4/25 Kelly Letter Topics
Weekly market review
Earnings season
SEC GS politics
Fin reform toothless
Money always talks
Greece still sinking
Japan's sliding credit
AAPL > MSFT
Falling bullishness
Grant on fin reform
Unwinding hedges
Who will buy JGBs?
Tempur-Pedic
Of snow and stocks
2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
My Maximum Midcap strategy is down 20% since its October high. In the past five years, it has declined farther than that only one time before recovering, and that time was down just 25%.
The ensuing recoveries averaged +38% in an average period of seven months.
Yesterday's article on leverage sparked conversation. It's the conversation that's always sparked by leverage because you invariably have to say that "it works both ways." Andrew Tobias pointed that out in his inestimable The Only Investment Guide You'll Ever Need.
Wade asked:
If the index falls 50% and you are leveraged 100%, don't you lose everything?
With most investments, yes. With leveraged mutual funds and ETFs, however, no. The reason is that they maintain constant leverage by daily rebalancing of equity and debt, whereby they buy shares when the market rises and sell when it falls. Even though they are selling shares by the boatload as the market plummets, they'll always have some shares leftover.
The main point, though, is whether you can be severely damaged by a leveraged index investment in the event of a big bear market and the answer is: absolutely. This is their downside.
However, can't we say the same about any investment? If you bough Sharper Image for $13 last June, you'd be in bad shape now. It closed at $1.81 yesterday.
Tom wrote:
If we start looking at your example from another date, the results would be very different. Let's say I had invested $10,000 on April 1998, at the start of a short bearish period:
04/98 to 08/98: -50% 08/98 to 08/00: +186% 08/00 to 03/03: -59% 03/03 to 04/06: +220% 04/06 to 07/06: -23% 07/06 to 10/07: +55%
This gives me a return of only 8.86% per year for the past 9.5 years, well below many actively managed funds. Am I calculating this right?
Yes, Tom is calculating right. The unfortunate person who started their investment program in April 1998 is still waiting to see much success.
Is it really the fault of leverage, though?
The total return of the leverage in the period Tom specified was 124%. During that same period, the total return of the Dow was 53% and the Nasdaq 45%. That gives them respective average annual returns of 4.6% and 4.0%.
As for how 8.86% per year since April 1998 stacks up against mutual funds, according to Morningstar, it makes the top quartile. That's pretty good considering that Tom deliberately chose one of the worst times to have begun the investment program.
Both Wade and Tom make valid points. Any leveraging strategy has the downside of magnifying losses. It's possible to time it just wrong and do lousy. Any measure that can be taken to reduce the steep losses helps immensely. We can't count on that skill, however, so I leave it out of my calculations and always include full losses with full gains.
My own ability to time the market has proven to be pretty good, which is why I'll be launching a timing service around these leveraging strategies next year. My hope is to add value by reducing the impact of down markets by being in cash during a portion of them.
A simpler approach is to only use this leverage after the market has corrected at least 20%, or to double your regular contributions to the portfolio during such corrections. Setting a concrete percentage on the decline required to use leverage removes the need for intuition, which is unreliable.
I'll show the benefit of using set percentage levels to change your contribution in a future article.
I advocate the use of leveraged index vehicles in my stock book and newsletter, such as those offered by ProFunds, ProShares, and Rydex.
Since I first did so five years ago, the strategy has been under attack. The point of attack is always the volatility of the strategies. The inevitable conclusion of the skeptic is that a severe bear market will wipe out the entire investment.
Anything that magnifies performance on the up and down sides will by definition be more volatile than the underlying investment. If you own an ETF or fund that returns 200% of the Dow, then your portfolio will be twice as volatile as the Dow.
Some people equate volatility with risk. It is one kind of risk, but not the only kind and usually not the most important kind. Say you're 30 years away from retirement. A bank savings account will not fluctuate at all during those 30 years. It will return a few percentage points of interest each year and not for one moment will the balance drop below what you put into the account. It exhibits zero volatility and is therefore not risky at all by this measure.
However, you are guaranteed to miss your retirement goals in that account. The money will not grow enough to meaningfully outpace inflation. In that sense, the bank account is the riskiest choice of all because it comes with a 100% chance of failure to reach your retirement goals.
Volatility, the rise and fall of prices, is not inherently bad. If it ultimately takes your capital to heights not possible without the volatility, then it was worth the rollercoaster ride. Married to the right indexes, leverage and its attendant volatility is an excellent long-term path to wealth.
