you what to do - I'd look to unload the MTGE and replace it with a tech name - I'm no Cramer so I'm not sure which one to recommend.

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#9) On August 12, 2013 at 5:19 PM, ikkyu2 (97.93) wrote:

I do not equal weight my stocks always, although I have what I think of as a 'position size'.  When I am speculating I tend to use a half-position-size.  I do not always rebalance if stocks outperform significantly, and I try not to catch falling knives either.

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#10) On August 12, 2013 at 6:55 PM, awallejr (38.34) wrote:

Except V isn't in the business of lending money, it is simply a "payment method."  Also GE is trying to unwind that part of the business and concentrate on the industrial end.

And yes Harry you should equal weight them to be considered diversified. Would seem silly to have half your money in one and the rest divded between the other 3 for diversification purposes. But as I said I am no real fan since it is designed more to reduce losses than maximize gains.

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#11) On August 13, 2013 at 11:57 AM, lemoneater (57.13) wrote:

My top 5 holdings are ISRG 12%, XLNX  7%, IMTKA 6%, MMM, and SE almost 6%. ISRG's current volatility would really bother me if I had not gotten some of it @ $99 and some of it @ $200.

Schwab has a fun portfolio tool. My target profile is Aggressive--a polite term that means that I do not have any bonds or treasuries  (in this portfolio) and that 50% of it is comprised of stocks that are not domestic large caps.

Our managed IRAs from work are so mutual fund/bond heavy that having just stocks for my personally managed portfolio makes sense. Not to mention I still find bonds harder to understand than stocks.


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#12) On August 13, 2013 at 12:39 PM, smac1161 (< 20) wrote:

My top 5 are DDD 7.89%, DIS 6.95%, JNJ 6.7%, WFM 6.20%, and NOV 5.96%.

I do believe that I am diversified.

Fun little exercise. 


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#13) On August 14, 2013 at 9:54 AM, JohnCLeven (32.36) wrote:

I'll submit my top 6...because I only have 6 stocks total.

Berkshire Hathaway, Inc (BRK.B) – (20.6% of portfolio)
Coach, Inc (COH) – (20.5% of portfolio)
The McDonald’s Corporation (MCD) – (17.9% of portfolio)
Advance Auto Parts, Inc (AAP) (14.8% of portfolio)
International Business Machines Corp. (IBM) (14.0% of portfolio)
Leucadia National Corporation (LUK) (12.2% of portfolio)


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#14) On August 14, 2013 at 3:55 PM, DCUDFlyer (25.59) wrote:

Interesting exercise, thanks for the post.

 My top holdings after a recent rebalance (also, reduced number of positions):

Johnson & Johnson (JNJ)

Citigroup (C)

Abbot Labs (ABT)

Microsoft (MSFT)

McDonalds (MCD)


I realize the overlap in pharma (ABT, JNJ) but solid dividends and earnings growth. Certainly need to revisit this point.

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#15) On August 18, 2013 at 3:01 PM, ikkyu2 (97.93) wrote:

I'm going to revisit this post.  Awallejr's first comment suggests to me that he did not even read the first sentence of my post, which anticipated and dealt with his complaint; so I am going to ignore everything else he said.  I don't like dealing with careless or thoughtless people.

lemoneater, I see that you have healthcare, hardware (chipsets), something I don't recognize but that appears to be software, 3M which is a stalware diversified industrial conglomerate, and a natural-gas energy company.  On the specific topic of ISRG you are way overweight it.  I would advise you to take profits; the FDA has not yet had an opportunity to really smack down a device company, but what they're discovering about ISRG's marketing practices suggests to me that they may choose to make an 'example' of ISRG.

Hardware, software, and ISRG's business are all heavily tech-focused and can be disrupted easily; you might want to consider adding some other sector in place of one of these.  You've got tech, energy and industrials covered; depending on whether you want a cyclical or not you might look into a financial, insurer, transports, or a consumer brands company.  (I know how you feel about the financials but the bank business ain't going away any time soon!)

smuc, your portfolio is perfectly diversified.  You are bold to have 1/6th of your port in DDD, I think; I regard that position as wholly speculative and would not be surprised if it went to zero in 5 years.  No risk, no reward, though.

John C Leven:  this is one of the best diversified ports I've ever seen.  I'm no Cramer but I'd bless it as it sits.  No one knows whether Coach will stay in favor as a consumer brand, I'd just keep an eye out for signs that its customers are going elsewhere.

DCUD:  That's a decent income portfolio; agree you're overweight pharma.  I do not see much potential for growth in any of the stocks you own.

I would caution everyone above - you all seem in love with your stocks' dividend yields.  In a rising rate environment that is not a very important feature for a stock; you may find yourself punished as investors seeking yield will be exiting your stocks in the next few years. 

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#16) On September 29, 2013 at 6:57 PM, awallejr (38.34) wrote:

Cleaning out my "following" threads and just noticed this comment:

 I'm going to revisit this post.  Awallejr's first comment suggests to me that he did not even read the first sentence of my post, which anticipated and dealt with his complaint; so I am going to ignore everything else he said.  I don't like dealing with careless or thoughtless people.

I certainly did read the first sentence of your post and I responded to it.  You simply dismissed any disagreement to being either a raging bull or bear.  I submitted that diversification basically tries to reduce losses.  But if you are in it to become wealthy you should concentrate your investments.  Look at all the billionaires, most of their money is in their own business.

Why you chose to be antagonistic I don't know since I don't recall ever being so to you.  But alas, you might want to look in the mirror first. 

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#17) On November 17, 2013 at 10:19 PM, mninvestor11 (< 20) wrote:

Just discovered this post, so here goes:

My top 5 holdings after a recent rebalance are:

Disney, DIS

Kroger, KR

Berkshire Hathaway, BRK-B

Vodafone, VOD

Proctor & Gamble, PG

I feel conflicted in that I feel like Berkshire covers a lot of the bases I'm weak in (Namely tech and financials offhand), but is that enough?

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