Updated Modification of Harry Browne Permanent Portfolio

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cosmic
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Post by cosmic » Sat May 29, 2010 1:14 pm

Lbill wrote:Dollar Up - Everything Down. I've posted on this before - the notion that rising U.S. Treasury interest rates will be the trigger for stocks, bonds, and gold to take a simultaneous swan-dive. The cornerstone of this unpleasant scenario is the huge holdings of U.S. Treasury debt by foreign governments such as China and Japan. Once the shoe falls and foreign governments begin selling Treasuries it will drive up the dollar and U.S. Treasury interest rates in the absence of inflation. Down will go long treasuries, down will go stocks, and down will go gold (because of it's inverse relationship to the dollar and because there is no inflation). Just today, there was a rumor on the wires that Japan might initiate selling of their Treasury holdings in order to drive down the Yen relative to the USD. China will not just sit there and watch Treasury rates go up and the principal value of their Treasury holdings go down. There could be a snowball effect. The key to the PP is that gold has almost always been inversely correlated to stocks and long bonds. But that relationship has never been tested in a world with vast amounts of U.S. debt held by foreign governments, accompanied by lack of inflation or outright deflation. This is a plausible scenario that would "stress test" the PP. Let's hope it doesn't happen.
This scenario is happening in the EU as we speak, and is driving gold (priced in Euros) higher not lower. Capital flight from the USA would drive the dollar down not up. So you would have weaker dollar, and higher long-term interest rates.

Also, gold has risen since 2007, so has the dollar, so this inverse relationship is not true. Gold has also risen from 2000-2010 despite persistently low inflation.

One can always construct nightmare scenarios for any portfolio. The question is not whether one can do this, but whether the portfolio has a better or worse chance of avoiding nightmare scenarios, or minimizing their impact. I think it's clear that the chances of the PP suffering a nightmare scenario, whilst not zero, are lower than the chances of a conventional portfolio (or any other kind) suffering a nightmare scenario; and also, that in this event, its losses should be more moderate than most alternative asset allocations.

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Post by cosmic » Sat May 29, 2010 1:35 pm

MediumTex wrote:
cosmic wrote:Finally, "being afraid" is not a reason not to invest. One should make financial decisions based on what will have the best reward/risk ratio whose maximum expected loss does not exceed your risk tolerance. Not based on what causes you to experience less fear or other negative emotions. If doing the right thing is scary, it is no less right. The solution is not to to the wrong thing, but to overcome or ignore your fear. You would be better off investing all-in today, then spending 1% of your total portfolio value on therapy sessions with a professional psychologist, because it will pay for itself within 2-3 months.

It's important to do rational analysis. "I'm scared" is a valid reason to run away from an alligator or a gunfight. It is not a valid reason to reduce your expected portfolio returns.
cosmic,

I like your thinking and comments. Very smart and funny.

However, separating emotion and rationality is not as easy for many people as you suggest. When the market is plunging, it is not irrational to feel fear--it is a response that is hardwired into us from millions of years of trial and error in running from alligators and other things with large teeth.

My goal isn't to make sure investors have achieved a state of samurai-like mental discipline before they start investing. I would like to see a person who is interested in the PP buy into it completely on day one, but if they need a little time to ease into the concept I understand the idea of getting comfortable with a strategy incrementally (even if it is at the expense of some lost returns). If the PP really is a "permanent" allocation method (which I think it is), I don't see much harm in scaling into it over a few months or even years if that's what helps a particular investor create a durable commitment to the strategy.

The next time I am talking about the PP with someone, though, I hope I have a chance to tell them that rather than letting their irrationality interfere with their investment returns they should consider setting aside a portion of their assets to pay for a therapist to help them become more rational. :)
Ok, I understand - and I agree that ultimately if something isn't "do-able" for someone, no amount of theory will help. I'd perhaps suggest a compromise - go all in with one portion, maybe 30-50%, then average in with the rest?

Let me know what response you get to the therapist option, I hope it's not violent!

Anyway, here's some more ideas about the PP and its merits. Some people have wondered what are the source of its returns. Historical performance shows it performs solidly, and it was designed 30 years ago so this is (unlike many portfolios) not the result of data-mining and hindsight bias. But how do we know it's not just luck, or a historical anomaly?

One good way to see if results are luck, or if they are robust and can be expected to last, is to look at economic theory. Here the PP is solid - the expected return from gold should be roughly in line with inflation, since it's a money substitute; cash should be roughly in line with inflation, since it's just money; long bonds have more risk so should return a bit more than inflation, maybe 1-2% more, and stocks have higher risk so should return quite a bit more, maybe 4% more than inflation (especially if it's small caps or emerging markets). This is all in line with economic and investment theory. Therefore the PP, with 1/4 in each, should return at least inflation plus the average real returns of its combined assets. I.e. 0.25-0.5% from long bonds, 1% from stocks, and 0 from cash and gold. That gives a 1.25-1.5% return. Rebalancing also improves returns. Clive (who posted on this thread) looked at historical returns and Monte Carlo analysis and got a figure of 1.5% real return from rebalancing. So the total expected theoretical return of the PP should be about 3% above inflation in the very long-run. This actually fits fairly well to the historical returns. The USA and west benefited from falling interest rates from 1980 - but Japan also shows a 4% real return from the data. So the history fits very closely to what theory predicts. That is a solid result and significantly increases my confidence in the soundness of the Permanent Portfolio.

In another post on this thread, clive suggested Mebane Faber's 200 day moving average diversified portfolio. Split capital 20% each in stocks, foreign stocks, REITs, bonds, and commodities, and sell each portion if the price falls below the 200 day moving average. Buy back when it closes above the 200 day MA. To avoid whipsaws it uses only monthly data for signals. Historically this has returned above 10% with moderate drawdowns.