It works best when combined with dollar-cost averaging. That's simply sending more money on a regular basis, usually monthly or quarterly. That approach, which happens to be the way most people actually invest, works best with a strategy that is volatile. Why? Because the change in prices is what enables the periodic investments to buy more shares when the price is cheap and fewer when it's expensive. The automatic result is that the investor ends up with more cheap shares than expensive and benefits when the investment finally rises overall. Stated differently, the average cost of his or her shares is lower than the average cost of the fund or ETF during a given time period.
This can all go terribly wrong if the investment drops to zero and has therefore no chance of recovery, or just drops very low and does not recover. With carefully chosen indexes to leverage, however, these risks diminish. They don't disappear, but they diminish.
Let's look at one example. In the 2008 edition of my Neatest Little Guide to Stock Market Investing, I mention that I like the S&P Midcap 400 index because it tends to rise more than the Dow in good times and fall less in bad times. Look at this chart of the two indexes since August 1991 and you'll see what I mean.
The period from 1991 to today included one of the worst bear markets in history, that being the dot com bubble burst that took the Nasdaq down some 80%. That's key to this analysis because critics always point to an awful bear market as the reason that leveraged strategies are doomed to failure.
Even a buy and hold approach to leveraging the S&P Midcap 400 worked fine in this case, however. Let's take a big-picture look at how 200% leverage against the index worked over this time period:
08/91 to 01/94: +88%
01/94 to 06/94: -23%
06/94 to 05/96: +96%
05/96 to 07/96: -25%
07/96 to 04/98: +157%
04/98 to 08/98: -50%
08/98 to 08/00: +186%
08/00 to 03/03: -59%
03/03 to 04/06: +220%
04/06 to 07/06: -23%
07/06 to 10/07: +55%
Had you invested $10,000 in the strategy back in August 1991, you would have $122,459 today. Had you invested in the S&P Midcap 400 index without any leverage, you would have only $71,339. While the strategy did not actually double the index, it did beat it by a wide margin.
Keep in mind that this is buy and hold at work through one of the worst bear markets in history. However, had you been smart enough to keep sending more money each month during those -23%, -25%, -50%, -59%, and -23% times, you would have done considerably better than buy-and-hold alone.
If you were just a tad smarter still and decided to double your monthly contributions whenever the strategy was down by more than 20%, you'd have done better still.
The point to remember is this: extreme volatility coupled with assured recovery is a potent combination. It's what gives you the confidence needed to send more money to something that is down 59%. You cannot have that confidence in an individual stock because there's a good chance that it won't recover or at least won't do so in a reasonable amount of time.
With an index, though, the situation is different. Indexes always recover. All 30 megacaps on the Dow, all 500 large caps on the S&P 500, all 400 midcaps on the S&P Midcap 400 are not going to go bankrupt at the same time. The indexes will have turbulent months and years, as the above history shows, but they will rise to new heights eventually. Confidence in that is what gives an investor the courage needed to pony up more capital during dark months.
To Kelly Letter subscribers, this is old hat. We monitor this approach and use it constantly. It's been very good to us.
Just recently the familiar saga played out again. During the sub-prime scare last summer, our Maximum Midcap strategy fell 23% from mid-July to mid-August. The predictable "I told you so" mail came pouring in as the headlines darkened around the credit crunch, systemic crisis, worst housing market in decades, and so on.
What did we do? Invested more money with full confidence that the index and our strategy would one day fully recover, as they always have.
Since the August lows, the strategy is already up 21%.
The current bull market is different than any other on record because there has actually been a large contraction in p/e ratios. At the start of this bull in October 2002, the p/e of the S&P stood at 29.06. It is currently at 17.84. There have only been two other bulls that saw contractions, but they were very small. This data bodes well for those arguing that this bull still has legs.
Then, on Friday, "Today's run to new highs in the S&P 500 officially erases all the declines we saw during the summer credit crisis."
As expected here in The Kelly Letter, the credit implosion story has lost its fear factor. The market rose strongly last week against a backdrop of bad news from the credit and housing sectors, because the economy remains strong.
Warnings from financial companies came as a relief since they clarified the extent of losses from sub-prime. Citigroup, for instance, warned of a 60% drop in 3Q earnings because of a one-time write-down. One time. The problem won't last forever and had little effect on anybody except those in high finance. Few waste tears on their paper losses.
Those fearing a recession missed out on a big part of this fall's rally. There are still some calling for a crash of epic proportions this month. The market appears to not share those concerns yet.
It's now been one month since we changed from our medium-term cautious stance to a medium-term bullish stance. I am proud of that courageous call, and subscribers should be proud to have followed it.
