Friday, January 16, 2009
(Cont'd from above)...

Jim (cont'd):   

But we are talking tonight about your discretionary portfolio… the money that you can afford to lose… even if you don’t want to. Once you have filled up your retirement account… and remember to use your 401K, if you have one… and an IRA, for that to get special tax treatment, you should invest the rest of your savings… that is the discretionary stream… even though this is money that you can take chances with… you still want to disaster proof that portfolio… and you do that by making diversified… now here is how we start building that portfolio… for the purposes of discretionary funds I am talking about investing in stocks… now, of course, you need to be diversified more than just holding stocks… but this is a stock show.

How many stocks…. no more than 10... no less than 5... you can’t be diversified with less than 5... but remember that you must do one hour of homework per week per stock… give it to someone else if you can… and you can’t do more than 10 hours of homework a week either… I mean unless you have a lot of free time on your hands… I don’t want you to be a mutual fund.

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Here is my TOP TEN LIST for how to pick stocks for your discretionary portfolio…
...and again, I am repeating… the key here is to diversification.. do you have your paper and pencil ready.

First, you want to pick a stock from your neighborhood…. a local name that you can check up on… a company you really know or relate to… it doesn’t have to be headquartered in your hometown…but make sure that it employs some people close to you… so you can talk to the workers around town… or read about it in your local paper… by the way local papers are your secret weapon… hardly anybody on Wall Street reads them… even though we have got the Web and you can… this gives you a stock edge… you have the local knowledge that the big money guys in Lower Manhattan or Greenwich, CT, just aren’t keyed into.

Second, you want to buy the stock of a defensive recession resistant secular growth company… a company where the earnings will be consistent… even when the economy stinks… can’t think of one, why don’t you go to your fridge… that is after you go to the supermarket… how about the local pharmacy… open your medicine chest… find some classic soft good stocks… to just give you two examples, and not necessarily these are the right ones, Proctor & Gamble, Kellogg’s… uh, these stocks are your insurance against the economy going south… if the economy has already gone south… you should buy more shares of your recession resistant stock relative to other stocks in your portfolio… because these do well… when the economy isn’t doing well… the economy… recession resistant.

Third, to be diversified you need a high quality cyclic stock to balance out the defensive secular growth stock that you just picked… the best time to buy these stocks is when they have been beaten down… and become what I call accidental high-yielders… industrial companies they hardly ever try to pay big dividends… because they know the business is lumpy, and if times get caught, they are going to have to cut the dividend… which is something that they are loath to do… but sometimes their stocks get so hard hit… that even a small dividend turns into a big… what is big?… 4% plus yield… that is the best time to buy an industrial if you have the opportunity.

Fourth, if you haven’t picked up one already you need a high quality brand name stock with a notoriously B.I.G. juicy dividend yield… your portfolio should have at least one high yielder, more is better…. now what counts as a high yield depends upon the strength of the market… but here I mean something with a safe dividend above 4%… these, again, just to give examples not to say these are the ones to buy… I am thinking about Verizon or AT&T… with yields at that level or higher… and if they are running big up… no, find some others… okay… something along those lines.

Fifth, I know it seems toxic at all times and has been for a very long time… but you should own one financial… if your local bank is a good one, nice place to start… what you are really looking for is something with a good balance sheet… that is not weighed down by a lot of toxic assets… and has the ability to acquire other banks.

Sixth, and I am the only person that will tell this for certain… make sure that you own something speculative… a risky stock… something that is trading maybe in the single digits… but you think can be a winner… now when the market stinks good small cap stocks are harder and harder to find… so if you don’t feel the need to speculate… this is something that you might want to forego at certain times.

Seventh, I think you should own a retailer… different markets call for different kind of retail plays… when the economy is awful, you can still find decent retailers… they are usually beaten up… maybe the trade down names, places where people shop more when they get poorer… like Dollar Stores… in better times, try to find a younger retailer that hasn’t expanded across the country yet… has a lot of room to grow… what else… a tech stock… as long as you are doing your homework… and the homework shows tech, or at least the part of tech that you are investing in, doesn’t just be awful.. and I have to tell you something… most people aren’t not willing to do that homework… and that is why I don’t like to recommend a lot of tech stocks… how about an energy stock… I like oil and natural gas, but only if the price is right… gold stock, yes, good hedge against craziness and inflation… I never frown on that…. but the most important thing…

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The Bottom Line!:     The bottom line, make sure that there is no overlap, if you own 5 stocks, or 10, I will make this very simple… no more than 20% of your portfolio should be in the same sector… that will not only save you from the pain… but it will spread the risk around… and reduce your potential downside… making catastrophes less catastrophic.

Diversification won’t prevent losses, but it could help in spreading out risk...   Okay, don’t have all your eggs in one basket… that is the lesson here… stay diversified… it will keep you in the game… will it keep you from having losses… absolutely not… but it will make it so you can survive now… and thrive later.

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:     Should my 401K and retirement account consist only of diversified mutual funds, leaving individual stocks to my discretionary investment account only?

Jim:      I happen to feel that most people do not have the time or inclination do to the homework… now, I have always felt one of the reasons that I talk a lot about individual stocks on this show… this show is self selecting… it is not clear that you would watch Mad Money if you didn’t own any stocks, or weren’t interested in the stock market… so I am persay saying watchers of this show certainly have the ability to do the research… but if you do not have the time or inclination.. I am thrilled to have mutual funds… in all of my books, I have always praised mutual funds, as the way to be able do it for the vast majority of Americans… obviously, again, those who watch this show are not the vast majority… they are people who watch CNBC… these are people who feel confident typically to do it themselves… and that is who should be doing it themselves.

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Q:     How do feel about diversifying your retirement portfolio with IRA Real Estate investment?

Jim:      I have been tempted to do that, and I have got to tell you I am working on that thesis… but, I do not have enough… I do not have enough to tell me if whether that is absolutely right… I like the inventiveness of it… but it is certainly not what is typical… and certainly typical from human resources point of view what they give… I can’t frown on it… it is just that I am not sure whether it works for most Americans…

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[verbatim recap]

[end of segment]


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