Doc's Diamonds

Rocky road ahead as we start our journey

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Well, we are all on the verge of starting this competition and I know the first thing we think about is "What stocks do I want to buy??". That is certainly how I normally look at any investment portfolio I have. I am generally not a "short sell" artist and rarely use that strategy. However, since I see some rough waters ahead, I might start with a large cash position to see which way the winds are blowing first.

I think the odds are that we are in the early stages of a market correction. This may last a few weeks or possibly much longer. However, I believe, if we do have a further correction, that will present a bunch of great buying opportunities. Everyone must remember that the biggest difference between this market drop from a high (although it sure has been pretty fast) and the drop, say, in 2000 is that this time the fed. fund rate is fairly low and the stocks are much more reasonably valued. When valued by price/earnings, PEG ratios, or other "value" indicators, we are close to historical averages and certainly not high.

Therefore, without an unexpected geopolitical event or natural disaster, a smart investor would take some gains off the table for the short-term, but plan a strategy of reinvestment going forward once we get the winds at our back a bit and weaker hands are sold out of the market. That could even come this week, at least for partial positions to be started. That is my initial plan. Now, for those who really want to "win" this competition as opposed to investing wisely, large positions in a stock which might have a blow-out positive earning report would be a good strategy. Of course, if you are wrong, good luck catching up!!

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Limping into action

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As I stated in my first entry, I intend to be somewhat cautious as I build positions in my portfolio until the direction of the market is clearer or I can get quality stocks at good prices. Today I began developing a portfolio in a way that I would recommend to anyone who wants to invest in individual stocks instead of ETFs or Mutual Funds. For some, a diversified portfolio of mutual funds or ETFs is a great investment strategy. For myself, I believe that stockpicking is something that should only be attempted if you are willing to spend the time necessary to research the individual companies and their stocks and develop a strategy for buying and selling. No strategy is perfect, but the key is developing a system you are comfortable with and following that system as consistently as possible. I am willing to put the time into the research so I have at least a reasonable chance for success.

As I give my investment rationale's for some individual stocks, please realize that I do not intend to quote detailed data for each stock. I will give my overview ideas and provide more detail when necessary. I do not want the principles to be lost in a sea of PE, PEG, Debt/Equity, or other ratios. I use all of these and more, but I do not think that spending your time reading what you can simply look up if you wish is useful.

As I slowly build my portfolio into "compliance" with Marketocracy, I will use my earlier blogs to discuss general principles of portfolio building. I will begin to give more rationale for why I purchased individual stocks after that. This may take several weeks of blogs.

Now for some basic principles I use for portfolio building. These are not always written in stone, but I use them pretty consistently.

1) No matter what the size of your portfolio, never use more stocks in the portfolio than you can responsibly track and act on in a timely manner. In this competition, I will use about 20 "base" stocks and will add some "wildcards" with available cash if I see some real opportunities.

2) Whenever possible, try to invest in "equal" increments for each stock in your portfolio. In this competition, I will eventually reach $700,000 for my core portfolio. That will mean I will make purchases equalling about $35,000 for each of my 20 stocks. The other $300,000 will either be in cash or used for what I call my "opportunity" portion of the portfolio. I will explain that later as I progress in the competition.

3) Diversify your investments over different market segments (eg. technology, comsumer discretionary, financial, energy), different market capitalization (small cap, mid-cap, large cap), foreign and domestic, and risk levels (speculation vs solid balance sheets and stock records). This might be almost impossible in a single portfolio, but I will point out my diversification as we progress and talk about individual stocks. This diversification is never perfect, but you should NEVER place all your eggs in one basket (eg. large cap domestic technology stocks with good balance sheets). It might seem right at the time, but this strategy is ultimately too risky.

4) Do not buy your entire position at one time unless you see a fantastic opportunity and can't wait. In general, those opportunities can end up "fools gold" and building a position in segments is usually better. I don't think you need to buy exactly equal segments at specific time intervals, but buying partial positions over time seems prudent.

5) Listen to others and read opinions on your stock ideas, look up other rating systems for your ideas, use as much outside help as you can get. However, do NOT rely on those investment "tips" for your final decision. Make your own decision based on your own research of the company.

6) Use technical analysis if you trust and understand it, but do not rely on a chart analysis without, at least, doing some fundamental research on the company as well.

These principles are some of the major ones I use for building a portfolio. This discussion does not include any buy or sell principles and is, by no means, comprehensive. I hope this helps to explain my portfolio as it begins to build.

Doc

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