In the past month since we went bullish, amid forecasts of recession, a global credit crisis, and a housing meltdown:
> The Dow gained 7.3% and the Nasdaq gained 9.8%
> Our Dow One strategy gained 29.3%
> Our Double The Dow strategy gained 14.4%
> Our Maximum Midcap strategy gained 14.0%
Less than two weeks ago, a reader named Brent attacked my bullish call. He pointed out warnings from Marc Faber and Enzio von Pfeil, the latter having just gone on "red alert" for the month of October. Brent told me to "wake up."
I concluded my response:
While I welcome all viewpoints around here, the most important remains my own and I continue to believe that we're not entering a recession, that the housing "meltdown" just means a great time to be buying a housing stock, and that any weakness in October is another chance for those slow on the uptake to get their money into the market.
The fact is we've been right, and that's making people who sat on the sidelines angry. They're looking for ways we got lucky, why the odds were against the market rising and how it was foolhardy for us to have bought in.
Don't pay attention. The best times to buy almost always look the way they did a month ago: scary, lots of emotion, a lengthening list of reasons the market couldn't possibly go up, threat of recession, inevitable systemic collapse, and so on.
Such times are often shrill with the warnings of eminent commentators, people with impeccable credentials who are nonetheless proven wrong.
We haven't seen the end of volatility. I'm sure any whisper to the downside will blare trumpets of "I told you so" from the cowering crowd, but you'll know the truth.
When it was time to buy, they didn't. My subscribers did, and they're richer for it. That makes them investors.
If you'd like to join the ranks of the knowing and have a penny to spare, try the letter's one-month trial. If you like it and continue, it'll only run you five bucks a month -- and you can stop that at any time, too. Odds are you won't, though. A full 85% of those who try the letter keep receiving it forever.
It's easy to see why. We're good.
Our permanent portfolios destroy almost every other service and are the very picture of relaxed investing. Just look at their performance since inception in 2002, and consider that as of last Friday they're up 27%, 23%, and 23% so far this year. They're so good that they're the subject of an upcoming book.
But the permanent portfolios are just part of the letter. Each weekly missive includes market commentary that cuts through the media fog that misleads people, as it did in the past month. It also includes our portfolio of individual positions that gooses performance beyond the core portfolios. We do well there, too.
If you join us today, you'll get the straight skinny on the housing market. We've been watching it for months now for a good entry point on beaten down homebuilder shares. Last week, Citigroup sent the whole sector flying nearly 20% higher as it called the bottom. We don't buy it for a second, partly because Citigroup issued the same call for a bottom last December -- and then watched the stocks lose another 60%. Be careful who you listen to.
Start by listening to me. I'll send you this weekend's note tonight, which includes the scoop on housing, a peek at Yahoo's pending recovery, and a look at whether gold is a good hedge against inflation.
As I mentioned, it's only a penny, you can cancel at any time, and you just might finally join the ranks of those who beat the market, without all the silly fretting that goes on elsewhere.
Could you have timed your switch from bearish to bullish any better? That was brilliant. I'm kicking myself for not moving money into the market two weeks ago, when you first said to get back in, and then last weekend when you reiterated the call.
My wife said the market looks scary with all the credit trouble, and she worried that banking problems like England's run on Northern Rock might come to the U.S. She said, "People are lining up at banks and you're gonna put money in the stock market?" That scared me a little, so I stayed away. Now, your Dow strategy is up 10% in the last two weeks or something, and I'm frustrated that I let her talk me out of investing.
Do you think I missed the boat?
No, I don't.
Since I changed from medium-term bearish to medium-term bullish on Sept. 10, here's how our permanent portfolios have done:
Dow One: +22%
Double The Dow: +9%
Maximum Midcap: +8%
Keep in mind that a good portion of those returns came just yesterday, courtesy of the Fed's 0.5% rate cut, which sent Double the Dow up 5% and Maximum Midcap up 6% in just a single day. The Fed doesn't cut rates every day and the predictable pop after its doing so may not last, so I wouldn't get overly excited about that.
What I would understand as quickly as possible, however, is that the market is poised for a solid performance in the medium term. If you're still stuck on last month's headlines about sub-prime and shaky credit markets, you're looking in the wrong direction on your calendar. Flip forward, not back. It won't be long until this silly little correction isn't even talked about, and it won't rate anywhere near the top of the issues successfully faced down by the stock market.
Here at The Kelly Letter, we were never afraid of sub-prime. We never thought the "state of the market these days" was scary. We watched all of the action with amusement, and watched for bargain prices, but not for even a minute did we think systemic failure was imminent.
