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Jason Kelly of The Kelly Letter May 13, 2008 Email this article to a Friend  Printer friendly page

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

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.
volatility. Without it, you're in a bank account. How much will that grow over the years? Not much. After inflation, not at all.

by Jason Kelly (The Kelly Letter)

Disclaimer:

Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests.

Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk.

There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.