Sectors

My portfolio is currently 65% tech stocks. 75% if you count AMZN, which is kind of borderline because it tends to move with tech stocks.

I’m 36 years old, so I’m thinking pretty long term. Also, tech is the industry that interests me the most. It’s also the one where I see the fastest and most sustainable growth potential currently.

My question is, how much of a problem is this? Saul’s portfolio is pretty tech-heavy too, but not nearly as much as mine. Saul (or anyone), would you ever let your portfolio get over 50% (or even 30 or 40%) weighted in any one sector?

Thanks,
Bear

Personally, it’s extremely disheartening to see your portfolio decrease massive amounts when the general market is going up, so I wouldn’t go higher than 30% in my portfolio in any one sector and I take a lot of time to think about correlation not related to sectors as well (oil and banking tend to be correlated closely, for example).

However, I also don’t think that all “tech” stocks are really information technology. Amazon for example is half retail and half tech, Shopify and other SAAS companies I look at as service companies, and Facebook/Google are completely reliant on advertising for their revenue/income (so are more comparable to companies like Fox or Viacom). Compare this to say, old Microsoft or IBM, where the risk for obsolescence is much higher (both companies now transitioning towards services rather than technology sales that are subject to commodification). I think services are easier to distinguish from a competitor than say, chipmakers (think SWKS vs Intel), or a phone maker like Apple. All this to say - I don’t want a very high sector related concentration in my portfolio, but I also probably categorize stocks differently than the general public when it comes to sector alignment

Occasionally, you can get lucky with a “rising tide” if you have strongly correlated assets, such as tech in late 90s and Bio in the couple of years prior to 2014, but it’s easy to get overconfident when that happens and believe it’s skill and not luck, and then get whacked when the tide goes back against you, as it always does

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September 3, 2004
Good bye Technology!

I made up my mind this week after working on the idea for a little over a year. I’m going to permanently rotate my portfolio out of technology because it no longer fits my investment needs.

http://softwaretimes.com/files/good%20bye%20technology.html

Denny Schlesinger

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I too think that diversification is extremely important. Way back a number of years ago I was burned pretty bad by being way too heavy in one sector. Now days I try to keep no more than 25% in one sector, but I have to admit that sometimes have cheated above that line for short periods. Right now my big holdings are TJX, SBNY, ARNC, FB, and now TWLO is getting pretty big so I too have a technology sector issue, but as of late it has been on sale! =)

Saul (or anyone), would you ever let your portfolio get over 50% (or even 30 or 40%) weighted in any one sector?

Hi Bear, I was going to answer that I don’t think in terms of sectors, I think of stocks, but that isn’t really true. As you pointed out, I do have a large percent in tech, almost as much as you and certainly over 60%, and higher after today. But tech is where the growth is. And of course I count Amazon as a tech stock. All they do is based on tech, and the internet, and don’t forget AWS, and Echo.

But I wouldn’t let any other sector get large (oil drilling, transportation, retail, chemicals, pharma, etc, and constantly watch to make sure my banking sector doesn’t get too big (SBNY and BOFI, although they are entirely different situations).

By the way, within tech I try to buy category leaders. (I think of Shopify, Amazon, Arista, Splunk, SilverSpring, and Hubspot as category leaders. Ubiquity is off doing its own thing. Paycom is not a category leader but plays to the small and middle market.)

Hope that helps.

Saul

Saul

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Thanks Saul,

I think what Aphalite said is helpful. There are many different areas of tech, and they are impacted by different things:

Healthcare tech
Advertising tech
Retail tech
Banking tech
Consumer products tech
different types of B2B tech

…probably a ton more that all move in different directions based on macro.

I like your take that Tech is kinda unique. I can’t imagine I’d let any other sector get this big either.

Thanks,
Bear

It’s a good question and one I constantly think about being also heavy in tech; the reason being, as Saul says, that is where the growth is, to which I would add, some of the best financial fundamentals too.

So I am undeterred but I admit I seize on a company which comes up through the growth screens and DD which is not tech! They do appear, good examples in the last year being RVs; THO and DW, which were hiding in plain sight for weeks before the market noticed.

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75% in Tech is too much. However, some of your picks are very solid and I’d hate to sell them now (SHOP, AMZN, FB, PAYC,…)

Tech stocks did not participate in the 10% bounce that everybody else enjoyed in November. Money was taken out of tech to rotate elsewhere. At some point soon, money will rotate back into tech and we will revert to the mean.

It makes no sense to me that a small cap prison operator like GEO jumps 50% in November while FB, AMZN and GOOGL retreat. Is the Trump admin expected to put half of us in jail??

The money that chased GEO in November came out of tech and is expected to come back home sooner or later.

Practically, I would not go and sell anything today. Let the natural attrition of your portfolio do the job. Don’t pick up any more tech for a while and when you sell a position, don’t replace it with tech. Over time, equilibrium will be restored.

#6

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YouAreNumberSix asked: “Is the Trump admin expected to put half of us in jail??

I think you asked this rhetorically, but here goes…

As I’ve discussed previously, I pay attention to REITs, and several (if not all) of the for-profit prison operators are in the REIT space. Under the Obama administration, the Department of Justice indicated that they would phase out use of for-profit prisons, sending the prison for-profits into quite a tailspin. Pull up a one-year chart for any of them, and you can see exactly the day the announcement was made. If a Trump administration reverses that decision, the for-profit prisons get a death row pardon, if you’ll excuse the phrase.

The rise in GEO (if not the magnitude) is rational. The decline in tech, I don’t understand very well at all.

I hope this helps. I also hope it ends any discussion on REITs and for-profit prisons. That stuff is not for this board.

Fool on!
Thanks and best wishes,
TMFDatabaseBob
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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Under the Obama administration, the Department of Justice indicated that they would phase out use of for-profit prisons, sending the prison for-profits into quite a tailspin. Pull up a one-year chart for any of them, and you can see exactly the day the announcement was made.

Okay, that makes more sense now. The Trump victory sent for-profit prison operators back to their fair value.

#6

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