4 CHARTS DEMONSTRATING BULLISH EXHIBITIONISM FOR THE WEEKS AHEAD
click chart to enlarge S&P 500 NASDAQ 100 NASDAQ...
5 WAYS DIVERSIFICATION FAILS INVESTORS EVERY TIME
Let’s get right to it: 1. To diversify a portfolio is not to mitigate risk. This is one of the most popular misconceptions that exists on Wall Street. It is bought into by a vast majority of the public, as well as the vast majority of financial professionals. Diversification, instead of being a tool for mitigation of risk is actually a tool for transferring risk. By having a portfolio of 50 stocks, the resulting effect will be a closer correlation to the popular benchmarks. Saying that diversification is a tool for controlling risk is similar to saying that buying SPY is a method of controlling risk. It’s not. All an investor is doing is transferring the responsibility to manage portfolio risk to the market itself, which is no method of risk control at all. 2. Diversification increases an investor’s expenses when there are a multitude of ways to create the same effect. Wall Street institutions have created literally thousands of tools (ETFs) that create the same result as having a portfolio of 20, 40 or 100 separate names. Anytime you move over the 15 individual stocks mark in your portfolio, odds are that an ETF exists that will create the same effect for a fraction of the cost. 3. Diversification increases an investor’s propensity to become confused during periods of adversity and in fact, prosperity. By diversifying a portfolio an investor is not able to comfortably put together logical reasoning for the behavior of the portfolio at any given time. Instead, perhaps rightfully so, an investor begins to attribute performance to favorable market conditions, as opposed to any solid research that identifies favorable investment opportunities. During adverse periods, an investor will not be able to identify whatever leaks exist in the portfolio, with the exception of comparison to a benchmark as a means of assessment. Again, what is occurring here is that the portfolio is benchmarked to the point that all decisions are made relative to the benchmark itself. There is no separate structure to define risk outside of the benchmark, much less individual understanding of the investments in the portfolio. 4. Diversification increases an investors propensity to panic during periods of adversity. This is primarily as a result of complete confusion as to what is occurring outside of the popular averages. When a portfolio is diversified into 20 or more companies, what takes place during bear markets or even severe corrections is that individual pockets of strength in the portfolio will be overlooked, especially when panic sets in. It’s very logical that when a large number of companies that an investor doesn’t understand properly are all doing harm...
EXCELLENCE IN A BULL MARKET
There are only a few ways to really excel in a bull market. And by excel I don’t mean bringing in a few shekels here and there through a disciplined trading strategy that relies on using breakouts or successful tests of a 50 day moving average to enter positions. That type of stuff, frankly, belongs in the amateur hour part of the Wall Street show, having no place in a voracious bull market that has potential to be historical in scope. What I do mean by “excel” is to create a multi-year period of returns that takes advantage of what a secular bull market is at its essence. And what a secular bull market is at its essence is a period of time when expectations that are black and white are exposed to numerous grey areas that cannot be explained, much less understood. This devastation of prevailing expectations comes in stages, popularly defined as early, mid and a late cycle rally. Each stage has separate significance to the expectations of investors and how they are reacting to those expectations. At its latest stage, expectations not only catch up to stock prices, but then start to move far ahead of price, which marks a finality of sorts to the secular bull market. A mass acceptance takes place of grey areas replacing the standard black and white perception that marks investor thinking. The realization that I keep coming to terms with after close to 20 years in this business is that there is no better level of returns that can be gained throughout such a period than to take a focused, long-term approach. I don’t mean to sound like a mutual fund commercial when I say that either. It is not the typical focused, long-term approach that the numerous articulate incompetents that populate Wall Street like to dictate to clients as an excuse for poor performance. By focused what I mean is that your universe of investments is small. Abundantly small. I don’t mean 40 or 50 names. I mean 10-20 names, preferably no more than 15 that you know inside and out. Companies that you are intimately familiar with like a proctologist would be to any asshole. Companies that you can assess on an immediate, real time basis when it comes to earnings report, mergers or managerial changes. You become so familiar with your tiny universe of stocks that you are an expert in everything these companies can do, have done and will do on both a fundamental and technical basis. You can’t be an expert when your universe consists of a new stock every week. You can be journeyman,...
NEWEST RESEARCH REPORT
The latest research report is on BFCF and is available here in PDF format.
4 CHARTS THAT WILL BRING YOU JOY EVERY MORNING DURING THE WEEK AHEAD
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PORTFOLIO UPDATE: NEXT TYPE OF MOTION
During the trading day Tuesday, I tweeted the following: After trimming some EVOL due to general market concerns and the resulting desire to raise cash in September, I added back to it at a premium from where I sold the shares. Unfortunately, there are times when you have to pay a premium for planned performance. I believe this is one of those cases. EVOL did not participate in the pullback that marked the end of September, as well as the first half of October. It has simply been consolidating. While it may seem that the stock looks overextended or even in a blowoff stage due to increased volume, it is my view that this is a moment in time where it is actually in a continuation phase as opposed to any top. From both a technical and fundamental perspective, I feel that the gains have much further to go. I have also been adding to a new position that I will be posting a research report on before the end of October. I am making this into a large position from the start due to the upside potential involved in the opportunity. It is literally completely undiscovered, with not a single ounce of coverage or commentary regarding the company. I look forward to presenting it once I put all the pieces together. With the addition to EVOL along with the yet to be announced new opportunity, exposure is now nearing the 100% invested level. Given my opinion of the upside potential for Q4, I think that this level of exposure will remain until close to year end. Of course, I will take the twists and turns as they come, without any preconceived bias. Back to digging for data....
THE RESISTANCE LEVEL THAT MATTERS THE MOST FOR THE BULLISH CASE GOING FORWARD
We saw last week that the S&P 500 passed its test of support with a dramatic thrust off a key trajectory dating back to the 2009 lows. We now look for the next driver of the markets to propel it past the mud pit that has marked October trading, thus far. There is one level of overhead resistance that matters the most for the markets in Q4. It, of course, has to do with technology. And, of course, it has to do with the top 100 technology companies on the Nasdaq. In true Q4 fashion, the index that will usher in an end to this governmental led vacillation of the absurd variety is the Nasdaq 100. Here is the view: click chart to...
4 CHARTS THAT WILL ALLOW YOU TO PRESERVE AND PROTECT DURING THE WEEK AHEAD
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HERE IS THE ONLY CHART YOU WILL NEED FOR THE REST OF 2013
Symmetry matters in the markets. It is a point I have attempted to emphasize consistently over the past few years. The chart below shows about the most perfect example of symmetry in action during a bull market that you will ever see. The ramifications are bullish in nature, with a significant probability of this week's low being it for 2013. click chart to...
PORTFOLIO UPDATE: ROTATION STATION
During the trading yesterday, I tweeted the following: The decision to reduce exposure here is more opportunistic than it may seem. Although my first concern is controlling risk in the portfolios, the opportunity to own technology into what I think we will be an explosive Q4 rally will become too good to pass up in the weeks ahead. While I am bullish on both HMPR and SBCF for the long-term, I question whether financials will be able to match technology in terms of upside into year end. Both SBCF and HMPR are now small positions (less than 10% of total equity each) in the portfolios. As it stands currently, exposure is at 75% invested with 25% in cash. WMIH, CIDM, EVOL, SBCF and HMPR are the fab 5 holdings for the time being. I expect to add 2-3 more holdings into this mix before October is out, with the prerequisite that the market stabilizes, of course. Been traveling since Saturday and just got back last night. A ton of catching up to do. I'll be posting detailed analysis on where I think the markets are headed during the...