Did you ever have your grandmother tell you not to put all of your eggs in one basket?

Well it turns out grandma was right. Grandma, knew a great deal about the power of diversification and how it reduces risk both in business and in trading.

IN BUSINESS …

What if McDonalds only sold hamburgers, do you think they would still be competitive when the world is turning to healthier lifestyles. Now don't get me wrong every once in a while I like to chow down on a nice juicy hamburger. But I also like to eat healthy and so do a great many other people. McDonalds moved with the times and diversified into chicken wraps, salads and a whole host of other healthier food groups. In other words they diversified.

IN TRADING …

It just doesn't make sense to trade just one market, there's just too much risk and too little opportunity in one market. A trader needs to stay flexible and at the same time be diversified.

Before we get into the meat and potatoes of market diversification let's take a look and see how the dictionary defines "diversification"

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1. the act or process of diversifying; state of being diversified.
2. the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.

Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.

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That's the official version of diversification. Now let's apply that to the markets. First off, we have to accept that the market can do only three things, it can go up, it can go down and it can go sideways.

Your portfolio on the other hand, can only move two ways. It can go up, or it can go down.

We all know the direction our portfolio should go, and we want to see it go in that direction with the least amount of risk. That's where diversification comes in.

NUMBER ONE SECRET TO DIVERSIFICATION

Here is the number one secret to market diversification, spread the risk and trade in non correlating assets.

Here's an example of a non diversified portfolio.

Say you are bullish on Crude Oil and you buy a futures contract in crude, but what if the rest of your portfolio was full of energy stocks?

What you have created is one basket of eggs. In this case a basket of energy eggs. Your portfolio is dependent on one sector and that is energy. This is just too risky for the average investor. No matter how many stories you hear from the various experts saying that energy is going through the roof you don't bet the farm on one market … ever.

You need to have as many non correlating asset classes as you can follow. This short video illustrates diversification perfectly.

The other key to diversification is cash. You don't have to be in all the markets everyday. Cash is a way of diversify … Swiss Francs, Canadian Dollars, Euros, etc etc.

Here's an example of how a well diversified portfolio.

Stocks, bonds, futures and cash.

Out of those four asset classes, you have a multitude of choices. Stocks allow you to cover a broad spectrum of different domestic and international sectors. Bonds do the same thing, and the futures markets cover everything from raw commodities to financial instruments.

You can divide your portfolio into different percentages and allocate then to various asset classes. The more you divide into non correlated asset the less your risk will be.

Here's what I am suggesting. I call it the Will Rogers approach. Here Will Rogers was known for his famous quips.

"I'm more concerned about the return of my money than with the return on my money".

I guess Merrill Lynch should have remembered that when it had to write off 8.4 billion dollars and cause the firm to have it's first loss in 93 years. Diversification would have smoothed that disaster for Merrill, what got in their way was plain old fashioned greed.

The American humorist Will Rogers (1879 - 1935) had a special way of making a point. Here's another one of his insights about trading and investing.

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it". — Will Rogers

Will was right!

Only buy sectors when they are going up. When they turn down, get out and move into cash. Then look for another non correlating market sector for your portfolio that's moving up. For sophisticated traders you can even short different asset classes which is a way to turbo charge your returns.

Learning when a market is moving higher or lower is not as difficult as you might think. Take a look at how you can tell if your favorite market is going higher or lower here.

Yes, it takes time to analyze the markets and find winners, but the time of a buy and hold strategy is gone forever.

We are living in extraordinary times, never before have we had so many people living on the planet. Never before have we had so many major countries competing for an ever shrinking supply of raw commodities. Never before have we seen times like this that present both great opportunity and great risk.

Diversify … spread your risk, don't be a Merrill. You can do well and thrive in the future with a well balanced and diversified portfolio.

Have a super profitable trading week.

Adam Hewison

Good Monday Morning Everyone!

Well the Super Bowl was last night and
I think the better team won with hard work,
commitment, and an AMAZING D-FENCE!

Now I'm not a Giants, or a Pats fan, but I do
like the Super Bowl. Last nights game was
a pretty good game and I'm happy to see Eli
and the Giants defy all and win. But my best
friend Jon asked me last night about trading and
what I thought would be a Super Bowl stock for this year.

We got into a good discussion about some of the
big movers last year (CROX, HANS, and a few
others)...and what could be this years Super Bowl
stock so he can "get rich quick".

I told him "to be honest...I HAVE NO IDEA! No one
really does. The market has so much going on right
now, that some are saying that Bank of America
could be this years winner solely on their Sub-Prime
positions! Some are saying that shorting the financial
sector is where the moves are made because there's
still a lot to write down. There may be a penny stock
out of Canada thats ready to discover the water to
crude formula!"

