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Henry Ford's MARKET
SECTOR ROTATION STRATEGY: WHY SECTOR TRADING MUTUAL FUNDS? Why not just buy the best stock in each market Sector? The reason is that neither you nor I are good enough at stock picking to put all our eggs in one basket. (Do you hear the Asset Allocation folks revving up their engines in the background?) By buying a Sector Fund we are capitalizing on the collective wisdom of the Fund Manager and his advisors, econometric studies, staff and mainframe computers to pick an assortment of stocks to make up the sector fund. If they know what they are doing, they do not just by GM, Ford and Chrysler to make up their Auto Sector Fund, as an example , but rather they include a mix of 15 to 30 or more companies that are integral to the Auto Industry as a composite. This includes the obvious mix of tire manufacturers, third party product suppliers of everything from windshield wipers, wheel rims and glass. IT ALSO includes the not so obvious finance companies, insurance companies and transportation industry stocks that benefit from the cyclical nature of the automobile market. Many of these issues are chosen BECAUSE of their diversification into other industries, unrelated to the making of Automobiles and trucks. It is just this diversification that allows a fund manager to make profits even when his particular sector of interest may be declining. There is also always a mix of cash, kept in reserve for buying opportunities, which increases as a percentage of the portfolio when times are tougher. If this diversification and built in asset allocation is so good, then why bother searching for better sectors....Let the fund manager do all the work. The fact is that YOU can out-perform any fund manager BECAUSE you do not have $3 BILLION to invest! By way of explanation, let me relate an anecdote. Warren has the same problem as the fund manager. In a cruel twist of circumstances, the truly successful Sector fund manager, (or any fund manager, for that matter), has as his biggest handicap.... the sheer size of his fund. Imagine what would happen if, tomorrow morning, either as a leader or a follower, he should decide that he wants to sell all of his GM stock. As he begins dumping his stock on the open market the price plummets as supply exceeds demand. The more he sells, the other funds that follow GM begin to sell their holdings, thus perpetuating the downward spiral until market equilibrium between fear and greed finally halts the price of the stock at a level which wipes out a major portion of the fund's profits. Instead, the fund manager must methodically and slowly reduce his exposure in such a way that draws as little attention as possible while maximizing and locking in the profits he has worked so hard to achieve. Like the Titanic, that at full speed took five miles to stop, he has no way to totally escape the iceberg of eventual profit erosion. He can only hope to capture enough to make his bottom line look good at the end of the day. You and I, are just "poor folk" (comparatively speaking), and don't have enough GM stock in all of our collective holdings to make even a ripple in the market. (Remember, 93% of all major stocks are held by institutions.) Therefore, we have the ability to move in and out of GM six times a day, if we are day-traders. (believe it or not, some active traders will write 50 tickets or more a day), picking up a few fractions of a point at a time; up or down. That is a whole different ballgame.
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