For more than a decade now I have played "Am I Diversified?" almost every Wednesday of my life.
I know it can seem tiresome and it certainly isn't as stimulating as the ponies, Texas Hold 'Em or even Sorry or maybe Chutes and Ladders.
But the fact is that this market, this current market, is made for this game. In talking to investors I was taken aback by how many wanted to know what was really wrong with Kimberly-Clark (KMB), down five points. Did something happen at PepsiCo (PEP) that it lost almost a buck and a half? What's the deal with Colgate (CLP)? Is it that Latin America is slowing?
No, none of this. In fact, PepsiCo just had a terrific presentation by Indra Nooyi today that showed me the growth is strengthening there. The raw costs of KMB continue to go down and the commitment to shareholders have never been better. Colgate's still taking share as relentlessly as it has for years now.
The issue isn't the companies, it's the cohort. While many people felt they would be safe if they spread their bets around the consumer packaged goods stocks, they got a rude awakening Wednesday that these stocks trade as one when the going gets tough, even as their fortunes are radically different.
Now it won't stay that way. Just like the drug stocks will soon sort out between the ones that are really doing well and the ones that are just yield equivalents, the consumer packaged goods stocks will sort themselves out about who has real momentum vs. who has little-to-no growth.
But the shock wave takes everything down first and it is vital that you aren't so consumed by the blast that you leave the market entirely, which is what happened after the dotcom explosion in 2001 and the bank and housing crashes that began in 2007. At that point, too, people felt that the market would initially see that Yahoo! (YHOO) wasn't the same as eToys and Amazon (AMZN) wasn't the same as Scient or Viant.
When the market was roaring higher, being diversified kept you from outperforming as well as you may have if you only owned Procter & Gamble (PG), Colgate, Kellogg (K), General Mills (GIS) and Kimberly Clark. I butted heads with Stephanie Link, co-portfolio manager of Action Alerts PLUS, repeatedly about how many of these stocks I thought we should own. Believe me, it was easy to craft a story for each. But as the PEG rates, or the price-to-earnings multiple divided by the growth rate, exploded to above 2 in almost every case and the risk just grew too great.
No matter what group, whether it be the utilities or the drugs or the foods or the master limited partnerships, there is no safety in numbers in individual sectors. They are birds of a feather and those birds get their feathers shorn when rates go higher, even if their businesses are unaffected by rates, which is almost always the case.
But look at it this way. You could own a bunch of utilities and for that you have been pulverized. So, even as "Am I Diversified?" gets tired for the gamemeister, the need remains there and, so, I guess it's game on for another decade's worth of new investors who still don't see the need to keep all of their eggs out of one basket, even when the basket's made up of staples, the safest of the safe.