Based on the record, it's an excellent system. There is one problem - there is no economic/theoretical reason why using a moving average should reduce risk or increase returns. In trending markets it will boost returns, in choppy markets it will reduce them. So no matter how good the data, one lacks the confidence from theoretical support for the results. And I read that the outperformance of the system is not statistically significant to a very high confidence level. Buy and hold using Monte Carlo analysis produces better results a certain % of the time. So it could be these results are blind luck. If Faber's portfolio underperforms for 10 years, how will you know if it's just an aberration, or if the previous 30 years results were the aberration and actually the method doesn't work at all?

For that reason, I think the PP can be relied on with more confidence. Even if it does perform badly for a while, it means that the bonds, stocks and/or gold have become a lot cheaper, and the cash is rebalancing into them, buying low, so if you are down 20% then it's too late to sell and you are getting relative bargains - just sit tight is the best response. With Faber's portfolio you could be down 20% and about to get whipsawed to death for the next 20 years in choppy markets, and you are selling low and buying high instead of the other way round.

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Post by zeugmite » Sat May 29, 2010 1:50 pm

You say there is data on PP Japan performance. Could you post this data?

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MediumTex
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Post by MediumTex » Sat May 29, 2010 2:22 pm

zeugmite wrote:You say there is data on PP Japan performance. Could you post this data?
Look back a few pages. It's there.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Post by zeugmite » Sat May 29, 2010 2:49 pm

MediumTex wrote:
zeugmite wrote:You say there is data on PP Japan performance. Could you post this data?
Look back a few pages. It's there.
Found it. So this confirms what I suspected, which is that PP does quite well except during deflationary contractions. This isn't an economic condition, more of a monetary policy condition. Perhaps this scenario has been taken off the table by stated policy objectives of the central banks now, but it is something to keep in mind.

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Post by MediumTex » Sat May 29, 2010 3:37 pm

zeugmite wrote:
MediumTex wrote:
zeugmite wrote:You say there is data on PP Japan performance. Could you post this data?
Look back a few pages. It's there.
Found it. So this confirms what I suspected, which is that PP does quite well except during deflationary contractions. This isn't an economic condition, more of a monetary policy condition. Perhaps this scenario has been taken off the table by stated policy objectives of the central banks now, but it is something to keep in mind.
30 year Japanese bonds weren't available for much of the period covered, so I don't know if we can say for sure how the PP would do during a multi-decade deflationary period.

Also, I think that a Japanese PP investor who had 15% of his equity holdings in international stocks would have probably done better than if he had used 100% domestic (Japanese) equities.

When talking about what does well during deflation, I think it's also important to remember that if the PP isn't doing that well, it probably means most other allocation methods are doing terrible.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Post by Roy » Sat May 29, 2010 4:15 pm

Lbill wrote:Bottom line: if you have a "lump sum" that is sitting in cash that you would like to have in stocks, and you plan to hold your investment for a period of time (20 years or longer), you're better off to just go "all in," rather than scale in over a period of time. If we can assume that these findings can be extended to Gold and Long Treasuries as well, and you plan to hold the Permanent Portfolio for a long period of time, then you should probably just "Do It" to take advantage of the time diversification of risk.
Hi, Lbill,

Yes, there are also other studies supporting the lump sum strategy but I believe those also use stocks exclusively.

As Tex points out, investing (or advising) commonly entails managing the emotions of each individual (the "willingness" part of the "ability" and "need" risk triad) so that the best possible outcome might arise for that person given emotional delimits that may apply. So, sometimes, as supported by data, the "best possible" is not the best, and incremental approaches—tailored to each individual—become necessary concessions to the superior plan. Likely the larger the initial lump, the better, and the more frequent the subsequent installments.

Regarding the PP, I think there was just one year in the last 38 when all three asset classes (Stocks, Bonds, Gold, or perhaps "CCFs" too) declined together, although you might find multiple consecutive quarters where this was so. (Not sure how this would have worked prior to 1972 with Gold or Commodities.)

Because it has three asset classes capable of high-velocity movements, a PP investor who lump sums might experience less regret (than conventional investors) since some are likely to be doing well at any time. But there may always be some emotional obstacles to manage, so whatever gets the engine running...

Roy

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Lbill
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Post by Lbill » Sat May 29, 2010 6:33 pm

Regarding the PP, I think there was just one year in the last 38 when all three asset classes (Stocks, Bonds, Gold, or perhaps "CCFs" too) declined together, although you might find multiple consecutive quarters where this was so. (Not sure how this would have worked prior to 1972 with Gold or Commodities.
There is asset diversification (which is well represented by the low correlations between PP asset classes) and there is temporal diversification, which is the distribution of returns over time. Temporal diversification is less discussed and probably less exploited by investors. Temporal diversification should incrementally improve returns, lower risk, or both - even for a portfolio that is well-diversified in terms of assets such as the PP. What is somewhat counter-intuitive is that you should try to distribute the total amount of your holdings (in real dollars) equally over annual periods. "Scaling in" to your target portfolio actually adds risk because it skews risk toward the later years of your investment period - that risk should be spread out over time as much as possible. Most investors can't do this, even if they want to, because they are earning and contributing to their portfolios over time. But some investors, particularly those near or in retirement, are sitting on a lump sum of capital trying to figure out what to do with it. Once one has decided on an investment strategy, and feels confident that they can stick to that strategy, they will probably be better off just to commit the funds to it, rather than slowly scale in over time. However, that might be a difficult thing for most investors to do. Psychology trumps logic in these matters every time.
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Post by Roy » Sat May 29, 2010 7:30 pm

Lbill wrote: There is asset diversification (which is well represented by the low correlations between PP asset classes) and there is temporal diversification, which is the distribution of returns over time. Temporal diversification is less discussed and probably less exploited by investors. Temporal diversification should incrementally improve returns, lower risk, or both - even for a portfolio that is well-diversified in terms of assets such as the PP...

