Fortune 40 Destroyed

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:

General Mills
Johnson & Johnson
Procter & Gamble

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.

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