Jim Cramer's fifth cardinal sin of stock-picking is about as counterintuitive as it gets: diversification and portfolio management.
In an exclusive video-conference call with members of his Action Alerts PLUS club for investors, Cramer explained that his skepticism about diversification, at least how it is commonly practiced today, isn't a long-held principle but rather a belief that has evolved over years of market experience.
When Cramer launched Action Alerts PLUS in the early 2000s, he recalled thinking at the time "we should be as diversified as the S&P."
Cramer noted he spent years debating with Stephanie Link the merits and demerits of being overweighted or underweighted in various sectors.
But Cramer said his approach has evolved toward "owning the best stocks regardless of the moment," while still maintaining "some diversification toward the larger segments in the S&P, the financials, the health cares and the techs."
However, managers who obsessively pursue S&P-style diversification wind up owning the bad with the good. Spelling it out, Cramer said that means owning "the dregs of the index, the carbon-based companies or some godforsaken area of tech or, worst of all, until yesterday perhaps, healthcare in an era where both parties love to castigate big pharma."
Instead, cash, generated by selling stocks in your portfolio, is the only effective hedge against the downside, Cramer said,
"I know this is a radical diversion from my previous point of view, but these last few years leave me with no choice but to say diversification offers no protection to speak of anymore," Cramer said.
Check Out All of Jim's Video-Conference Call
Cramer's video-conference call was only available to Action Alerts PLUS members, but you can sign up for a free 14-day trial and watch a full replay.
Joining Action Alerts PLUS gives you access to all of Cramer's monthly private video-conference calls and provides you with a host of other benefits, including:
- A complete rundown of all of stocks that the expert holds in his charitable trust;
- E-mail alerts that give you a chance to buy or sell any stock before Cramer makes a trade for the trust;
- Custom research throughout the trading day from Cramer and his team of stock-market analysts. You get to see some of the same research that Cramer and his team sees every market day as they make investment decisions.
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