What Gives the Portfolio Its Power?

Some of the most popular features of my stock book and The Kelly Letter are the permanent portfolios. The one I emphasize is Maximum Midcap, a strategy that seeks to double the performance of the S&P Midcap 400 index, a market segment that's one of the best-performing over time.

The strategy is dismissed by investment advisers as forcefully as part-timers praise it. Why? Because it returns more than almost every expert and proves that they are unnecessary. They don't want that message getting much play.

Which is the reason I get hundreds of gloating emails whenever the market takes a turn south and my permanent portfolios, which are always invested, head south as well. "Hah!" goes the typical note. "Not so smart now, are you? One of these years maybe you'll come to accept the necessity of timing."

What they miss is that the occasional plunge to the depths, when coupled with a disciplined investment plan that adds more money on the cheap, is precisely what gives the portfolio its power. If you're a long-term investor, you want volatility. Without it, you're in a bank account. How much will that grow over the years? Not much. After inflation, not at all.

The first quarter of this year found the timing adherents in full plumage. They couldn't find enough ways to say they told me so, but were at a noticeable lack of words when pressed for when. "Back when I called the top," they'd begin. "When?" I'd ask. "When I called it." Ah, gotcha. A lack of specificity is a sure sign of hollow claims.

Aside from the fact that there is no long-term "top" because the market will eventually rise higher, there's the niggling inconvenience that nobody's able to identify the short-term ones until after they've happened. Lot of good that'll do you. Also, the guy who got it right this time probably won't be the one who gets it right next time, so this whole exercise is best suited to those who need to gamble but can't afford enough gas to get to Vegas -- and who can these days?

If you'd rather invest wisely and leave the games for something less important than your future wealth, take a look at my permanent portfolios.

For all the shouting about the end of the world arriving -- yes, again -- and how "this time it's different because the amounts of money involved are so staggering" (again), Maximum Midcap has quietly climbed nearly back to break-even for the year so far.

I'm not kidding. The end of the financial world as we know it lasted all of two months from the March lows.

In that time, Maximum Midcap gained 32% and is now just 1% below break-even for the year. Wow, guys, that was some crisis you cooked up there. Money we invested near the lows per our regular schedule has increased nicely without any of the undue stress experienced by those trying to second-guess Armageddon's timetable.

Sure, they'll be back with their feathers on display again down the road when the market goes through another of its down times. What they'll fail to point out is that all one has to do to keep a cool head when others panic is realize that the market falls 1/3 of the time and rises 2/3. The odds favor the longs, and the odds are completely in the favor of one who keeps investing during the 1/3 down times.

For now, though, they've been reduced to saying that this rally never should have happened, that it's a blip in a longer-term down trend, and that the Big One that didn't happen this time is just around the corner.

Funny thing about that Big One is that it's lived "just around the corner" ever since I got my start in the market 15 years ago. The best glimpse I had of it was the dot com bubble burst when the Nasdaq lost 78%.

Even in that, though, a person investing in Maximum Midcap at the worst possible moment, the very peak before the great crash, would have recouped their principal in just five years. A year and a half after that, the strategy was up 21% overall while the Dow was up just 11%.

Anybody astute enough to keep investing in the strategy while it plumbed its depths recovered far more quickly thanks to a 127% gain from March 2003 to March 2004. Remember, we're discussing what was likely the worst bear market of our lifetimes, and even through that the strategy survived and thrived.

You can see the historical performance of Maximum Midcap at jasonkelly.com/strategies.

Disclosure: The Kelly Letter puts more money into Maximum Midcap every month, no matter who's telling us we're stupid to do so.

Comments

[Indexor]

Once again, nice advertisement for your book and newsletter. Do you sell used cars or aluminum siding on the side?

[Cousin A.]

Whatsthmatter? Did you guys make the mistake of betting against him? There is nothing that adds to a discussion like personal attacks against those with whom you disagree, eh!

[YITBOSGP]

Read his book and look through your couch and find the money to sign up for his free trial to his website, you might learn something.