Making a sector bet through proshares is the way to go in my opinion. I can buy short real
estate and then a short financials while using calls/puts on the individual stocks
depending on which way the market is moving and make some of the easiest money possible.
Places like Bear Stearns has way too many employees to be a dominating force. They
basically even themselves out, with some people going short the others long it's like a
game of Tug-of-War. When you look at Cramer's hedge fund you can see that it is so much
simpler to focus your companies energy on exactly what you need. Simply because he didn't
have a random Harvard grad making a long position with someone elses money on AHM. I'd put
my money on a 10 man fund over a 2,000 any day. Problem is those 2k move their stocks
more....must pass hedge fund taxation bill.

Making sector bets is the name of the game. If you want to diversify across all sectors
than just do an index fund. Otherwise, look for justified momentum in certain sectors and
ride the good stocks in those sectors until you find new opportunities. Look at the Energy
and Materials sectors over the last 4 years. I assure you any investor having had exposure
to those sectors would be very pleased. Energy is a justified bet because of Middle East
tension and global demand for oil, especially with developing countries like China.
Materials is justified because of the global demand for materials. Let's not make
investing more complicated than it needs to be. There is too much diversification in many
portfolios that only yield average returns.

I go diversification by sector for the most part but there's clearly some grey area there.
For example, LMT and CAT are both in the industrial sector but one's machinery and one's a
defense contractor and their businesses arent really related (i dont think anyways). I'd
carry both at the expense of a sector I may not like, say utilities. Also, a part of the
diversification is in how you weight each sector. For con. disc. I have HD in case a
miracle happens in housing and or if the hurricane seasons bad (hopefully it isn't). But
it's also my smallest position.

I'm no expert, which seems to be a plus, but I have one stock per sector and am very
pleased.

I have come to wonder if diversification by sector is truly the best way to minimize risk,
especially considering the fact that the market is a group of mutual funds and hedge
funds. Mutual funds during times of volatility tend to rotate money out of cyclicals and
buy secular growth stocks. Furthermore, international companies can drastically outpace
domestic companies, even with similar end markets (e.g steel). Is it not more important
to diversify based on cyclical/secular growth and international/domestic, as opposed to
industry?

Taking Friday's volatility, a portfolio which consisted of a group of U.S financial,
chemical, retailer, tech and basic material stocks may seem diversified. Yet, it consists
of no secular stocks and gets hit by mutual fund rotation. The opposite also occurs. I
want to know more about what others have said about diversification and ideas on how to do
so with success.

Last edited on: 08-04-2007 09:43 pm