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‘Don’t diversify’ says this legendary investor

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From Kim Iskyan, Editor, Stansberry Churchouse Research:

Diversification is generally considered one of the basic tenets of investing and financial planning. Owning a mix of assets, ideally with a low correlation – including stocks, bonds, real estate and gold, for example – is Investing 101.

That is… unless you’re one of the world’s most famous investors. Jim Rogers, who I’ve written about recently (see here, here and here), is not a fan of diversification…

Jim doesn’t buy into the cult of asset allocation

“Well, I know that people are taught to diversify. But diversification is just that’s something that brokers came up with, so they don’t get sued,” Jim told me recently when I sat down to chat with him here in Singapore. Then he added, “If you want to get rich… You have to concentrate and focus.”

This obviously goes against conventional thinking. But this kind of thinking is what made Jim one of the world’s most successful investors. He co-founded the Quantum Fund – one of the world’s most successful hedge funds – which saw returns of 4,200% in ten years.

He quit full-time investing in 1980 and went on to travel the world a few times. He also wrote several books about what he saw and learned. Even if you’re not a travel or money junkie and know little about finance, these are some of the most educational and entertaining books you’ll ever read about investing.

Why (maybe) you should diversify

I’ve also written about the importance of diversification to reduce risk in your portfolio. As the saying goes, don’t put all your eggs in one basket. But you also need to make sure they’re not all on the same egg truck, either.

Diversification can limit the risks that are specific to a company or industry. For example, bad (or fraudulent) company management is a firm-specific risk. An airline employee strike, which has an industry-wide impact, is an industry risk. These are called “diversifiable risks” because they aren’t directly related to the broad financial market system.

Market risk (also called “systematic risk” because it relates to the financial system as a whole) is unavoidable for anyone investing in financial markets. Market risk is affected by things like interest rates, exchange rates and recessions. Diversification can’t touch market risk.

The graph below shows these two types of risk. Every investor is subject to systematic risk. Diversifiable risk is higher if a portfolio includes a small number of holdings. And diversifiable risk declines as the number of holdings in a portfolio increases – to a certain point. Having a portfolio with five securities definitely beats a portfolio of just one security. But diversifying beyond 30 securities doesn’t bring any additional benefits in reducing overall portfolio risk.

But Jim Rogers disagrees. “The expression on Wall Street is, don’t put all of your eggs in one basket. Ha! You should put all of your eggs in one basket,” he told me. “But be sure you’ve got the right basket and make sure you watch the basket very, very carefully.”

Now, of course this strategy of putting all your eggs in one basket… but making sure it’s the right basket, is not for everyone. It’s a high risk, high reward strategy.

And Jim acknowledges that. “If you don’t get it right, you’re going to lose everything. But if you get it right, you’re going to get very rich. And by the way, don’t think it’s easy getting it right. It’s not easy. It takes a lot of insight and work and everything else. But, if you get it right, you’ll be very rich.”

Good investing,

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Kim

Crux note: To hear more of Kim’s insights, make sure to sign up for the free daily e-letter the Asia Wealth Investment Daily here.


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Inside the dismantling of General Electric

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Starved for cash, an iconic American company takes apart the legacy it spent a century building.


From CNN Money:

GE is slowly dismantling an empire.

It was once a sprawling corporation that included NBC, Universal Studios, a giant appliance company and even one of America’s biggest banks.

But now the iconic company founded by Thomas Edison is making itself smaller and smaller. And that shrinking has gained urgency in recent months as GE races to raise cash, chip away at a mountain of debt, and plug a huge hole in its pension fund.

No business is too sacred for the chopping block, especially because GE’s stock price has been cut in half over the past two years. Even businesses central to its vaunted history — the 111-year-old railroad division and Edison’s light-bulb unit — are up for grabs.

“This is a slow-motion break-up of the company,” said Robert McCarthy, an analyst at Stifel.

In the 1980s and 1990s, legendary CEO Jack Welch turned GE into the biggest and most complex conglomerate on the planet. Now the new boss, John Flannery, is trying to fix the company by doing the exact opposite.

“Our objectives are to run the businesses well, make the portfolio stronger, simpler and continue to work as hard as we can to earn back your trust and to deliver for you,” Flannery told disappointed shareholders last month.

The sell-off amounts to a rejection of the conglomerate model itself. GE wants to focus its attention on what it believes it does best: making power plants, jet engines and health care products like MRI machines.

Continue reading at CNN Money…


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A tremendous opportunity at the cross section of two markets

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From Zach Scheidt, Editor, The Daily Edge:

Pop quiz – can you name this stock?

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I’ll give you a couple hints…

  • This stock is in the red-hot retail industry.
  • The company reported tremendous earnings this week.
  • Strength is being driven by the vibrant U.S. housing market.

Did you get it?

The company is Restoration Hardware (RH), a home furnishing store that has been knocking it out of the park thanks to a convergence of two major trends in the U.S. economy.

If you bought the stock at the beginning of last year, you’d be up 500% on your investment today.

And the best news is that for RH — and so many other retailers in this industry — the fun is just getting started!

Have Money, Will Spend…

This is a great time to be selling luxury products to American consumers.

Ironically, as I write this alert, I’m sitting in my local Starbucks next to a table full of nine different “entrepreneurs” discussing their business of selling luxury health products to consumers in our community.

With unemployment levels at extreme lows, wages ticking steadily higher, and inflation readings well within a “normal” range, Americans just have money to spend!

That’s exactly why the consumer discretionary sector of the stock market has been so strong, and why retail stocks like Restoration Hardware are on the move.

