Although it may seem that most fund managers are simply
glorified stock pickers, their task is actually quite different.
They don't beat their benchmarks by simply cobbling together a set
of compelling investments. They take a snapshot of the U.S. and
global economies and then decide the best ways tocapitalize on big
[block:block=16]In effect, these folks conduct a top-down analysis,
setting goals in terms of sector and asset-class exposure, and
then, through bottom-up research, find the best vehicles to fulfill
those goals. As an example, I'mbullish on the auto industry, which
as a group looks set to post ever-rising results into the middle of
the decade. With this in mind, I focused on
, a member of my
$100,000 Real-Money Portfolio
because it strikes me as having the best balance of risk and
Frankly, I think
and a wide range of auto parts suppliers such as
Goodyear Tire & Rubber (
represent compelling bargains as well. Yet it would be foolish to
build a portfolio holding only these stocks.
I've been thinking about this a great deal recently as my portfolio
gets fleshed out.
My recent pick
Marathon Oil (
has put more money into play, and I've spent almost $80,000 of the
$100,000 allotted to this portfolio.
I was moving quickly to get fully-invested because I saw a clear
opportunity as the year began. As my recent defensive pick of
Marathon Oil shows, I am not in as much of a hurry these days,
thanks to robustmarket gains. Indeed, I see Marathon as something
of ahedge for the rest of my portfolio, should rising energy prices
derail a few other picks.
What will I be doing with the remaining funds? I'll be making sure
I have a truly diversified portfolio. With
and Marathon Oil giving me exposure to commodities,
giving me exposure to the U.S. consumer, Ford and
Exide (Nasdaq: XIDE)
exposing me to industrials,
bringing me the proper weighting in financials, and
Ligand Pharma (Nasdaq: LGND)
giving me a play on biotech drugs, I will likely seek to avoid any
exposure in those areas.
What's left? Several other sectors that come to mind, though they
don't all necessarily hold great appeal in this phase of the
• Utility stocks represent more income than growth, and that's not
my current focus.
• Health care is such an important part of theeconomy , but there
is so much uncertainty in the next few years, highlighted by
considerable pressure to rein in costs, that I would only want to
find healthcare companies thatoffer considerable savings to
insurers or patients.
• Telecom and technology also have a key role in the U.S.
. I continue to search for plays in this group that appear to have
solid downside support and strong potential upside.
I'm also in search of more foreign exposure. I'm extremely
on the long-term outlook for manyemerging markets (
which I note in this article
). Though they always carry the risk of downside, due to their high
volatility, a broad-based fund may be the way to go.
For that matter, if the U.S.
continues to scale new 52-week highs and rallies into the spring,
I'd look to add a
such as the
ProShares UltraShort S&P 500 (SDS)
. It's too soon to make such a move now, but we're getting closer
Hitting a wall?
So what happens when I become fully invested, having deployed the
$100,000 in real money allotted to this portfolio? Will I simply
stop making fresh additions to my portfolio? No way. At that point,
I'll have to identify investments that are ripe for profit-taking,
freeing up cash to keep adding names. I can also lighten exposure
by selling half of a position in certain stocks to free up funds.
This won't be a high-turnover portfolio. I'm using the figure of
200% as abenchmark . This means my average pick should be in the
portfolio for an average of six months (implying 200% annual
portfolio turnover). Some picks will be held for a lot longer than
that. Some will be held for a much shorter time frame. As I've
noted before, I am striking a balance between investments (with
long holding periods) and trades (with short holding periods).
Please remember that this
$100,000 Real-Money Portfolio
is only available for free for a limited time. Down the road, as we
make any changes, I'll also slightly tweak the nature of my
communications. In addition to the full complement of (hopefully)
compelling stock picks that you can expect on a regular basis, I'll
also be quite active in keeping you abreast of the latest
behind-the-scenes actions taking place with my picks. (I'll give
you a few examples in a moment).
I also expect to finish every update with other investment ideas
and topics about which you need to know. They may not involve the
picks in my portfolio, but they should help you become even more
informed about the trends impacting the market, key industries and
Action to Take -->
The resolution of the Greek crisis further underscores my bullish
view of Alcoa and Ford. The biggest risk I saw in these two
investments is that the Greek crisis would spiral out of control,
leading to severe erosion in economic activity across the
I don't think we've heard the last of Greece, nor do I think Europe
can avoid arecession in 2012. But there is a big difference between
tepid demand and sharply-falling demand for cars and aluminum.
Current share prices in each of these two stocks appear to be
bracing for a worst-case scenario, which is now less likely in
light of the recent deal in Greece.
Alcoa's story isn't just about demand, it's also about supply. The
company, along with other major aluminum producers, has been
curtailing output to help supply levels move back below
demand levels. You're not seeing the impact yet in aluminumspot
orfutures prices, but the bias toward rising aluminum prices is now
much greater than the bias for downward-moving prices. Alcoa's
stock price will closely mirror this metric, so you may want to
track it yourself if you haven't already bought shares.
Lastly, I wanted to give a fresh view of Zipcar now that the dust
has settled on a so-so quarter.Shares are below the point where I
recommended them and took another hit this week as the company made
an investment in a peer-to-peer car-sharing company. This is a wise
hedge for the company, ensuring it doesn't miss out on what looks
to be a burgeoning trend. Exposure to both the car rental and
peer-to-peer car sharing market, if eventually housed on one
platform, could become the proverbial "killer app." Meanwhile,
shares languish (for now) as investors mistakenly focus on
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of C, F, AA, ZIP, XIDE, HAS, LGND, MRO, in one or more if
its "real money" portfolios.
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