..."Scaling in" to your target portfolio actually adds risk because it skews risk toward the later years of your investment period - that risk should be spread out over time as much as possible. Most investors can't do this, even if they want to, because they are earning and contributing to their portfolios over time. But some investors, particularly those near or in retirement, are sitting on a lump sum of capital trying to figure out what to do with it. Once one has decided on an investment strategy, and feels confident that they can stick to that strategy, they will probably be better off just to commit the funds to it, rather than slowly scale in over time. However, that might be a difficult thing for most investors to do. Psychology trumps logic in these matters every time.
Agreed on both the better plan and the difficulty in implementing it for many.

The other opportunity that arises to lump-sum is when a plan gets rolled-over after a person leaves a job, often affording the opportunity to reinvest elsewhere (at Vanguard, say), rather than remain at some money-manegement house charging around 230 basis points in total fees (about 150bps in active management house fees plus another 80bps or so in the actively-managed funds they use). I've talked with many people who lost jobs in the last 2 years and what their new strategy might be. Regardless of strategy, they could save a lot in expenses providing they get past the belief that they need to pay yet another management house for their "expert" active management. Some got free of that psychological trap, others didn't.

How do you utilize "temporal diversification" to improve the returns of the PP, unless this had to do with the lump vs. DCA?

Roy

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Post by cosmic » Sat May 29, 2010 7:56 pm

lodrigj wrote:Fugger liked stocks, bonds, real estate and gold, didn't he?

Why isn't real estate in the PP?

What about an REIT like Vanguard's VGSIX mixed into the PP?
IMO the best way to own real estate is own your own home. There is a definite "crisis" advantage to owning a safe haven you can live in. And real assets have a certain security that paper assets lack - the law can always confiscate stocks, bonds can be defaulted on, but few governments in history have dared to try and steal the homes of their citizens. Living in the place you own is also much lower risk than being a landlord.

Besides, everyone is naturally short real estate until they own a place to live. So, if you do own your own place, that is more than enough exposure to real estate IMO.

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Post by cosmic » Sat May 29, 2010 8:54 pm

zeugmite wrote:
MediumTex wrote:
zeugmite wrote:You say there is data on PP Japan performance. Could you post this data?
Look back a few pages. It's there.
Found it. So this confirms what I suspected, which is that PP does quite well except during deflationary contractions. This isn't an economic condition, more of a monetary policy condition. Perhaps this scenario has been taken off the table by stated policy objectives of the central banks now, but it is something to keep in mind.
As MediumTex points out, that data uses 10 year bonds, which are far less good as a deflation hedge than the 30 years that Browne recommends. So the PP would have done a bit better.

Also, as shown in the data, the PP still outperformed stocks, cash, CPI, and a 50/50 stock/bond mix during that period. Only bonds were better, as you would expect in a 20 year deflation/depression. It is hard to think of a passive portfolio that would do well in that situation.

This is another reason why having maybe 20-30% of your PP in other G7 countries is a good hedge.

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Post by zeugmite » Sun May 30, 2010 1:31 am

cosmic wrote:As MediumTex points out, that data uses 10 year bonds, which are far less good as a deflation hedge than the 30 years that Browne recommends. So the PP would have done a bit better.

Also, as shown in the data, the PP still outperformed stocks, cash, CPI, and a 50/50 stock/bond mix during that period. Only bonds were better, as you would expect in a 20 year deflation/depression. It is hard to think of a passive portfolio that would do well in that situation.

This is another reason why having maybe 20-30% of your PP in other G7 countries is a good hedge.
I agree with having allocation to other countries (although now there is a lot of correlation at least among the places you'd be comfortable investing in). But I am not sure about the claim that PP Japan outperformed the 50/50 stock/bond mix. In the entire 1990's it didn't. It only started to do so after Japan began quantitative easing. And I am not so sure the 10-year/30-year bond issue is the cause. You see the same thing in briefly deflationary periods in the US PP.

I think it's safe to say that gold biases you toward an inflationary expectation rather than a deflationary one. Again, this may be a good call since central banks have this bias, as well.

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Post by rogueeconomist » Sun May 30, 2010 3:45 am

"Besides, everyone is naturally short real estate until they own a place to live. So, if you do own your own place, that is more than enough exposure to real estate" cosmic

Oddly enough I was listening to Craig's MP3's of HB's radio shows and this was one of the questions he addressed. Harry said that real estate isn't really an appropriate investment in a sense because it is illiquid, has fairly high carrying costs (maintainance, insurance, taxes, etc), and doesn't always have returns consistant with underlying economic conditions (big factors in RE pricing are things like location, design style, amenities a potential buyer is looking for, etc. -- these factors are significant yet are independent of prosperity, recession, deflation, inflation, or a Zimbabwe- style paperparty).

He said that it's usually best to think of RE as a durable consumption good meaning that people buy a house because they like it and it makes them feel secure. It can also be thought of as a business if one wants to be a landlord. It is also a speculation if one thinks they have an edge in this area.

So it doesn't really have a place in a bullet proof portfolio structure that needs to be rebalanced annually (sometimes more frequently and how to sell 1/3rd of a house or apartment building). Also remember that the firms in the stock portion own some real estate so there is exposure there. More importantly most people have too much exposure to RE if they own their home because as a percentage of total assets the home likely is large.

One could argue that people that don't own their own place should have some REITs or other RE related shares but that might fit better in a variable portfolio rather than keeping a constant fixed allocation. Then again the more complex original construction had a RE and natural resource share allocation.