If you did, take this opportunity to look into yourself and ask if you have what it takes to be an investor. I'm not joking. What happened over the summer is not unusual in the stock market. If it rattled you, this business may not be up your alley. If you pay attention to fear-mongering headlines in even the most august of publications, this business is definitely not for you. If your first reaction when hearing how bad things are is to think about what to sell when you should be thinking about what to buy, you need to hang it up while you still have some capital left.
Now, the market won't keep going higher at this pace, of course. Last week was great and this week is off to a heck of a start, but even in a strong medium-term environment, the market won't just rise.
You'll know you've reached a professional stance when your approach to stocks is the same no matter what's in the newspaper. When they say the world is ending, you look for bargains. When they say it's a new world economy and that stocks won't ever go down again, you still look for bargains. The media is a sideshow, folks, and the sooner you realize that, the better.
Directly to Alan's question: No, I do not think it's too late to get in this market. The beauty of my permanent portfolios is that it's never too late, hence their name. What Alan really wants to know, though, is whether he missed the opportunity to get money in for the end-of-year run-up I wrote about.
Obviously, he missed some of the performance, but not all. The end of the year is quite a ways out there still, and the people who think the market is scary will take more convincing to realize that it's not -- and will pile on just about the time the bargains are all gone. That will send prices higher, so there's still upside in this market.
As ever, be smart. Don't put your money in at the highs following the Fed's rate cut. Wait for another scary headline and a price drop. It'll happen along the path higher, which is still intact.
I'm fortunate to have amassed a circle of readers that are passionate about my books. They offer me tips on improving them, suggest topics for further study, and tell others about them. An author can't ask for more from his readers.
Sometimes, though, they protect me too much. My stock book is highly rated at Amazon.com, but not everybody rating it approves. When Nicholas E. Johansen awarded it a mere three stars and supplied some unflattering comments, readers reported the transgression to me within hours. One went so far as to suggest that I prove to Amazon that some of Mr. Johansen's comments are not true and demand that they be pulled. I will not do that.
Instead, I'll address some of what he wrote, focusing mostly on his skepticism around my permanent portfolios.
Mr. Johansen begins his review with a much-appreciated summation of what he considers to be good about The Neatest Little Guide to Stock Market Investing:
Kelly does an excellent job of defining various stock terms -- everything from P/E ratio to beta -- and doing it in simple language. As a side note, his writing style and prose is significantly better than that featured in most investing books, since he was an English major. Additionally, Kelly provides excellent research resources, including ones that I had not found in my extensive internet searches. More information and more sources is never a bad thing, and Kelly provides the latter in spades. Finally, his introduction to such investment greats as Warren Buffett and Peter Lynch -- while rudimentary -- are very helpful for the new investor. I find it particularly good that he utilizes Lynch extensively in his own strategy, because Lynch is (arguably) the best fund manager that has ever lived.
Lest you become too comfortable in this warm light, however, know that the English major benefits won't outweigh the detriments to this reviewer before he's done. He quickly moves on to the problems he sees:
Unfortunately, Mr. Kelly adds a bit of his own intuition and thoughts into the strategies he presents in this book. First and foremost, his notion that investing in the UltraDow mutual fund is sound is beyond ludicrous. Not only is this an ineffective use of money, but its volatility and risk far outweigh its gains.
Ah yes, the oldest objection in the book against my doubling strategies: they're volatile.
Folks, here's a tip for you: whenever an investment strategy has the word "double" in the title, it's going to be volatile. When you double the performance of an underlying investment in both directions, you're going to experience -- by definition -- twice the volatility of the underlying investment. What I show in the book is that doubling groups of reliable stocks such as the Dow and, in my new edition, the S&P MidCap 400 index, is that they have always recovered in the past and that down moments in the market provide a wonderful chance to put more money to work at a discount.
I hammer this idea home regularly in The Kelly Letter. Commit it to memory: extreme volatility coupled with assured recovery is a potent combination.
You would not want to double the performance of a single stock because there's a chance that the stock will decline so precipitously that you'll lose all of your capital. That's not the case with my doubling strategies because they target major indexes. In fact, I show that even if an investor began my Maximum Midcap strategy at the worst possible moment, its peak before plummeting, he or she would have been back at even within five years.
That's comparing only the initial investment with no additional money added along the way. If, however, an investor was astute enough to buy more shares during the down times, as advised in The Kelly Letter, the margin of outperformance by Maximum Midcap was far larger. From its low in March 2003 to the end of 2006, the strategy returned 272%.
This is no small feat. The dot.com crash of 2000 to 2002 was the worst bear market of my career so far, and likely the worst of my lifetime. The Nasdaq plunged 78%, after all. It doesn't get much worse than that.
