The Stock Surfer

The Desert Island Portfolio

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If you were stranded on a desert island for 3 weeks, which stocks would you hold? Would it be Potash (POT), the subject of the Strategy Lab's "Question of the Week"? Would it be a financial stock, or a solar stock, or perhaps a Chinese solar stock? These are the questions I've been asking myself as I prepare for my honeymoon, which will not be on a desert island, but pretty close for stock monitoring purposes.

Here's what I came up with, explanation to follow:

Consumer Staples: 37%
Wal-mart (WMT), Philip Morris Intl (PM), Colgate-Palmolive (CL), General Mills (GIS), CVS Caremark (CVS), Kraft (KFT)

Energy and Royalty Trusts: 25%
Petrobras (PBR), Permian Basin (PBT), Prudhoe Bay (BPT), Precision Drilling (PDS)

Video Games: 20%
Activision (ATVI), Electronic Arts (ERTS), Gamestop (GME)

Short ETFs: 10%
Ultrashort Financials (SKF), Ultrashort S&P 500 (SDS)

Cash: 8%
Dry powder ($$$)

As uncomfortable as I am with this market, I can't ignore the change in street sentiment. As Jeff Macke has said, you need to trade the tape you have, not the tape you think you should have. I think the market should go down. I think the Bear Stearns (BSC) buyout prevented disaster but socializing risk will not, in the end, prevent a potentially deep recession. I think the consumer is in trouble and deflation is the real "flation" to worry about. I think LDK Solar (LDK) is unsafe. The tape says I'm wrong. For now. That's ok, but I don't want to chase hot sectors and get burned. A few weeks ago, I was tempted to "go for the gold," but in one day all the gold-heavy portfolios were obliterated. This is how I feel about solars and metals and even fertilizers. So what do I do?

My organizing principle for a snorkel-friendly portfolio is the money version of the hippocratic oath: Do no harm. Consumer staples, in my opinion, will do no harm. They are insulated against a weak consumer, and margins for companies like GIS and KFT should increase if commodities deflate. Video games will do no harm. I have written extensively about the strong video game cycle and won't repeat myself here. I only wish I could own Nintendo (NTDOY.PK) for the SLO contest. Energy trusts will do no harm, mostly because of their attractively high dividends. Ultrashorts actually may do me harm when looked at individually, but as part of a portfolio they will act as a protective hedge against disaster--sort of like an automated external defibrillator (that machine that shocks the heart back into rhythm, you know, after the doctor yells "Clear! Clear!").

I have no doubt that someone will pass me atop the SLO leaderboard, but I like my chances of remaining near the top even as I sit on the beach and enjoy some light reading, like Reminiscenes of a Stock Operator and Fooled by Randomness. I also look forward to spending some time underwater--as long as it's me with flippers on, not my portfolio. See you in a few weeks!

(PS--After seeing Dennis Gartman on Fast Money, I may add some steel and coal plays. Why? He's smarter than me...)

[This article simultaneously posted on my personal blog, with pictures.]