My new assett allocation
February 05, 2011
– Comments (10)
Yes, I have made a crapload of short blogs lately. I am trying to learn, sue me.
Anyway, so throughout a lot of thinking and reading, I have come to the conclusion that rather than try to learn everything about everything, I will stick to my strengths. This is not to say I won't try to learn a lot more; in fact, after I learn more about fundies, I plan on spending a few years learning TA, banking, utilities, insurance, railroads, retail, and some other attractive sectors, commodities and coutnries. I have realized however, at least for the short term, that my strength is swing trading. To me, it is fairly obvious when a company or sector is oversold. Mos t of the time, it involves looking at prior prices, then looking at how the news has affected them, and then figuring out if it was overblown, but leaving a margin of safety. Maybe an example would be better: Every source I saw for BAC's mortgage right downs was far less than the value the stock took on the news. On top of this, the wikileaks thing, which I calmly assessed would never come to fruition, drove the stock down to $10.96 when the net tangible book value was $12.91. The insiders were buying at $15, and the yield curve was widening like crazy, while the 52 week high was $20. I figured the company had to be worth atleast $20, but I bought at $10.96 and sold at a little over $14 in a matter of a few weeks. Selling is one of my weak points, so I figured locking in a nice profit was better than trying to analyze and hold onto a hated bank (eveyrbody I know who uses them is unhappy). Yes, I understand the concept that 'locking in profits' can often be foolish if the company is still undervalued. But I know myself, and I know i made a nice size. I made a similiar call with STD.
On to the point, I know long term investing is much better for tax purposes. I don't yet have the capital to properly diversify in the way I am about to lay out, but I should in the next 2 years, so I am reworking my model. I will list the % I plan on putting in each, and why...please tell me if my logic is sound, or if I am destined to underperform
20% Cash and short term trades: I like leaving money open for buying corrections, but there are about 5-10 different types of trades that I notice fairly obviously. I have made money on C calls a few times in a row because it acts so predictably around earnings. I love trading, and I am good at certain trades, so I will stick to them. If I need to raise cash, these trades are only in my portfolio for a few days or weeks, so they are almost as liquid as cash.
20% economic situation: This mostly encompasses my swing trading. This economic situation category includes ETF's, and equivalents. For me, an example of an equivalent is using SLW as an etf for silver. It is best of breed for silver, and if I am bullish on silver, I buy SLW over bullion, agq, etc. I use SLB for oil. So if I am bullish on a few different commodities, I either buy a corresponding etf or best of breed stock. This does not have to be a short term portion of my portfolio. If interest rates rise dramatically and I am able to snag long term bonds at very high yields (compared to histroical levels), I will put all 20% into those bonds. If I were in a higher tax bracket I would be loading up on munis as they give some a tax equivalent rate of 12%, which is nice. The advantage of this section of my port is that lets say I buy SLB, SLW, and SSCO. When copper spikes, I can sell SSCO and if SLB and SLW are lagging, I can hold them until they spike. Buy dips, sell spikes, but assuming I have 4-5 different types of stocks I am bullish on, I will almost always have one that is outperforming the market, which is when I can sell that one and load up on some of the laggards.
20% long term stocks: Companies with a strong niche, that survive reccessions, good management, and consistently outperform the S&P. This would generaly be spread amongst 3-5 stocks, as I don't have the desire to analyze the reports of 20 different companies. This will most likely include PM as an investment I will hold until I die, and the other 2-4 would probably include MTB, LIFE, KO, and some other great companies (maybe BRK-B)
15% index funds: over time, I know small cap equities outperform all other investment classes. Thefore, about 8% would be in IJR, the best small cap index fund IMO. the other 7% would be 3% SPY (since this IS the market), and 4% QQQQ since my other individual stock picks are unlikely to be tech stocks (since I don't know much about technology and can't analyze it, but I do believe technology companies will shape our future and I need exposure). I understand what equity classes outperform in the long run. I also understand that I am not currently the best fundamental analyzer out there. However, to quote Joel Greenblatt, "If you don't lose money, most of the other alternatives are good". If I know what will make money but I can't pinpoint it, the baskets will be nice. Considering 60-80% of mutual funds cant beat the market, I figure I can beat them all simply by buying the dips and selling the spikes. Why not do this, unless I think the market is headed to 0?
10% emerging markets: I think emerging markets will outperform mature first world markets. However, I dont want to fly to different countries and get to know everything about them, so I make it simple and buy funds. 5% VWO for general diversification, and 5% BRF because 1) I like the Brazil story 2) small caps are best. That simple
5% in special situation stocks: these are generally pretty easy to follow when they come about. It requires about 5-10 hours of analysis, and after that you generally dont have to hardcore track the company, just let the situation play out.
5% in growth stocks: Once in a while, there will be a company that I think is fantastic and will be the next big thing. I am not going to miss out on the next AAPL, which I should not have, while I stared at everybody's iPods. For me right now this would probably be IMAX.
5% "free money": Shorting broken etf's, but a basket of them, so I don't get screwed. This would mean shorting UNG, VXX, GSG, and FAZ. Overtime it will be profitable, but if its too large a % of my port I can go bankrupt.
I think this strategy should play to my strengths, please help me out if you notice flaws.
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