Yet, even investing in this strategy at the worst possible moment of one of the worst bear markets of our lifetimes did not produce financial ruin. In fact, the intelligent investor who followed my advice to keep investing during the worst months was back to even within a couple of years and is now counting substantial gains.
Even right now, we're seeing the volatility in action. The Kelly Letter invests more money in each of my doubling strategies at the end of each month. That happens to be today. You know what happened last week? The market sold off and my Maximum Midcap strategy, true to form, fell twice as much as its index. It dropped 12% in a week.
Sounds terrible, right? However, if you look at the long history of the index itself you'll understand that such downdrafts are just part of the pattern. When the index turns up again as it always has, shares bought at the 12% discount will roar back with twice the vigor of the market itself. That's the beauty of this approach.
Subscribers received a reminder email last night to buy more shares today. You can see how they've fared over the years we've been using this strategy here.
If that's "beyond ludicrous," join me in the crazy camp. There is no evidence that these doubling strategies entail volatility and risk that far outweigh their gains, as Mr. Johansen claims.
He then attacks what he perceives to be my lack of professional training:
In the preface, he states that using this book "always works" -- a pretty bold statement from someone who is A) not a business major and B) not really even a market professional. Only later, towards the very end of the book, does Kelly admit that he has "limited experience" in the area of stocks. Er...what was this about "this book always works"? Kelly's strategy is, in essence, based upon filling out a worksheet and setting arbitrary numbers as "good" or "bad" -- i.e. when X ratio outweighs Y number, this stock is a good buy. Get enough of these "good buy" signs together, and you have a stock to buy. Not only does this show his lack of knowledge on the subject, but worse, he makes these statements as if they are guaranteed to make you money.
This part is just plain untrue. Nowhere in my book does the phrase "limited experience" even appear.
As for my worksheets, what stock worksheets do you know that don't compare numbers and ratios to benchmarks and competition to see how they stack up? I'm not sure why Mr. Johansen considers that to be a bad approach. I never imply to readers that getting enough good measurements together automatically produces "a stock to buy." In fact, here's an excerpt from page 24 of the book pointing out the uncertain nature of stock analysis:
The annoying thing about stock measurements is that even if every one of them gives a green light to a stock you're considering, it might still end up being a bad investment. It's not like measuring your inseam. Once you know that number, you know the length of pants to buy and if they're that length, they fit. Period. It's not that simple with stocks.
I've been wrong on stocks. So has everybody who's ever worked in this business. It's part of the business. What I tried to do in my book is give the reader an edge over the odds by showing certain measurements that have worked and are better than nothing when it comes to understanding a company.
With no measurements, we might as well throw darts or roll dice. We need measurements to determine what a company is worth, compare what it's worth to its current price in the market, and determine if we have a chance to buy it at a discount and benefit when the market awards it the value that it's worth.
As for my having studied English instead of business, guilty as charged. I don't consider that to be a weakness and, apparently, neither do others in this business. I interviewed Bill Miller in May for subscribers. He's famous for having beaten the S&P 500 for 15 years in a row from 1990 to 2005 at the helm of Legg Mason Value Trust. Know what he studied in college? Philosophy.
Next, Mr. Johansen has a few choice words for beginning investors:
Interestingly enough, Kelly almost always talks about buying shares in the HUNDREDS. That's right, as in 200 shares of Microsoft. Almost anyone who knows something about the market will tell you that investing $5,000 or even $10,000 will yield underwhelming results. The # of shares Kelly is dealing with proves to show that he is not only small time (re: has not made a lot of money off trading) but probably hasn't been at investing for very long.
Clearly, Mr. Johansen was not an English major. The first thing writers learn is to know their audience. My book is for beginners. I deliberately designed my examples to be near the amount of money that my readers are likely to be managing when they first approach the market.
Besides, what works for $10k works just as well for $100k. It's like swimming. You learn to do it in water that's shallow enough to allow standing when you make a mistake. What you learn in that shallow pool, however, will get you through the deepest waters later.
And, if any reader doubts my own authority on the subject, just look at whose advice appears in my book: Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller with historical perspective provided by James O'Shaughnessy and cameo appearances by Susan Byrne and Charlie Michaels. This is an all-star roster and maybe, just maybe, combining their wisdom as top performers in the investment business with the writing skills of a lowly English major is precisely what a beginner needs to take those first few steps.
Not just beginners, either. You don't get higher in the world of investing than the people whose advice I capture in my book. Any investor will benefit from distillations of their advice. About my summary of his techniques, Bill Miller wrote, "Jason Kelly captured my investment methods well, and better than most who have tried to describe what I do."