There was another topic I was thinking of relating to foreign stocks/bonds. Back in the 70s buying foreign stocks was a pain with high transaction costs but today it's as easy as typing in the ticker symbol of an ETF, so it's reasonable to include foreign holdings in the PP as we inhabit the globe under conditions of a globally intergrated economy it makes sense to own global assets. Also related is that I have noted Harry seemed to have intentionally simplified things; _Inflationproofing your investments_ is 550 pages while _Failsafe Investing_ is 170 and instead of having suggestions for little 5% and 15% allocations to things he distilled it down to basic asset classes. If one feels comfortable increasing the complexity that may not be a bad idea as long as they hold enough of the different asset classes to keep the portfolio as a whole performance inline so the aggregate classes can do their jobs when needed. The legs of the stool have to be sturdy enough to hold the weight of an uncertain future.

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Post by Clive » Sun May 30, 2010 4:40 am

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Post by Clive » Sun May 30, 2010 4:45 am

cosmic wrote:...This is another reason why having maybe 20-30% of your PP in other G7 countries is a good hedge.
I think you'll find that after you take currency exchange differences into account there is little/no difference whether you invested domestically or internationally. A Japanese investor who bought into a US PP would have achieved a similar reward to that of a Japan based PP (and visa-versa).

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Post by Gumby » Sun May 30, 2010 6:31 am

craigr wrote:
rogueeconomist wrote:The idea was also found in an old French booklet that was originally published in the 1700s:

"... the financial world operates with reference to three primary markets: stocks, bonds and gold. ... I have watched closely the behavior of all three markets and have noted what has become an economic fact: one of the three major markets is always rising. Therefore, anyone who holds investments in all three will be profiting in at least one of them at any given moment. But very few people understand this -- they confuse diversifying an investment with diluting it, and think that remaining in one market is safer. The truth is that when the value of one of these three markets is falling, the value of one or both of the others will be rising. Therefore, your loss in one is compensated by a gain in another. And, as we shall see shortly, a falling market offers you the opportunity to buy more for less." - Victor D'Argent. _An Uncommon Way to Wealth_.

The author then went on to describe a rebalancing technique he called value averaging.
Very interesting. I just ordered this book for a monumental sum of $1.93.
Craig, maybe you can tell us your thoughts about the book after you've read it? From what I can tell, the book was given away by the truckload as a promotional giveaway by scam artist Ken Roberts and his mail order course "The Most Powerful Moneymaking Manual." Unfortunately, I'm not able to find any record of Victor D'Argent (even as a Pen Name), nor am I able to find any mention of the book ever being published in French or English before 1994.

I find this incredibly suspicious. When someone distributes a book as part of mail order course that claims to make you rich, I immediately question the publisher's motive and their trustworthiness. Combine that with the fact that no one else on the planet — other than Ken Roberts — has ever published this book, and it just so happens to espouse timeless advice and investment concepts of modern days (including concepts such as "value averaging" as well as some of Harry Browne's own PP investment rules and advice) under the guise of a purportedly fictional/historical author and it smells very, very fishy to me.

Here's one review of the book that stood out:
Book description: Dublin: Charterhouse Publishing, 1994. This harmless tale of financial prudence was evidently a promotional item prepared by Mr. Roberts' financial services firm. The Editor's Note is as preposterous as the nom de plume, the parable itself cottony, and the publishing house, if it ever existed, is now defunct. But it is a handsome, nicely produced little book that proves once again that all that glitters is not gold. 91 pages with prefatory matter. Covers and text are near new.. Printed Coated Boards. Fine/No Jacket. 7 1/4" Tall. Hardcover Fiction.
The direct translation of D'argent from French is "Money". I haven't read the book myself, but on the surface all evidence seems to suggest that Ken Roberts is the so-called Victor D'Argent (or "Victor Money").

And when you think about it for more than ten seconds, it does seem preposterous that a guy named "Victor Money" was sitting around in the 1700s doling out timeless investment advice about the stock and bond markets — markets which were barely in their infancy at the time.

Craig, can you transcribe the Editors' Note for us when it arrives? I think we could all use a good laugh. :lol:
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Post by cosmic » Sun May 30, 2010 8:49 am

snowman9000 wrote:
Ray, I should clarify my comment about the gold. I was not questioning the amount of gold to be held. Rather, I was trying to say that holding that amount of gold becomes an issue of logistics. Someone with an $80,000 portfolio can have 20 one ounce coins at home, or a safe deposit box. Someone with $8,000,0000 in a PP has different logistics when it comes to gold.
Not really. Bear in mind, a 2 metre cube of gold contains $6 billion worth of the metal, and the entire world gold reserves would take up a little less than a 12 meter cube. $2 million is about 4 good delivery bars, each of which is 11 inches long - storage is no problem at all, that is one of the reasons gold is such a popular store of value throughout the ages.

GLD and Perth Mint aren't allocated gold so they don't eliminate the IOU factor, unfortunately. And GLD has high expenses and unpleasant tax consequences. Your friend should consider storing good delivery bars in a secure, insured vault, and keep some of it at home or in a secure property under his control, in a good hiding place.

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Post by cosmic » Sun May 30, 2010 9:07 am

Interesting stuff again Clive.

I don't have the data to hand, but I remember seeing a study that a hedge fund cited, which said that higher yielding stable/G7 currencies don't actually depreciate enough over time to offset the higher yield. I.e. you get paid a bit to take "risk". For Yen investors, with the lowest yields for the last 10-15 years, this means they should have benefited, but I haven't run the numbers to check (don't have access to them). It could be worth checking if you have the data. And, with a 20-30% allocation abroad, you get more protection against political risk at home, and should be able to earn a bit extra by rebalancing too. I would go a bit abroad just for that reason, even without any extra returns, but I would love to see the data on it too. Worst case, over the long-run your home currency soars, in which case your foreign allocation loss is offset by being able to buy beachfront mansions in California and the Cote D'Azur, or penthouses in Roppongi, at half price.

