i used to be very diversified, owning hundreds of individual stocks. a position of more than 1% of portfolio struck me as "huge". however, a couple of years ago i decided energy was the best sector to be in, so i sold all my non-energy names. within the energy sector, i was still very diversified. but gradually i became more comfortable with the names and decided to overweight certain subsectors, and that really cuts down on the number of quality names available. for example, if you want a pure play on sour refining in the United States, VLO is it. if you want a pure play on Canadian oil sands that is a real, operating producer (as opposed to somebody with a business plan and billions of dollars and ten years of capex ahead of them), you have COS and SU. so, i have found my portfolio get MUCH, MUCH more concentrated than it used to be. while diversification certainly has its benefits, these subsectors have handily outperformed the broader oil and gas indices, which themselves have clobbered the broader markets and just about every other market sector.
a year ago people said oil and gas had outperformed and were good shorts. many hedge funds bragged about being short into the first few days of January 2005, but energy only underperformed for about a week and that's all she wrote. i still go back to 1980, when energy stocks were 30% of the SPX. at the end of 2003 that weighting had fallen to 5.6%, and even after killing the market the past two years, has only risen to 9-10%. i see it as a decade-long secular shift from tech/finance back to energy and basic materials, which i expect will bring energy back to 20%+, and maybe 30% if we get a good blowoff top. so, i think there's still a long way to go and i'm sticking to my guns. |