I appreciate Mr. Johansen's taking the time to write a review of my book. I also appreciate the many kind readers who worried about my well-being. Rest assured, I've withstood more vicious attacks on my strategies and more scathing indictments of my education.
None of it matters as much as the facts. My book does always work. I track everything in it on this site and in my weekly advice to subscribers. There are fewer and fewer critics of my methods as the years go by. Why? Because my strategies are beating almost everybody.
Even Bill Miller, much as I respect and admire him, is behind my Maximum Midcap strategy through the dot.com crash to now. Of course, his performance was far less volatile and that's a different kind of victory. What I'm proud to show is that my strategies are some of the best ever explained to beginning investors, the overwhelming majority of whom invest more money each month or quarter to achieve their goals.
That approach, known as dollar-cost averaging, has no better friend than my volatile but skyward reaching strategies, Double The Dow and Maximum Midcap. Just as The Kelly Letter is doing today, Tuesday, July 31, buying more when the price is down and waiting for the eventual turbo-charged recovery has proven to be a winning approach to the market.
I hope you're not too disappointed that it was brought to you by an English major.
Tomorrow: A response to my Power Investor article from the software's publisher, The Investors Alliance.
On June 20, Fortune magazine crowed about its Fortune 40 portfolio. On its website, it describes the group as "Forty stock picks inspired by the greatest investors of all time: From the deepest values to solid growth, these shares can make retirement dreams come true."
This is typical of the financial media, and how it pulls in the unsavvy with the barest of research. The list of 40 stocks is a Who's Who of world famous large companies, and anybody surprised to see their names has been stranded on a deserted island. Take a gander at this excerpt of 10 companies from the list of 40, and see if anything strikes you as groundbreaking:
3M Altria Coca-Cola ConocoPhillips General Mills Johnson & Johnson Microsoft Pfizer Procter & Gamble UnitedHealth
Wow, Fortune left no stone unturned to put together that list, eh? You can see the depth of their research in every name. Basically, they just listed Dow companies and/or their competitors.
From my excerpt of 10 companies, 7 are Dow components. ConocoPhillips is not on the Dow, but its archrival ExxonMobil is. Kelly Letter readers have known the power of the Dow for a long time. It's good to see that Fortune has caught on. What they seem loath to admit, though, is that their idea of gathering the names of market leading companies is more than a century old. The Dow Jones Industrial Average, which has been maintained by the editors of The Wall Street Journal since 1896, has not beaten the Fortune 40 yet but give it time and you might be surprised. Fortune simply believes that it picked better stocks than the editors of The Wall Street Journal. It added no innovation whatsoever to the quest for superior performance.
From Fortune's June 20 article:
"Our 40 favorites turned in a banner year, trouncing even the S&P's glitzy performance. From June 2, 2006 to June 1, 2007, our diversified group returned 27.4%, compared with 21.5% for the S&P. Since its inception in 2002, the Fortune 40 has delivered an 18.3% annualized return, easily besting the S&P's 14.7%."
That's only impressive to the uninitiated. Let's compare the Fortune 40's performance from June 2, 2006 to June 1, 2007 against my permanent portfolios. In that same time frame:
Maximum Midcap returned 29.7%
Double The Dow returned 40.7%
Now, let's compare the Fortune 40's 18.3% annualized return since its inception in 2002 to the annualized returns of my permanent portfolios since that same year:
Maximum Midcap delivered a 30.0% annualized return
Double the Dow delivered a 19.6% annualized return
As you can see, the permanent portfolios easily bested the Fortune 40 in each time frame.
What's more, the Fortune 40 is impractical for most people to implement. Almost nobody has the patience to buy 40 different stocks, then maintain a proper allocation among them as they rise and fall. No investor's return would have been the same as Fortune's results, because nobody would have maintained a perfect allocation as Fortune can do in its financial model.
My permanent portfolios, by contrast, offer a better performance along with the simplicity of being accomplished with a single investment. Plus, anybody following my permanent portfolios achieves precisely the same result that I report, because there is no reallocation involved at any time. Your money is always properly balanced because there's only one investment involved! It's a constant source of disbelief to me that more people don't know about this doubling approach.
You would think that the editors of Fortune could do more research for their readers. I was in college when I realized that the Dow offered a great shortcut to the world's leading companies, so it's hard to be impressed with Fortune's recent discovery of that fact.
Then, I spent years looking for ways to beat the Dow, as readers of my stock book know. After much experimentation and back testing, I discovered that simply doubling the whole average was superior to all other techniques, particularly when combined with the investment of additional money on a monthly basis.
