"I don't set trends. I just find out what they are and exploit them."
-- Dick Clark
The iconic radio and television host wasn't talking about investing, but the principle is still the same: You don't need to be a trend setter with your portfolio. To be a successful investor, all you need to do is identify opportunities with growth potential.
Fads vs. trends
There's the rub now isn't it. Yesterday's trend is often today's fad.
Of course, as comeback kid Crocs
The fad-less trend
It's not like you have to hit the growth cycles of sexy high flyers to be successful. Investing in a nice steady trend like health care -- people get sick even in a recession -- can result in outsized returns.
As the baby boomers get older, the number of medical procedures and drugs that the average American takes will increase. The only problem is the cost of health care has increased so much that the payers are starting to push back. While the amount of care required might go up, the cost per procedure or drug dose is likely to come down, which is going to wreak havoc on margins for the R&D-heavy industry.
On the other hand, saving people money is the main goal of prescription pharmacy benefit managers (PBMs). MedcoHealth Solutions
The PBMs are going to benefit greatly from the coming patent cliff; three of 2010's top 10 drugs aren't expected to be in the top 10 in 2014 because their patents will have expired. The expirations will continue through the next decade, benefiting the PBMs year after year.
We don't diversify for diversity's sake
That subhead is one of the investing points that the Fool's real-money Million Dollar Portfolio uses to explain to members how the portfolio makes its investing decisions. You can't ignore growth opportunities just because you feel a need to balance out your portfolio.
On the other hand, capital preservation and growth is also one of the tenets, so it's not like the advisors are going to stick the entire fund into one stock; Million Dollar Portfolio shoots for having 20 to 50 stocks in its portfolio at any given time. It's a tricky balance.
Here's how they suggest navigating that dilemma: If there are opportunities to be had in a certain industry, the portfolio will overweight itself to take advantage. Assuming the observed opportunity turns into a realized result, the overweight portion can drive the overall portfolio results higher than one that was equally balanced between different industries.
A little more than 15% of portfolio is invested in three insurance companies. Crazy? No. The insurers offer some diversity among the group; there's a specialty insurer, a health insurer, and Berkshire Hathaway
Bottom line: if you want to get rich exploiting trends while managing risk, you want to spot them, identify specific profit opportunities, and then responsibly overweight your portfolio toward those opportunities.
The Million Dollar Portfolio advisors are willing to give their opinions of the upcoming trends. Just enter your email in the box below to get "Motley Fool Top Picks & Perspectives 2011," a new free report with stock recommendations and portfolio guidance for the year ahead.
Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Berkshire Hathaway and Google are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers selection. Berkshire Hathaway, MedcoHealth Solutions, and Netflix are Motley Fool Stock Advisor recommendations. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Berkshire Hathaway and Google and has a disclosure policy.