Then I addressed his "get rich quick" comment:

"Jon", I told him, "you're my best friend, you were the
best man at my wedding, you'll be my god father to
my next child, but if you ask me something that stupid
again I'll never talk to you again." He was shocked!

He didn't understand why he couldn't get rich trading
and take an easy trade and buy himself a new Corvette!

The next 2 hours were spent explaining that 100% of all
traders lose money at some point or another. 100% of
traders second guess their trades, get ticked about
a bad trade, and dwell too long on what could have been.

At the end of the second half the game was no longer
important to him. He was more interested in what is
realistic trading goals. I told him, "if you make 10%
every year, you're a winner. He said, "WHAT??!?!?
You're a pretty good trader, a smart enough guy,
and you're around smart traders and all you think is
good is 10%??"

The reality is, that I think he finally learned, that trading
is not the lottery. You won't make a million dollars
in 1 trade, you'll probably lose money, and trading is
HARD!

We stopped talking the 3rd quarter as I think the
beers were getting to him, but at the start of the 4th
he came back and said, "ok what do I have to
do to get 10% returns." I told him there is no easy way
but the best way is to spend some time learning
about different trading styles, methods, and money
management skills.

"Jon" I told him, "it took me 3 years of reading and
studying before I found what I liked to trade, how
I felt comfortable trading, and what NOT to do. All
that changed when I had access to VIDEO education
via INO TV." He's never been much of a reading fan,
as he's much more of an auditory learner, with really
not much time to sit and read. So I told him that
INO TV will be a great way to learn BEFORE he makes
his first trade.

With all the money being lost on a DAILY basis, the least
he, or ANY trader, can do is expand their own knowledge
base. It's never killed anyone to learn about something.
I've never watched a seminar and said to myself "I didn't
learn a single thing from that". You pick up info all the time
and can either apply or reject what you've learned.

Have a GREAT trading week and check out INO TV today
because if Jon can do it...you can to.

Learn more about INO TV HERE

"Today this market is increasingly dominated by one player. Together Microsoft and Yahoo can offer a competitive choice."
Statement from Microsoft, Inc.

That's the official line from Microsoft in its quest to acquire Yahoo.

Sad to say we had to pass on this deal. We couldn't get the bank to go along with it. Microsoft on the other hand does not need a bank, as it is in a lot better shape than most of the nation's banks.

OK, so we all know who the big 800 pound gorilla in this game and that's Google. But, does anybody remember the name "Altavista"? Well Altavista used to be the 800 pound gorilla and the search engine du jour. What happened to Alta Vista was that it was taken over by the metrics of the web, where nothing is forever. Could Google be far behind?

The big question is, can Microsoft and Yahoo equal Google? If this hostile bid ever is finalized, it's going to be very interesting to watch the implementation of two very different cultures. Is Yahoo with all its Yahooligans going to stay Yahoo? Or, is a decidedly less cool northern neighbor Microsoft going to kill off any further web innovation at Yahoo?

Also, as I write this blog, the market has voted to punish, and push down Microsoft shares. We would not be surprised to see Microsoft shares dropped even further from current levels. Currently, we're trading around the $30.50-area.

Rest assured that this weekend most of the financial press will be writing about the potential marriage of Microsoft and Yahoo.

It is BIG NEWS!!!

There's no doubt about it, Google is the big Kahuna in the world of online advertising. But all this could change pretty quickly for Google, and here's why.

If you're not familiar with affiliate marketing, then you really don't know how Google makes its money in the trenches. Google shares revenues with thousands, if not millions of partnering web sites. Google advertising matches advertisers to web sites or searched words. This is what it does best and it does it very well.

It also pays the web site owners for this privilege. Any other company who decides on a similar course of action will also have to pay the website owners more for this same privilege.

Here's how I see it, if Microsoft decides to pay more than Google to appear on an affiliates website, then that money will have to come out of the fees it receives from its advertising income. In Google's last earnings period, it said that payouts to affiliates were an ever increasing cost of doing business.

Rest assured capitalism is alive and well and every affiliate, no matter how big or small practices it. Affiliates have no loyalty to Google, they will switch in a New York minute to whoever pays them the most money to be on their website. This in my opinion represents an "achilles heel" in the long run for Google.

Google is going to find it increasingly more expensive and difficult to retain its affiliates. If I were Microsoft, I would come in with killer deals and a greater share of the marketing pie for every affiliate web site that Google has a relationship with.

As for Google's stock, we expected that the potential re-emegence of a very real competitor will erode the big profit margins that Google has enjoyed in the past few years.

The Chinese have a saying that goes like this. "May you live in interesting times." Never has this been more true than today.

We expect that this historical battle between Google and Microsoft will be one to remember and one that will be analyzed at business schools around the world for years to come.

It's going to be interesting.

Have great weekend,

Adam Hewison,
President, INO.com.