Across the board, I’m seeing strength in restaurant stocks, apparel stocks, athletic gear stocks, discount retail stocks, and even auto stocks!

Essentially any investment tied to consumer spending has a very good chance of producing significant gains this year.

Hopefully you’ve already been paying attention to this area and making money on your investments. After all, we’ve been pounding the table about retail stocks for months here at The Daily Edge.

Fortunately, even if you’ve missed out on this ramp in consumer spending so far, there’s still time for you to cash in.

Because today, there’s an additional trend that’s helping to push a specific group of retail stocks even higher.

Compound Your Gains with a Vibrant Real Estate Market

Are you in the market to purchase a new home?

Even if you’re not personally looking for a home to purchase, chances are good that you know someone who is. Perhaps even your children or grandchildren are getting ready to make their first real estate purchase.

The housing market in the U.S. has been on fire lately. And that’s not about to change any time soon.

Demographic trends are pointing to strong demand for new homes as young families start to move out of rental properties and invest in their own homes. With so many of these families delaying purchases following the financial crisis 10 years ago, there’s now a tremendous amount of pent up demand.

Think about your experience the first time you bought a home…

If your family is anything like mine, you probably spent the first year making multiple trips to Home Depot (HD) or Lowe’s (LOW), buying furniture and having it delivered, and stocking up on everything from dishes and kitchen appliances to decorative items.

My wife still insists that these are not discretionary purchases, but actual necessities to make our house a real “home.”

Just over the past month, we’ve started to see investors take a renewed interest in home builder stocks. For a while, these investors were more focused on higher interest rates (and the potential for mortgages to become too expensive) than they were on the supply and demand dynamics in the housing market.

That’s now looking like a big mistake as homebuilder stocks rally.

Which is why I’m still very bullish on these stocks, as well as the retail stocks that will increase sales as more homeowners start furnishing their new digs.

Here’s How to Play It…

We’ve got an abundance of opportunity tied to both the expanding retail market and the recovering housing market.

Today, you can tap into both of these trends by investing in stocks like Restoration Hardware that fit both the retail market and benefit from purchases that new homeowners are making.

Home remodel stores like Home Depot (HD) and Lowe’s (LOW) are in a great environment right now. Not only are people buying tools and fixtures, but more discretionary items like plants, grills, and even luxury appliances are flying off shelves.

When it comes to stocking cabinets and shelves, stocks like Williams Sonoma (WSM)have been booking profits and trading higher. I’d recommend buying any pullback in home decor stocks like this.

And finally, home furnishing stocks offer great value. You may not think of La-Z-Boy (LZB) as a cutting edge retailer, but the company has new product lines that are in line with consumers’ evolving tastes.

Don’t forget the widescreen TVs these new homeowners will be purchasing to watch sports this fall. Shares of Best Buy Inc. (BBY) have been trending higher, and there are plenty of other consumer electronic choices to consider for your investment portfolio.

In short, there are tremendous opportunities in the cross section between the retail and home buying markets. Picking a handful of stocks in these areas can go far in helping you to build your wealth as the U.S. economy grows.

Here’s to growing and protecting your wealth!

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Zach

Crux note: It’s so easy, an eight-year-old can do it…

That’s the “social experiment” posed by one market trader… and the claim he’s set out to prove in this presentation. 

No buying stocks… No options trading… But this financial maneuver is good for thousands of dollars in gains. Click here to learn more.


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Edwards Lifesciences’ stock chart flashing a bullish pattern

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With U.S. stocks on the climb thanks to bullish institutional buyers, CNBC’s Jim Cramer figured investors would start to get hesitant about buying into a market that’s heating up.

But after consulting technician Rob Moreno, the “Mad Money” host concluded that that would be a mistake.

“There’s a lot to like about this environment, and more importantly, there are plenty of stocks that still haven’t really run very much,” Cramer said. “That’s right, we’ve got a bunch of laggard stocks that could soon break out to higher levels.”

One stock that exemplified this theory was that of Edwards Lifesciences, a Cramer-fave medical equipment maker that specializes in artificial heart valves and blood pressure monitors.

Shares of Edwards hit a fresh 52-week high Tuesday, closing at $148.52 a share after several months of up-and-down trading. The company’s April earnings report missed expectations.

But Moreno, the publisher of RightViewTrading.com and Cramer’s colleague at RealMoney.com, spotted some signs of life in the health care play.

Turning to the stock’s daily chart, Moreno noticed that “while it’s been consolidating, it’s also made an inverse head-and-shoulders pattern,” Cramer said.

“For those of you who don’t remember, an inverse head-and-shoulders is not an upside down bottle of shampoo,” the “Mad Money” host continued. “It’s a formation that looks … a little like an upside-down person — a head between two shoulders — and the important thing is that this one is one of the most reliably bullish patterns in the book.”

To ascertain how far Edwards’ stock could still run, Moreno measured the distance between its lowest lows (the “head”) and the “neckline,” or the line connecting the two “shoulders.”

For Edwards, the distance came out to roughly $23, meaning that once its stock broke out above the “neckline,” it could still rise by $23 a share.

To Cramer’s delight, shares of Edwards broke above the “neckline” level Monday, rallying another 1.54 percent in Tuesday’s trading session.

Better yet, Moreno pointed out that its moving average convergence-divergence indicator, which helps technicians spot changes in stocks’ trajectories before they happen, is on the rise, maintaining the bullish crossover it made in late May.

“You may think this stock is getting away from you, … [but] based on the inverse head-and-shoulders pattern, Moreno thinks this thing could be headed to $166 before it runs out of steam,” Cramer said. “After marking time for a couple of months, this looks like the next leg of Edwards’ long-term rally happening right here, right now.”



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