The following is from this year's Note 16 of The Kelly Letter, which went out to subscribers last Sunday morning.
The market continues confounding bearish pundits. The Dow Jones Industrial Average closed above 18,000 for the first time since last July, and from its Friday close at 18,005 requires only a 1.5% rise to eclipse its all-time high of 18,272 recorded last May.
The year is going well for us, helped along by the strong outperformance of our preferred small- and mid-cap stock sectors in the past two weeks, and I'm already tempted to declare the changes in Tier 3 a success. Our goal there was to reduce the drag of forecasting on the overall portfolio by putting an even larger percentage of capital under the guidance of reactive systems. The two new ones in Tier 3 are Dow 2 and Mo 1, with the speculative portion of the tier reduced to just a fifth of the allocation.
Dow 2 sensed the time to move out of Intel (INTC $31.64) and into Wal-Mart (WMT $68.72), which has been great. As Intel works to realign itself with a growing emphasis on mobile devices at the expense of personal computers, its stock price is struggling. As Wal-Mart benefits from a turnaround plan that's farther along and should produce a leaner retailer, its stock price is appreciating.
The differential between the two stocks, with INTC down 8.2% and WMT up 12.1%, is a 20.3-point spread. This translates into a significant improvement for us, given our high allocation to the Dow 2 plan. We invested $69,091 in WMT on January 4. It's now worth $78,478. Had it remained in INTC, which we sold that day at $33.93, it would be worth just $64,427. We're $14,051 ahead, thanks to the Dow 2 signal. …
The last two weeks have provided a convenient case-in-point for why our reactive systems are such a fine way to benefit from the financial markets. They are low-stress and run on autopilot, beating the frantic pros who continue demonstrating their shortcomings with newly failed predictions. I was able to leave the plans alone through a busy schedule that included major earthquakes [in Kumamoto, Japan] as a disruption, and what did I find upon returning? Our money beating the market and therefore most professional money managers. The S&P 500 is up only 3% so far this year. We're up 5.6%. Even more impressive, unlike most price-only comparisons, these are more accurate total-return comparisons.
Stay true to intelligently reactive plans built on decades of market behavior. They are beatable by dumb luck only, which pundits call skill, and which we know to be unreliable. Guessing is best reserved for fun and games, not money management for a better future. In the end, steadily and surely, automated intelligent reaction outdistances professional guessers by a wider and wider margin, while costing far less in fees. Just ask Bill Ackman at Pershing Square, the billionaire hedge fund manager who lost 20.5% last year and another 25% in this year's first quarter. That's some bang-up expertise for hire at a high price, eh?
No thanks. We'll stick with what works, and what's cheap. How convenient that they're the same thing.