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Importance Of Diversification To Mitigate Risk, PART 2

|Includes:Alimera Sciences, Inc. (ALIM), ARIA, ASMB, ATHX, CHTP, CYTR, HALO, MDGL, PSDV, RMBS, RMTI, S, SPWR, SUNEQ, ZIOP

One of the readers here, KC, asked a question that I feel deserves an answer in a fresh new blog post...

Here is KC's (paraphrased) question(s):

"Looking back through the moves displayed here on your O2W public portfolio over the first half of 2013, generally speaking, there were pretty much 3 underlying stocks that made the portfolio successful-SPWR, SUNE (WFR), and S. (respective profits->$620k, $394, $45k). Were you just simply very confident / comfortable with these companies based on your five step method and that is why you weighted them so heavily?

...And as we are nearing the New Year, are there any particular stocks, or sectors for that matter, that you personally believe will rewrite history in 2014 like SunPower and the Solar Sector did in 2013?"

Diversify...but Not Too Much

In my post, "Importance Of Diversification To Mitigate Risk," I stated the following:

"it's important to diversify…not a whole lot, but enough to help mitigate the pain of bets that could, and will, go awry…too much diversification will only offer moderate growth..."

As you can see, even though I espouse diversification, I am not very big on too much diversification...However, I diversify just enough to ensure that my overall portfolio is relatively safe in case one of my picks turns out to be a clunker...

As KC correctly noted, during the O2W 6 month experiment, most of the gains came from 3 bets that paid outstanding returns, however, there were a couple of clunkers and since my level of confidence in those stocks was not very high, I made sure that my bets were not too big...So yes, I was very confident in my bets in Sprint, SunPower and MEMC Electronic Materials and the results proved that my confidence was well placed...

Buying Options on SALE:

One other point...when my level of confidence is very high in a given stock, I will continue to buy options in that company even, in fact, especially, when its price is going down...I figure that if I made a purchase at a higher price then when the price is down, I should love the new discounted price...Most folks don't buy into a good company when its stock is going down and instead chase it when its price is moving up...I, on the other hand, buy with both hands when the price is going down and start to sell when the price starts to rocket up... I buy big when the prices are actually going down...This allows me to build sizable positions every time the options go on SALE...

One recent example is GALE...I started to buy GALE's $2.5 CALL options for 35¢ and then chased it all the way down to 20¢ and ended up owning more than 60% of all the open positions in that particular option...Currently I own only 10 contacts, basically having sold my entire position during the recent run-up with a rate of return comparable to one of my O2W portfolio bets...Today, I am looking to begin rebuilding a brand new position in GALE...

One of my all-time favorite sayings: "Opportunities always look bigger going away, than coming!"

Play the Cycle:

Also, over the years I have learnt when to get on the train and equally as important, when to get off...And since every stock has a cycle, it is very important to recognize those cycles if you want to achieve outsized gains...Once you recognize the cycle of a given stock you will know when to get off its gravy train, and then, when to get back on for a brand-new ride...

Stock Tips for 2014

There are a number of stocks that I'm quite bullish on...I will share the names of 6 here and plan to write a new post on the seventh :-) :

ARIA, GALE, GTAT, HALO, PSDV, and the usual suspect, SPWR...

You will find out about the 7th in the next few days...

:-)

kp

DISCLAIMER: All postings made here are strictly for my personal record keeping and in no way, shape or form, am I even remotely suggesting others to follow my Buy and Sell moves. Trading options is definitely not for the faint of heart as one's portfolio can move up, or down, anywhere between 10%-30% during a single trading day. Feel free to follow my progress here, but PLEASE do not follow my moves. However, if, in spite of all my exhortations, should you decide to do so, be advised that you, and ONLY YOU will be responsible for any losses that you may suffer...In other words, the onus is strictly on you. On the other hand, if the move(s) result in a profit for you, I am open to discussing a split. ;-)

Disclosure: I am long AAPL, ALIM, ARIA, GALE, GTAT, HALO, PSDV, RMTI, SPWR, SUNE, VTUS, ZIOP.