Thursday, November 17, 2005


Many folks worry more about being diversified than about making money. Don't take me wrong, diversification is an important technique used to reduce risk. However, some of the greatest money masters the world has ever known did not or do not like to be overly diversified. John Maynard Keynes liked to own no more than 6 stocks. He once said that with perfect diversification there is zero profits.

Warren Buffet owns concentrated positions in a relatively few stocks. He has the confidence to invest heavily in what he believes will do well. He has made some big mistakes but he also can boast of the best long term track record ever. "Uncle Bill Miller" of Legg Mason Value Trust fame is also known for concentrated positions. Despite a heavy load of better that 1.75%, he has beaten the S&P 500 for an incredible 14 years in a row.

I am pleased to report that a good friend of mine has made a very high return this year. While looking at his account earlier tonight, I was surprised at just how persistent he is. When he grabs onto a good stock, he locks on like a snapping turtle and will not let go. In the past 18 to 20 months, he purchased AMR 8 times,GOOG 9 times and CAL 33 times! He has not ever sold a single share of these three stocks. With almost every addition to his account, large or small, he purchased shares in one of these stocks. He owns other stocks that have done well but these three are clearly his favorites.

He has made more money this year than many folks will make their entire lives. He made the most on CALbut his purchases of ,GOOG are the most remarkable. Of the nine purchases, 4 of them were made at the approximate prices of $90, $190, $290 and $390. I am confident that he will buy more before the stock gets to $490 and I am confident that he will buy more when the stock gets to $490.

Another friend has made a huge gain on ,GOOGLE this year while losing a little on the airline stocks. He took a beating on NWAC but his recent gains on CAL and AMR are pushing him toward a break even on the airline portion of his portfolio. It is also interesting that a friend with a retirement account largely positioned in index funds has his biggest gain in LCC. After the bankruptcy court helped this company dramatically reduce its operating costs, it looks to be on the way to a number of profitable years ahead.

I don't often write much about some of my families long-term holdings because we have not added to these in a good while. A number of these are at or near 52 week highs. I may have given a bit of a wrong impression about my position on the market as emails and phone calls have asked if I am selling out. Nothing could be further than my position. I believe that after 23 months of sideways consolidation, the market is ready to break-out into a full blown BULL MARKET STAMPEDE. I have simply said that aggressive investors who are willing to bet on their ability to time the market (typically a bet with poor odds) that the market is approaching over bought conditions. The sentiment is too strong. The problem is that if this current rally is the break-out rally then forget about sentiment and stay on board for a heck of a ride. In aggressive accounts that are trading on margin, it makes a lot of sense to take a little off the top. These accounts will still make a lot of money if the rally continues.

OIL and other commodities are the big question marks. Oil has broken down below the 200 day moving average. This could be a bear trap or it could signal an upcoming swift drop of another 10% or more. With the curbs on demand in place in the very populous countries of China, India, Indonesia, Malaysia and others, I suspect that the drop will continue. However, there is a divergence between oil and gold.

There are a number of ways of looking at the strength in gold but perhaps the best thought is that the move is a "flight to quality". It is a flight to quality in countries like France which is facing riots in the streets, Italy which is facing a recession and many other nations which are experiencing the worst of inflation.

In America, short interest rates are currently considerably higher than the core inflation rate. Thus gold is expensive to hold here. However, the strength of the US dollar coupled with the huge spike in oil prices has hit our trading partners very hard with a mega dose of inflation. Any goods bought from the US cost more and, since oil is traded in dollars, the cost of oil has gone up by the nominal price and the currency swing; a double whammy that has many folks running scared.

Which brings us back the the thought of MAKING MONEY. Warren Buffets adage in regard to fear should be heeded in times like these. Warren said that fear and greed drive the market and the secret to making money is to buy when others are fearful and sell when others are greedy. In this case, the fearful are afraid to buy stocks and the greedy are jumping on the "big move" in gold.

Emotions are strong so the run in gold could last a little longer. However, another bump in the Fed Funds rate is going to put all the more pressure on central bankers around the world to "protect their currencies" by bumping their short rates. Gold, which does not pay a dividend, cannot hold up to higher and higher short term rates.

One of the reasons so many folks can't understand why the FOMC can't set a tight target and stick to it is that they do not appreciate the degree that the interest rate game is a relative game. Short rates in Australia have been well above rates in America for quite a long time. Short rates in Canada have been bumped recently. Folks get all bent out of shape about current account surpluses and deficits and suggest the world is coming to an end. The humorous part is that the citizens of the one country are whining about the surpluses just as loud as the citizens of the other country are whining about the deficits. The fact that the citizens of a very wealthy country can buy a lot of goods is seen as a terrible condition. The citizens of the poor country only wish they could have it so good.

The US is the manufacturing engine of the world. We produce more goods per capita than anyone else. We own more assets than anyone else. Individuals in America who learn how to invest can make a lot of money. I congratulate my good friend on the success he has had this year and I wish him and all of you the best in the years to come.