That last part is key because the permanent portfolios are volatile by design -- twice as volatile as their market segments, in fact. During down periods, they fall twice as far as their market segments. Investing more during those times has proven extremely profitable because they've always recovered -- twice as powerfully as their market segments. That's why we invest more money at the end of every month regardless of market conditions, as we did just last Friday. That's another way I keep these approaches simple. There's no timing involved, hence the name permanent portfolios.
Extreme volatility combined with assured recovery is a potent combination. Lucky for us, most people don't know about it. That includes, apparently, the editors of Fortune.
Stick with me. I keep investing simple and effective. To try my newsletter for one month for just a penny, please click here.
So far this year, here's how The Kelly Letter's permanent portfolios have done:
+2% Dow One +19% Double The Dow +28% Maximum Midcap
Looking back a month, it's a good thing we stayed fully invested. As I wrote then, these permanent portfolios are always fully invested -- hence their name -- but the latest month is a great example as to why.
Concerns about the market having come too far too fast, and the old adage to "sell in May and go away," pushed timing instincts to the front last month. The popular media warned of a crash, and my subscribers wanted to know if it was time to sell.
I, too, sounded cautious when I issued my forecast of a rising market in the short term to be followed by a falling market in the medium term. The first part has happened; we're still waiting to see about the second.
I also wrote that the beauty of the permanent portfolios is that they're formulaic. You don't need me to keep them going. All you do is send more money at the end of each month, as we just did this past Thursday. That takes advantage of any dips in price, while leaving the bulk of your money in the market at all times to capture the two-thirds of the time that the market rises.
Just look at the results.
With most investors marveling at the Dow's impressive 9.7% rise so far this year, we're sitting on twice that in Double the Dow and almost three times that in Maximum Midcap.
People continue doubting these strategies, but they keep working. With each passing year of beating almost every professional money manager, each dip successfully cleared and recovered from, I grow fonder of these doubling approaches.
The numbers tell the story. If you'd invested separate amounts of $10,000 in the Dow, Double the Dow, and Maximum Midcap at the end of 2002, here's what you'd have in each today:
$16,235 Dow $23,290 Double the Dow $36,614 Maximum Midcap
The same amount invested in Fidelity Contrafund would be worth just $18,205. Even in Janus Contrarian, one of the top-performing mutual funds of the past five years with an annualized return of 18%, your $10k investment would be worth just $27,778. That's ahead of Double the Dow now, but it probably won't sustain the lead because it was achieved with human stock-picking, which is historically unreliable. Most fund managers eventually revert to the mean, which is the market, and the doubling strategies beat the market.
Even against leaders like Janus Contrarian in their temporary outperformance stage, Maximum Midcap shines. It's a full 32% higher than Janus Contrarian.
If you're waiting for a pullback, keep pooling your money. When a correction comes, you'll be hard pressed to find a simpler way to play a recovery than one of these permanent portfolios. They combine extreme volatility with assured recovery, and that's a potent combination.
To see if this simple, effective approach is right for you, click here to start a one-cent, one-month trial of The Kelly Letter.
Now that it's May, people are writing to ask whether I think it's time to get out of the stock market. The old adage to "Sell in May and go away" has stuck far and wide, it seems.
According to The Stock Trader's Almanac, the best six months to be in the stock market are November through April, and the worst six are May through October. However, the system utterly failed last year and in many other years. In fact, the Almanac itself is looking into a significant tweak in the system to account for the fact that the date ranges appear to be changing.
Also, the Almanac uses an MACD-based signal to tell subscribers when to get in and out of the market for triple the performance of the rote calendar system, and that signal has not been issued yet.
Better than all of this, however, are my much simpler permanent portfolios. They've run circles around the best six months in back-testing and in real-life since I began using and tracking them at the end of 2002. They're better than the MACD signal, too, because that's subject to the analyst's interpretation and gives a fair number of false calls.
If you're a trader, perhaps market timing is appealing and you enjoy technical signals such as MACD. For most investors, though, a long-term solid performance with as little fiddling as possible is better. For that, I highly recommend my permanent portfolios. You can see Double the Dow's performance history here and Maximum Midcap's performance history here.
The reason they work is that they couple extreme volatility -- in each case twice the market's -- with assured recovery. With a typical index fund, you don't get extreme volatility, so money you invest on a regular basis such as monthly doesn't ever get super bargain sale prices. With a typical stock, you don't get assured recovery because sometimes stocks go to zero and never come back. Just ask anybody who invested in the sub-prime lender market recently.
By the way, one group of stocks that comes close to providing assured recovery is the Dow. I also have that covered with Dow One, the historically strongest of the Dow Dividend Strategies, although you'll see on the performance page that Double The Dow has been a better bet, and will never fail to recover.
