You Are Here:
(left click = same tab) or (right click = new tab)

Diversification Can Kill Your Returns

by Rodney Beasley

Summary:

A method never talked about.
Over trading now is an enemy.
This method teaches control.

You seldom ever hear this approach being discussed in the media…
Why doesn’t the media talk about a concentrated portfolio approach?

The Answer Seems Obvious

A portfolio made up of only a handful of equities doesn’t promote trading. Brokerage firms are one of the largest advertisers within financial news networks. These are the folks that make trading for a living look so easy. They want you to trade, trade, trade! So it seems obvious why they wouldn’t promote such a strategy that doesn’t involve a lot of trading. Finance websites need clicks and advertising dollars to stay alive. The cost per click for terms related to stocks, brokers, and trading, are very expensive.

Terms such as “best online stock broker” are some of the most expensive searches on Google, costing anywhere from $3.00 to $50.00 per click. So, they have a huge interest in promoting active trading. It should be no surprise why this reduced trading strategy gets no respect, and even ridiculed by the media.

The strategy I am speaking of has worked for many, including our members. The only regret is not giving it a specific name long ago. We gave it a tagline called the “12 Trades Per Year Portfolio”. In hindsight, maybe it should have been called “7 Trades Per Year” or “9 Trades Per Year”. In other words, we are having a hard time to even make 12 trades per year with this method.

What This Is Not

I am speaking of the elimination of over-trading. Over-Trading is an easy mistake to make. We have all been guilty. Boredom sometimes will make us put on a trade we should not have done. A financial guru talking about option activity in a stock is not normal, and a buyout that could be in the works can cause a trade that should not have been.

The thing is, you can fix this starting right now. Just don’t do it! It is as simple that! Stop it, and stop it now! If you do nothing else, and stop this bad habit now, you will see an immediate payoff. This isn’t rocket science, it is basic self-control. Don’t enter a trade without the full confidence, and risk reward, on your side. Even then, you will still have your losers, so don’t compound it any longer by making too many trades.

Billionaire investor Warren Buffett famously stated that “diversification is protection against ignorance”. It doesn’t make sense to over-trade, if you know what you are doing. Warren Buffett is basically saying that diversification is for the average investor.

How To Carry Out This Strategy

Stay in touch with the latest news flow. Keep yourself informed, and wait. You are waiting for an event. What event? We don’t know what we are waiting on, but we know some type of event is coming sooner or later. While you are waiting, make notes about stocks you think will rise or fall.

For instance, if the news of the week is “Gold is going to rise”, make a note of what you think will happen in the next week, month, or year. Make notes of stocks, and sectors, you think are overvalued and undervalued.

Try to find upcoming trends, and what the media might be talking about in the next 3 to 6 months, like we did with Nvidia (NASDAQ:NVDA). We were writing about it in March when it was trading at $32.00. This will all start to make sense soon. Like in sports, you are training. The more you do this, the stronger you become. Without proper training, you are doomed to fail.

Also, surround yourself with like-minded thinkers. Seek them out. You will eventually become a product of the people who surround you. Do this, and when the “event” presents itself, you will have the confidence to act accordingly.

The “Market” Is A Big Cry Baby. I Hate It When Pundits Treat The Market Like A Person

The “market” wants this or that. The “market” wants rates to stay the same, or wants a rate hike. Are you kidding me? These statements are coming from educated people! I want you to take notice of how many times you hear someone in the financial media make a statement about the “market” as if it is a person. They speak of it as though the market is an all-knowing being.

If you listen to the media enough, you would think the “market” is a 5-year-old child crying over candy! The “market” is made up of people. Guess what? People are driven by 2 main emotions, fear and greed. Once you realize that fear and greed are the main drivers of this whole market game, you will then begin to spot the overpriced stocks, due to these emotions.

As you get more experience under your belt, you may then start the actual process of implementing this strategy. This is where the rubber meets the road.