As for the Quant and SL/7 portfolio, it's a bit like trend-following in that the results from the past look good, I am just saying that still there doesn't appear to be any genuine economic reason why that should be the case. It's quite possible that trend following has worked for 50+ years, but as more and more people become aware of it, that could result in the advantage being competed away by excess capital. Downswings would become greater and choppiness would increase, and suddenly buy & hold + rebalancing becomes more profitable. I am more comfortable earning theoretically justified risk premia than exploiting a potential pattern-based market inefficiency that is less likely to persist permanently.

Still, I think it is an excellent idea *if* you are going to follow trends as a strategy, to blend it in with the PP - that's the classic Harry Browne PP/VP mix. The VP should do relatively well in the situation where the PP does badly i.e. all asset prices collapse.

One further point about SL7 and the Faber quant portfolio is this - make sure your stop loss points are not obvious. So for example, do not use the end of the month, and do not use round numbers like 7%. The reason is that others are likely to use round numbers/end of month or year dates as well, so you will encounter more slippage due to more competition to exit at the same time. Instead, make your Faber stop-loss some random date in the middle of the month. Put your stop loss at 6.83% or 7.12%, not 7%.

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Post by cosmic » Sun May 30, 2010 9:18 am

zeugmite wrote:
I agree with having allocation to other countries (although now there is a lot of correlation at least among the places you'd be comfortable investing in). But I am not sure about the claim that PP Japan outperformed the 50/50 stock/bond mix. In the entire 1990's it didn't. It only started to do so after Japan began quantitative easing. And I am not so sure the 10-year/30-year bond issue is the cause. You see the same thing in briefly deflationary periods in the US PP.

I think it's safe to say that gold biases you toward an inflationary expectation rather than a deflationary one. Again, this may be a good call since central banks have this bias, as well.
Well, in the 90s you had the big fall in interest rates in Japan. 30 year bonds should have outperformed 10 year bonds, and should have yielded slightly more as a risk premium too. So the PP with them would have done better than with 10 years. Obviously this is a somewhat theoretical insight as 30 year bonds aren't always liquid and available in some countries.

Still, I take the point that there is not a passive indexing portfolio that outperforms in *all* scenarios. The PP still seems very robust though. Slightly underperforming inflation in a rather rare environment is not disastrous, compared to traditional stock/bond mix performance in decades like the 70s or 30s.

Steady long-term deflation does seem to be the PP achilles heel. I wonder if this means the gold weighting is a bit high, and the long bond a bit low?

Running the country numbers, I notice that the UK PP from 1972 to present has done very well, with an almost 5% real return. Whereas Japan 1990-2009 has done poorly, with only approx 1.6% real return. Given that the UK had very high inflation during this period (6.4% per annum), and Japan very low (0.5% per annum), this does seem to show up an inflationary bias in the PP.

Maybe 20% gold and 30% long bond would perform better in deflation and still do well under inflation? Or 22.5% gold, 27.5% long bond.

Edit - just plugged those allocations in and it makes very little difference.

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Post by Clive » Sun May 30, 2010 10:35 am

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Post by Clive » Sun May 30, 2010 10:49 am

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Post by Gumby » Sun May 30, 2010 10:57 am

cosmic wrote:Bear in mind, a 2 metre cube of gold contains $6 billion worth of the metal, and the entire world gold reserves would take up a little less than a 12 meter cube.
I'm pretty sure that the total world gold equalling 12 cubic meters is a myth. According to the World Gold Council, at the end of 2009, it is estimated that all the gold ever mined amounts to about 165,000 tonnes.

165,000 tonnes = 165,000,000 kg. The density of gold is 19,320 kg per cubic meter. Dividing 165,000,000 kg by 19,320 kg per cubic meter gives 8,540 cubic meters as the volume of all the gold in existence. The volume of an Olympic-size swimming pool is 2,500 cubic meters (50 m by 25 m by 2 m). Dividing 8,540 cubic meters by 2,500 cubic meters give 3.42 Olympic-size swimming pools as the volume of the gold in the world.

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Post by Clive » Sun May 30, 2010 12:32 pm

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Re: Wisdom from 1997

Post by cosmic » Sun May 30, 2010 1:34 pm

6 Iron wrote:I found this article from 1997, one of the older references I have seen to the Permanent Portfolio, but it makes for fascinating reading. Enjoy!

