Time for a market correction

No question about it. The Dow and S&P have been going straight up for months. Not even a single triple digit down day.

• The Housing market is crashing – The market doesn’t care.
• Inflation is at the high end of the Feds comfort zone – Fed who? says Mr Market
• North Korea has nukes – Market shrugs it off.
• OPEC cuts oil production – So what says the market.
• Iran/Nigeria/Venezuela problems could spike oil prices – We got reserves.
• Amaranth collapse – Did something happen? Buy Buy Buy.
• Too much money chasing too few investment opportunities – Private Equity buying anything they can for an LBO
• High flying stocks and companies based on eyeball count are back. – Myspace, Facebook, YouTube and anything that’s Web 2.0
• Momentum funds are back – Lets chase the market, what a brilliant idea. NOT
• Mutual Fund Mondays are back – Retail investors chasing mutual funds that have already outperformed.

AND finally

• Frequent use of the scariest words in the investing: “This times its different because….” – Yea right, its different because people want to fool themselves into believing its different

So does that seem like a Goldilocks scenario? To me it seems like a Deja vu from 2000. A lot of people (who seem to live in a Toy story world) are convinced the markets are heading “to infinity and beyond”. Ok I’m exaggerating, but at the very least we need a 5% (600 points) correction to remove froth from the markets. An 8-10% correction would be better IMO.

The return of Fidelity Magellan?

Peter Lynch managed the Fidelity Magellan fund from 1977 to 1990 averaging 29% returns over the period of 14 years. At one point the fund grew assets to an unmanageable $100 billion. In recent years the fund became an Index hugger with most stock picks matching the S&P. Factoring in expenses the fund underperformed its category and even the S&P 500 index for years.

Stansky who managed Magellan for nearly a deade retired October last year. He was replaced by Harry Lange. One year later the fund looks a lot more interesting to me. A year ago the top 10 holdings in order of percentage of assets were GE, Microsoft, ExxonMobile, HomeDepot, Citigroup, J&J, Intel, Lowes and Viacom. This year the fund has Nokia, Slumberger, J&J, UnitedHealth, GE, Peabody, AIG, Google, Genentech and Corning. When you manage $45 Billion you need to find good large cap stocks wherever you can, so its great to see Harry Lange is looking at international stocks, the fund has Nokia, Nomura, Canadian Natural Resources and Samsung among its top 25 holdings.

Only time will tell if the fund returns to its glory days but its a step in the right direction.
Conflicts: My 401k is managed by Fidelity and I have avoided the Magellan Fund in the past.

Berkshire Hathaway shares cross $100,000

Around 1:20 PM Eastern. Berkshire Hathaway class A shares crossed the $100,000 mark for the first time ever. This has been a resistance level for the stock for a few years. Berkshire Hathaway is a holdings company run by Warren Buffett. The company which started out in 1965 has never split its shares.

Wheel of Diversification

Cramer says diversification is the only free lunch. I agree, diversification is a necessity and is very easy to accomplish. In 1999-2000 people bought Dell, Microsoft, AOL and Cisco and thought they were diversified. The tech sector crashed in 2000 and all their stocks dropped in value. The best way to protect against sector downturns is to diversify. One should also try and diversify such that market cycle do not affect their complete portfolio. Say I diversify my holdings into companies involved in Basic Industry, Energy and Precious Metals. Since all three industries tend to perform well at the top of a bull market and do poorly at the bottom my portfolio is vulnerable to an economic/stock market cycle.

To avoid diversification mistakes and to provide a guide I came up with a wheel. The diversification wheel is not meant as a recommendation of any sector or stock. It is just a quick tool to look at which industries/sectors are similar enough that they may be affected by a sector downturn or the economic cycle.

Click here for the full sized image

To use the wheel click the link above for the full sized image and print it out. You can use the wheel to judge if you are diversified by marking your top holdings on it.

Diversified: If your stocks are in sectors that are roughly spread out equally around the wheel then you are diversified.

Vulnerable to sector downturn: If the sectors are very close to one another you may be vulnerable to a sector downturn.

Vulnerable to market/economic cycle: If the sectors are concentrated in one half of the wheel you may be vulnerable to an market/economic cycle.

Pick a stock to diversify: Mark your existing stock picks. The centre of the section on the wheel which is missing from your portfolio would probably make a good addition to help diversify your portfolio.

The Wheel is a work in progress, any suggestions for improvements to the wheel are welcome and I will try to incorporate them.