Finally, better than just selling everything you own and suffering the taxes along with the uncertainty of not knowing when to buy back in, is setting stop-loss orders under some of your stocks that have performed well recently. That's what I did over the weekend with two stocks owned in The Kelly Letter, and both hit for respective profits of +8% and +30%.
Stop-loss orders (better thought of as lock-gain orders on stocks that are up), are a great way to take precaution against a potentially falling market, without worrying about getting the timing right.
Besides, surely you're aware by now that almost nobody can successfully time the market. Remember, getting out is only half the battle. When would you get back in? Probably after a surprise rally that nobody saw coming, and after missing the bulk of the gains to be had.
Why bother? Just keep buying into proven strategies through good and bad times, and you'll come out ahead of almost all timing gimmicks -- and with fewer gray hairs.
I spent the early part of my investment career researching strategies to beat the Dow. I was intrigued by the book Beating The Dow by Michael O'Higgins and John Downes. Then, I relished further work by The Motley Fool to improve upon the strategies.
Each of the Dow strategies involves using dividend yield to select a portion of the 30 Dow stocks that have historically been most primed for recovery. All are large, market-leading stocks like Boeing, Coca-Cola, Intel, Microsoft, and Wal-Mart. That they will recover is almost never in question. What is in question is which ones are most undervalued at this moment and should, therefore, perform better in the short term than the whole Dow itself.
In my own further research, I discovered a strategy better than anything ever attempted before. It's more volatile than the Dow, but because the Dow generally rises over time, it comes out ahead of the Dow -- and all other strategies intended to beat the Dow -- over time. I call my strategy Double The Dow.
After putting it to work, I continued looking for better ways to beat the Dow and was pleased to discover that the best way is not with its own components, but with an entirely different index. We can still use the Dow as a benchmark, but if another index exists that loses less than the Dow in bad markets while gaining more in up markets, that index should be a better hunting ground for our investment dollars, right? Of course.
I found such an index: the S&P Midcap 400. Then I further researched how to beat it over time. That strategy is called Maximum Midcap, and like its predecessor, Double The Dow, it has done remarkably well in both backtesting (the way I researched both) and in real life since I began using it at the end of 2002.
From December 31, 2002 to last Friday, here's the growth of $10,000 in the Dow Jones Industrial Average (via the Diamonds Trust, symbol DIA) and in each of my permanent portfolios:
The Dow $14,828 Double The Dow $19,661 Maximum Midcap $27,886
Pretty exciting, wouldn't you say?
Best of all, these strategies are completely automated. Each month, I remind Kelly Letter subscribers the day before the last trading day of the month to make their monthly investment the next day. That's all there is to it. In each issue of The Kelly Letter, I show both the growth of the initial $10,000 in each strategy along with the growth of $100 invested on the last day of each trading month. It's right there in print (in pixel, actually) for subscribers to follow along and watch their own money grow with the letter's.
Double The Dow and Maximum Midcap are my permanent portfolios. They go down at times just like everything else, but they eventually come back up. Our $100 invested at the end of each month takes advantage of the down times to add more money at cheaper prices. Then, when the eventual recovery takes shape, we profit off of it instead of just getting back to even.
This is not revolutionary. It's called dollar-cost averaging and happens automatically by just sending more money every month. It's best suited to a volatile investment that eventually recovers, and both of my permanent portfolios are perfectly suited to this approach -- by design.
I tell you this today because tomorrow is the last trading day of January and I just reminded subscribers to get ready to send their monthly contribution tomorrow.
If you give The Kelly Letter a try for a month, you'll see exactly what the permanent portfolios buy. Do it now, and you'll be able to make your first investment along with us tomorrow.
The cost for a month? A penny. "No way," you say. Really.
For just a penny, you'll receive every note I send until the end of February and have complete access to all of my research and portfolio positions on my subscriber-only website.
If you like The Kelly Letter (which you will, I'm sure), then do nothing and I'll charge your PayPal account just $5.48 per month. If you ever want to stop (for shame!), you simply click either at PayPal or at the bottom of any note I send and both the letter and the monthly charges will stop immediately.
It's true what The Kelly Letter has been called in the press: the last honest place on Wall Street.
To read more about The Kelly Letter, Double The Dow, and Maximum Midcap, and sign up for your one-cent trial in time to invest in the permanent portfolios with us tomorrow, please visit:
It's a pleasure having you visit my site, and you're welcome to keep coming back forever for free. I would simply like you to see what a wee bit of money can do for your long-term portfolio performance.