Harry Browne Gives Up -- A Little

By Boris Kupershmidt

Special to The Libertarian Enterprise

The September 8, 1997 issue of Forbes Magazine carries an article "Requiem for a Market Letter".
Written by Mark Hulbert, who for many years has kept tabs on the investment letters industry, it bemoans the recent death of so many of them, and goes on to analyze one letter in particular that has been discontinued, Harry Browne's Special Reports, continuosly published since 1974.
Perhaps it is understandable why Hulbert is troubled, for if more of these letters were to experience the same catastrophic drop in their subscriber base and close up shop, there would be little left for him to report on and he would have to find something else to do. But I found it curious that while he concedes that, yes, Browne's portfolio produced 3% real return against stocks' 9% over the last decade, he goes on to blabber about "comparative volatility" and makes no mention of the real issue here. Browne's subscribers, following his advice, will not only have suffered huge losses -- compared to the simplest option of leaving their money in an index fund and enjoying 23 years of worry-free life -- but have actually been cheated by having bought a worthless product at the considerable expense of around $300 per year.
This is obviously only my opinion; here is what it is based upon.
All of Browne's books are very fat, and each one of them is a swindle. The contents of each could be described simply and succinctly in a few pages. But this conclusion can only be reached upon plowing through each whole volume, be it his disquisition on how to find "freedom in an unfree world" or how to take advantage of Swiss banks.
Browne's single investment idea consists of the so-called "Permanent Portfolio", divided into four equal parts between stocks, bonds, gold, and cash, the basic idea being that no matter what kind of trouble is prevalent at the moment, at least one of the four components will benefit, even if others are going to the dogs. The wisdom of this idea could be debated, but the point is that he has published it in at least one of his books, and there is no further reason to continue extracting considerable subscription fees for repeating endless variations on the theme.
I could make a more substantial criticism of Browne's investment philosophy -- if that is the proper word -- by remarking that it takes a very special kind of moron to continue following a wholly defensive financial strategy while in the world outside unimaginable productive capacities are continuously coming on line, due not only to over 50 years without a major wars (and a concomitant destruction of human beings and property), but more specifically to the cumulative power of ever-increasing and accelerating human ingenuity, unleashed by the growing number of people all over the world able to contribute the inventive powers of their brains to the creation of new products instead of simply being killed off or forced to live from hand to mouth.
It's not unlikely that Browne's subscribers are a very healthy lot, otherwise it would have taken them much less than 23 years to wise up to the trash they were getting from their guru. Indeed, even if one lives in an underground bunker and has no other relations with the outside world, an occasional visit to a doctor's office would show no equipment older than a few years, and that is a fairly good reflection on the speed of change and innovation in the world, including the worlds of economics and finance.


Boris Kupershmidt, a former citizen of the former Soviet Union, is a full time mathematical wizard. His latest book is being published (if all goes smoothly) by the American Mathematical Society.
Since then, stocks returned 3.1% versus 6.8% for the PP, resulting in a terminal value of 1.44 for stocks vs 2.19 for PP. Mr Kuperschmidt has experienced an opportunity cost of $75,000 per $100,000 invested at a cost of approximately 3.5 times the downside volatility, including a 45% decline and a 55% decline. That is assuming that he stayed the course through those 2 big bear markets, rather than selling out near the lows after the stomach-churning declines.

It would be interesting to contact Mr Kupershmidt today and find out what happened to his investment portfolio - did he stick with 100% stocks? Did he switch, and if so what to? What's his current opinion on the permanent portfolio?

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Post by cosmic » Sun May 30, 2010 1:40 pm

For a truly Permanent Portfolio, I would recommend Barton Biggs' "War, Wealth, and Wisdom" book, which looks at the performance of real estate, stocks, and bonds before, during, and after WWII. The charts of German and Japanese equity and bond indices should be of particular interest - let us just say that if any Germans or Japanese were following a domestic equity/bond mix Bogle-type strategy before WWII, they weren't afterwards.

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Post by craigr » Sun May 30, 2010 6:31 pm

Gumby wrote:Craig, maybe you can tell us your thoughts about the book after you've read it?
I have invested an entire $1.93 plus $2.99 shipping for this fine book. I cannot reveal the secrets it contains for free.

Ummm...actually yeah I'll post what I think about it. I've read a lot of investing books always hoping to find something useful but unfortunately most fall very short.

If a book is especially dangerous I simply won't mention it and just throw it out instead of selling it to the used bookstore. That way there is one less copy to fall into the hands of the unsuspecting.
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Post by MediumTex » Sun May 30, 2010 7:58 pm

craigr wrote:If a book is especially dangerous I simply won't mention it and just throw it out instead of selling it to the used bookstore. That way there is one less copy to fall into the hands of the unsuspecting.
It would be nice if it were that simple, but when you become aware of something truly dangerous you normally have to abandon everything and have an adventure (usually involving some last minute travel) in order to work out the implications of the subversive information.

If that book turns out to contain dangerous information I suggest you watch "Three Days of the Condor", "Enemy of the State" and "The Da Vinci Code" while you are packing your bags. Doing some Jason Bourne affirmations wouldn't be a bad idea either. :wink:
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Post by craigr » Sun May 30, 2010 8:07 pm

MediumTex wrote:
craigr wrote:If a book is especially dangerous I simply won't mention it and just throw it out instead of selling it to the used bookstore. That way there is one less copy to fall into the hands of the unsuspecting.
It would be nice if it were that simple, but when you become aware of something truly dangerous you normally have to abandon everything and have an adventure (usually involving some last minute travel) in order to work out the implications of the subversive information.

If that book turns out to contain dangerous information I suggest you watch "Three Days of the Condor", "Enemy of the State" and "The Da Vinci Code" while you are packing your bags. Doing some Jason Bourne affirmations wouldn't be a bad idea either. :wink:
Sadly I've not come across information that dangerous. I guess by "dangerous" I mean "uncommonly bad and likely to make the person following it lose their shirt."
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Post by snowman9000 » Sun May 30, 2010 8:13 pm

brswif00 wrote:
B) recessions are self-limiting and therefore exist only for a relatively short amount of time
Maybe this is a direct HB quote, but I'm quite curious how you know that all recessions are self-limiting, and also how you define "relatively short"?

Japan is going on a third decade of recession, and the rest of the world seems headed that way. There have certainly been recession/depressions in the past, and not just the Great one, that lasted ten years or more. To me, that doesn't seem relatively short, but it certainly could be depending on one's perspective.

This isn't a quibble with the PP, it is actually my reason for adopting the PP. If I expected mostly prosperity I could be 70-30 stock-bond, or something more conventional.
A recession used to be known as a period of tight money. Japan has had the opposite of tight money. If Japan's money was any looser, it would have be tested for social diseases. What they have there is a prolonged but soft depression. IMO.

