Frat House Stocks

This column was originally published on RealMoney on Aug. 9 at 2:30 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

A portfolio is like a micro study in group behavior. For the group to function, the personalities in it have to get along. As director of this metaphorical gathering, I make sure I understand the characteristics and potential of each member of the portfolio, and restrict admittance to those likely to complement.

If I try to put 30 Type A, superaggressive personalities in one room and I don't serve the right punch, there is likely to be a brawl and bills for damages. Because I outsource party planning to entities like the Federal Reserve, international political and economic concerns, the weather and OPEC, it is best to create a diverse group of portfolio members so as to maintain balance in any environment.

The portfolio is actually like a fraternity, as we have the ability to control admission. As I skim through the applicants, I tend to get three different types of companies pledging. The large-cap blue-chip and defensive names know better than to apply -- we like to stay up late and party, and they can't hack it.

Basically, I choose between growth, value and speculative names. Other than benefiting the environment, I'm also concerned with how long they plan to stay. Some speculative or growth names might be enrolled only for a semester and realize they prefer the pace of country living.

This applies to hedging also. If the portfolio is filled with aggressive names, it pays to have some beta shorts in the portfolio as well. If we're sitting on a bunch of low-volatility longer-termed shorts and the Fed spikes the punch bowl again, we might need to move into a new house. Inversely, sitting on a bunch of value stocks and shorting beta names doesn't make much sense either. If pizza and guests show up unexpectedly and the party really gets going, the value names will be sleeping, while the beta shorts are waking up the neighbors.