Narrow Leadership

Yesterday on CNBC David Faber and Gary Kaminsky did a bit about how five stocks have accounted for 27% of the S&P 500's performance this year. As I am in a Tivo-less environment I could not pause to get all five but two of them were Apple (AAPL) and Berkshire Hathaway. Kaminsky made a comment that per S&P the leadership had never been that narrow before.

Beyond the point of narrow leadership like this being a negative harbinger, which was not discussed, Kaminsky made a comment that if you don't own the five stocks you are lagging the S&P 500. The comment is peculiarly narrow in focus. While there are probably money managers who can only operate in the SPX universe, that does not apply to a lot of people and certainly not you.

There is a lot of value in terms of performance, both nominally and on a risk adjusted basis, that can be added with country selection and avoidance and in certain years domestic sector avoidance (tech in 2000 and financials in 2007). Kaminsky's comment seems to be very much a bottoms up point of view which I think is a more difficult way to go.

In this context I've been writing about several investment destinations over the years that offer a different economic makeup than the US, are on firmer economic footing than the US and are likely to play an increasingly important role in the world economic order than they currently do. One example is Chile which, as measured by the iShares Chile ETF (ECH), is up 32% YTD versus 6.33% for the S&P 500. ECH is a client and personal holding.

The conclusions drawn above (makeup, footing and so on) would seem like an easier task than guessing when, if ever, the mania surrounding Apple will fade (should it grow bigger than Exxon Mobil (XOM) I think that would be a very loud bell ringing) or get caught off guard in Berkshire god-forbid Warren Buffet has a health event.

To be clear I am a huge believer in using individual stocks, I just believe getting to the picks via a top down process makes more sense (for me anyway). One way to think about top down is that a lot of time can be spent on what to avoid as well as what markets are healthiest in the context mentioned above. If the net result of a broad based index is the results of the worst performer, the best performer and everything in between then figuring out what looks the worst, fundamentally, and avoiding it can at the very least smooth out the ride. From there figuring out that a country like Chile offers a lot as a long term investment destination should add value over some reasonably long period of time like the duration of a stock market cycle--remember that in any given year your "favorite" investment destination can go down which is one reason to focus on the entire stock market cycle.