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Post by snowman9000 » Sun May 30, 2010 8:14 pm

duplicate deleted

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Post by technovelist » Sun May 30, 2010 10:27 pm

Gumby wrote:Kind of an odd question, but has anyone else noticed that their general level of happiness improved after starting a PP?

I completely didn't expect it, but after seeing the PP respond flawlessly to the latest crisis du jour (i.e. Greece) I've never felt better about my investment strategy — in the sense that I don't worry about it at all now. It's like a huge weight has been lifted off of my shoulders, and I can now spend time actually enjoying everything else. I'm curious if that feeling goes away after a few weeks, or if this is just another feature of the PP?

Makes me wonder why I even have a VP at all. :happy
No, that is a feature of the PP. It's also a feature of my 70% gold, 25% Swiss Franc, 5% silver portfolio. :D

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Re: Brokerage advice for a new PP'er

Post by kyounge1956 » Mon May 31, 2010 9:38 pm

macclary wrote:(snip)The PP is (probably) the optimal static buy-n-hold portfolio for the level of returns it seeks and the assumptions it uses. Here are some of Browne's assumptions that lead him to suggest the PP:

1) No one knows what is going to happen tomorrow or the next day.
2) Buy and hold is the portfolio style that is most likely to succeed for most people.
3) There are exactly 4 basic economic climates, and one best asset to own in each case.
4) Risk should be reduced as much as possible.
(snip) (italics added)
This is only my second post to Bogleheads. I have only read up through page 40 on this thread, so my apologies if this question has already been asked and answered since then. A discussion about the Permanent Portfolio arose on another list I frequent and prompted a question in my mind which relates to the third of the four basic assumptions listed above. The four economic climates the PP is designed to weather can ISTM be seen in terms of two axes: expansion/contraction and deflation/inflation or perhaps the second axis should be called confidence/uncertainty. This raises the question of whether there is a third axis in the economic "universe". If there is a third axis, how might its nature be discovered and what asset classes correspond to the positive and negative directions along it? Possibly the existing history of the PP is not long enough to reveal whether such a third axis exists. If there is an asset class that does well in those few years when the PP goes backward rather than gaining, ISTM that might say something about the existence/nature of a third axis. Do any of the radio programs contain a discussion by Harry Browne of his reasons for concluding that there are no more than four climates?

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Re: Brokerage advice for a new PP'er

Post by craigr » Mon May 31, 2010 11:25 pm

kyounge1956 wrote:Do any of the radio programs contain a discussion by Harry Browne of his reasons for concluding that there are no more than four climates?
Not that I am aware. However myself and many other people have put a lot of brain cycles into this and my own review of history basically agrees with what Browne postulated. A review of US market history and other market history you can find various events on the timeline and see how the markets reacted. There were periods of inflation and deflation in the US during the Civil war and reconstruction for instance when a gold standard still existed. In other economies we can see similar cases of how the stock market, bonds and money supply expanded and contracted.

Recently I had a person in Greece write and they are facing huge problems that could very likely impact their savings due to bad inflation if they leave the Euro. In that country people are responding by buying gold for instance if they are able (or allowed). So even in that unpredictable situation inflation is the likely predicted outcome and people are responding to it by buying gold.

In 2008 we had a currency crisis in Iceland that caused bad inflation and gold was the asset to hold for them. Likewise in 2008 we had a deflationary event kick off in the US and LT bonds were the asset to hold here. But in 2009 the markets righted themselves somewhat and the stock market recovered as deflation threats seemed to fade so stocks responded well. Etc.

Could a third axis exist? What history we have across multiple countries shows that some pretty serious events have occurred and the four economic climate model has pretty much accommodated them all as far as I can tell.
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Post by kyounge1956 » Tue Jun 01, 2010 1:48 am

MediumTex wrote:
Lbill wrote:Also, I-Bonds cannot be held in tax-deferred accounts; for many investors, the majority of their portfolios are in IRAs and 401(k)s.
The thing I like about I-bonds, though, is that you don't need to hold them in a tax deferred account to get all the benefits of tax deferral. Each I-bond is sort of like a self-contained traditional IRA with no required distributions.

I'm not saying they are right for everyone, but I-bonds can be a solid piece of the PP puzzle for many investors. I think that they are not utilized in many cases simply because people are not aware of them.
Why I bonds rather than EE, or both? Is the annual limit $5000 of each series or $5000 all of all Savings Bonds?

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Post by MediumTex » Tue Jun 01, 2010 8:49 am

kyounge1956 wrote:Why I bonds rather than EE, or both? Is the annual limit $5000 of each series or $5000 all of all Savings Bonds?
EE bonds lock you into an interest rate when you buy them that is currently very low. I-bonds, however, pay a rate that is tied to inflation. Since the Fed has made it clear over many decades that its policy is basically to create a low but steady rate of inflation, over time I-bonds are a bet that the Fed will do whatever it takes to create some level of inflation, or stated differently, the Fed will do whatever it takes to prevent a long period of deflation.

Even in a prolonged state of deflation, an I-bond investment won't see a loss of principal, so overall I find it a great addition to the PP cash piece.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Re: Brokerage advice for a new PP'er

Post by MediumTex » Tue Jun 01, 2010 8:55 am

kyounge1956 wrote:This raises the question of whether there is a third axis in the economic "universe". If there is a third axis, how might its nature be discovered and what asset classes correspond to the positive and negative directions along it? Possibly the existing history of the PP is not long enough to reveal whether such a third axis exists. If there is an asset class that does well in those few years when the PP goes backward rather than gaining, ISTM that might say something about the existence/nature of a third axis. Do any of the radio programs contain a discussion by Harry Browne of his reasons for concluding that there are no more than four climates?
Harry Browne defined "reality" as the thing you bump into when you aren't looking where you are going. If such a third axis existed its effect on the PP strategy would need to be confirmed by the PP "bumping into" it at some point along the way. I don't see that the PP has bumped into any such unforeseen hidden dimension (small drawdowns every decade or so doesn't suggest to me a hidden dimension), and thus I'm not too worried about it. If the PP were to bump into something like that in the future, I would be very interested in exploring what it might mean.