Proponents Of Efficient Market Hypothesis Say That Any New Information Relevant To A Company’s Value Is Quickly Priced By The Market

This is the biggest load of bull dung ever sold to the investing public! If this is true, how did I and a handful of friends make a small fortune by buying HealthSouth at .19-.40 cents, and sell it not long afterwards for $6.00? Talking about a prime example of fear and greed! This was a classic case.

Even though I did make the highest percentage return of my career on this play, I look back and think of how I should have bet bigger. I still get an occasional phone call from people who I shared the HealthSouth trade with, and they say “I wished I had followed you” or “I would have made a fortune had I listened”.

That’s the thing with investing, trading, speculating, or whatever name you choose. You can almost always look back, and see where you could have done better. The same holds true with life in general. Don’t let those once in a lifetime events leave you on the sideline.

Warning: This Method Can Be Boring

This is where it can get very boring. We wait, wait, and wait some more. We start thinking this should be called “No Trades Per Year”, because it is boring. We think the opportunity will never come. We still continue to wait, and sooner or later the “event” comes.

A Few Recent Examples

Sometimes it comes slow and gentle like the Oil Trade alert on February 12, 2016. This play felt like it was in slow motion. Almost every talking head was saying that $20.00 Oil was coming. If you listened to the media that week, the oil producers were going to start paying us to fill our vehicles, because it cost too much for them to store the oil, and stupid low prices are here forever, so there was nothing anyone could do.

I will never forget thinking of the old simplistic saying “Be buying when they crying, and be selling when they yelling!”. It just seemed so obvious. The United States Oil Fund LP (NYSEARCA:USO) was the vehicle that we chose to trade at $7.81. USO traded near $12.00 towards the end of May 2016. It felt so easy to do.

The United Rentals (NYSE:URI) buy in January at $46.60 didn’t feel as obvious as the oil play did when I think about it in hindsight. United Rentals wasn’t a media stock darling, and seldom gets any mention. The alert went out while a conference call was taking place. The stock closed at $55.84 the day before, and was down more than $10.00 on the earnings miss. This felt like a big over reaction. We knew there was no danger of a bankruptcy, or any real liquidity issues. It was the classic case of a stock getting punished over a quarter to quarter miss.

United Rentals traded at $49.46 only two sessions later, and hit $51.08 five days afterward. The people that did sell at those price levels have nothing to be ashamed of. It retreated to $43.34 on February 11. But those that stayed with URI are looking like a stock picking Rainman as $82.12 was the closing number on August 23. But, guess what? We closed the position for the member alerts portfolio on April 27 at a price of $68.07 causing the portfolio to miss out on the next $14.00 of profit.

Do you see how you can always look back, and see how you could have done better? You can’t get too caught up in what you missed, but you can learn from the event. A ride with just 1000 shares turned $43,000 into $68,000. A percentage that is seldom achieved in an ultra-diversified portfolio.

Holy Grail?

This is not the Holy Grail. Is this method bullet proof? No! Is the risk higher? It depends on which academic pundit answers the question. I can say that I like the chances of picking 5 stocks over a 12 to 24 month period, instead of picking 20 to 50 stocks. I like the odds better, because I can control my risk even more by only entering stocks I feel confident about. The risk level is up to the individual.

You must have a mental disaster plan in place. In other words, in a highly focused portfolio, you should always have a proper escape plan. This can be accomplished with using a “stop” and/or by taking insurance on your play via options.

The most common method to lower your risk is by adding “puts” equal to the amount of shares you own. This gives you a known risk amount. Others may choose not to buy insurance, if their confidence level is high. It all boils down to risk tolerance and personal preference.

This method isn’t for everyone. A person could choose to do this with only a small portion of their portfolio. Once you come to the realization that the “market” isn’t an all-knowing entity, and that “Fear and Greed” plays a huge role in the “markets”, you then become a better investor.

StockSpotify.com Actionable Alerts Investigative Research. We do the work, you make the money. Visit StockSpotify.com, then click on Insiders Edge at the top of the page to see how we called the bottom in Oil, and many winning stock plays.

Leave A Comment

Note: Your comments are welcome, but they must be in response to the topics of this page.

five × 2 =

%d bloggers like this: