Diversification -- how you are doing in the decline depends on it

At the low this morning was your portfolio down more than the 8% the S&P was down from its high? Then most likely you own some portion of financial stocks -- banks, brokers or mortgage REITs, high yield bonds or some other vehicle that is high yield oriented (business development companies, MLPs, etc.) or small cap stocks.

These are the worst performing areas so the more exposed you are to them the more you think the decline has been bad. If you own a lot of health care stocks or consumer staples like PEP, then your portfolio has done very well and you can't understand what all the fuss is about.

TECH, LH, MDT, ILMN, NVT, CME, etc. these are all up or flat since the market peaked. AB is another one that is only a couple of dollars from where it was in mid July.

If all of my portfolio was in DFR or BSC or something similar, then this decline would be much worse than it has been for me. Having a heavy exposure to smaller cap stocks has not helped -- especially with one that had a rough reaction to earnings (TSRA) but the list of stocks above that are up or flat during the decline is an offsetting factor. Diversification is key and its not just about owning different sectors as it is owning stocks with different drivers -- i.e. don't have all your money in stocks driven by the private equity boom or the mortgage boom or the debt boom, etc.

When I wrote a several posts ago about losing permanent capital, what did I mean? If you owned shares of SUNW, JDSU, EMC, NT, etc. during 2000 and did not sell until sometime later then you lost permanent capital. Some of those stocks are STILL down 90% from their highs several years later. They aren't coming back. American Home Mortgage is not coming back -- neither is Novastar or many other financials -- perhaps even BSC or even my own DFR. Yet during 2000 there were plenty of stocks that were bottoming and actually took off over the next several years -- they were non-tech stocks and include everything from MO at $20 to Exelon at $20 to many others. They have outperformed the market dramatically over the last 7 years.

There are financial stocks today that will lead to loss of permanent capital and there are non-financial stocks that will be big winners in the future. The key is finding those stocks where the future prospects of the business are materially better -- not just a little but a huge gap -- from what is embedded in their current prices. This is what I will continue to try to do.

BTW, the bond market is working the same way -- the problems are in sub prime, Alt-A and the debt that is private equity related or is part of a package of loans that is called a collateralized debt obligation. The CDO's aren't very liquid in the best of times but now its obviously worse. The more exposure to those areas and the more leveraged you are, the harder this market is for you.