When I'm committed to a long-term investment or trade, I presume that a rising tide lifts all boats. To that end, simply buying a single stock might not cut it. In a bull market, you want to own as many stocks for which your thesis holds.
Think back to tech stocks in the late 1990s: more than just Microsoft (MSFT) or Cisco (CSCO) were advancing. From roughly 1997 to 1999, everything related to technology soared. The same phenomenon happened with REITs a few years ago. They all did well.
While mutual funds and exchange-traded funds are useful for gaining broad exposure to a particular market or industry, the fund's allocation might not actually weight the highest probability trades. As I first noted a few years back, most popular ETFs tend to overweight large-cap stocks.
When I'm bullish on an industry, I prefer to assemble my own basket of what I believe to be the strongest companies. Among shipping and transport stocks, for example, I've taken initial positions in names like Kirby (KEX), SeaCube Container (BOX), Golar LNG Ltd., (GLNG)Scorpio Tankers (STNG), Textainer Group (TGH) and Baltic Shipping (BALT), all of which have shown recent momentum. None of these are included in Guggenheim Shipping (SEA), the lone water transport ETF.
And while I am optimistic on the sector, I do not yet have any favorites. Like a farmer, traders plant a large number of seeds with the understanding that not all will germinate. Early on, we just don't know who will win big.
It the sector itself weakens, so will my holdings, exactly why stop-loss orders are vital in minimizing losses after a meaningful decline from the purchase price. But as long as the theme trends higher, I'll add to the stocks which show the greatest strength, leading to overweight positions in the best performing names, not just the biggest. Actively managing positions yourself over simply buying an ETF allows you to focus on the strongest ideas, not just those favored by index providers such as WisdomTree, MSCI or Standard and Poor's.
Out of an initial "planting" of half-a-dozen stocks, trading ideas often follow the 80/20 rule: 3 or 4 might underperform or get stopped out with small losses. But it only takes a few sizable winning positions to more than make up the losses.
In the end, the strongest boats will lead the fleet.
—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC
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