It's sort of like ghosts--I don't know if ghosts exist, but since they don't bother me personally I don't spend that much time trying to come to a final answer on the ghost question. If ghosts were bothering me in a "Ghostbusters" kind of scenario, I would be a lot more interested in the ghost question.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Post by kyounge1956 » Tue Jun 01, 2010 10:42 am

MediumTex wrote:
lodrigj wrote:Fugger liked stocks, bonds, real estate and gold, didn't he?

Why isn't real estate in the PP?

What about an REIT like Vanguard's VGSIX mixed into the PP?
HB addressed this issue in detail in "Why The Best Laid Investment Plans..." and one of the reasons was that real estate is not a very liquid asset and thus is hard to rebalance against the rest of the PP.

At rebalancing time, you can't just sell your driveway and buy a little more stock with the proceeds.
I'm trying to remember the earlier parts of the thread. Didn't HB have reasons for excluding real estate in addition to the lack of liquidity? ISTM that the existence of a real estate index fund completely eliminates the liquidity problem—I can't sell a few square feet of driveway to rebalance, but I could sell a few shares of VGSIX.

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Post by Gumby » Wed Jun 02, 2010 8:46 am

kyounge1956 wrote:
MediumTex wrote:
lodrigj wrote:Fugger liked stocks, bonds, real estate and gold, didn't he?

Why isn't real estate in the PP?

What about an REIT like Vanguard's VGSIX mixed into the PP?
HB addressed this issue in detail in "Why The Best Laid Investment Plans..." and one of the reasons was that real estate is not a very liquid asset and thus is hard to rebalance against the rest of the PP.

At rebalancing time, you can't just sell your driveway and buy a little more stock with the proceeds.
I'm trying to remember the earlier parts of the thread. Didn't HB have reasons for excluding real estate in addition to the lack of liquidity? ISTM that the existence of a real estate index fund completely eliminates the liquidity problem—I can't sell a few square feet of driveway to rebalance, but I could sell a few shares of VGSIX.
Harry Browne discusses why REITs are not a part of the Permanent Portfolio in the April 10, 2005 radio show (Skip ahead to 22min 10sec):
CALLER: What about Real Estate mutual funds?

HARRY BROWNE: Well, Real Estate mutual funds are more liquid. First of all, you'd want to be sure that if you got into an REIT it was one that — which is a Real Estate Investment Trust — you were getting into one that is actually buying and selling properties rather than an REIT which is actually financing properties. Because there are two types of them and you could buy the wrong type by mistake and you wouldn't be, really, speculating on Real Estate as you thought. You would be speculating in interest rates and mortgage rates and so on. So, I think that Real Estate can be a speculation in that regard. It's just... I don't see it as tied to any part of the economy. Let me take this opportunity to state a general principle about the Permanent Portfolio. I selected each of those investments for the portfolio because each of them has a tie to a specific part of the economy of where it does well, where it does better than other things. Real Estate can do well during inflation. It can do well during properity. We know it does very bad in a deflation. But it also can do poorly during inflation as we have seen at sometimes in history. And it also can do poorly during a time of prosperity as it did during the 1980s. So, it is not tied to an economy directly like gold is tied to inflation, stocks are tied to prosperity, and bonds are tied to either prosperity or deflation. The only economic environement that I've never been able to find an investment that's tied to it directly is a recession, which is fortunately a short term phenomenon and does not affect the long term performance of the portfolio. But again, using a Real Estate mutual fund — an REIT — I would still consider that a speculation outside the Permanent Portfolio. And I can well understand that there are people who disagree with that, but that's my position on it.
As you can see, HB had no issue with people using REITs in their Variable Portfolio, for speculation, as long as they were using money they could afford to lose. It just isn't a part of the Permanent Portfolio.

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Post by rogueeconomist » Thu Jun 03, 2010 7:51 pm

"Craig, can you transcribe the Editors' Note for us when it arrives? I think we could all use a good laugh." - Gumby

Editor's Note:
"The author of this story uses the pseudonym Victor D'Argent. He is believed to have become the head of one of the largest Parisian publishing houses and to have assisted the careers of Gustave Flaubert, the celebrated author of Madame Bovary, and Victor Hugo, who became internationally famous for writing Les Miserables. D'Argent himself eventually became something of a recluse, widely sought for financial, artistic, and personal advice, but quite careful about revealing his secrets. Just a few days before his death, he delivered this story to a small, provincial publisher who printed only a few copies, unaware of the true identity of the author.
A badly damaged but complete copy of this original French edition of An Uncommon Way to Wealth was discovered amongst the private papers of a wealthy Anglo-Irish bachelor, who recently passed away. The copy was found in the late gentleman's home in County Cork by an antiquarian bookdealer from Dublin who had purchased the books remaining in the house from the heirs. The bookdealer made a gift of the book to the translator of this first English language edition."

I had the wrong timeframe as Flaubert and Hugo are circa mid to late 1800s. I don't know anything about Ken Roberts and have never taken the course mentioned above. I got the book with a box of other finance/investment books on Ebay years ago -- oddly enough including How You Can Profit From The Coming Devaluation and Why the Best-Laid Investment Plans Usually Go Wrong.

Now I'm curious as to whether or not it is authentic. I wonder if anyone that speaks French could see if the French version is in any electronic card catalog or otherwise recorded prior to 1994 when this edition was published. If it's as old as claimed it's in the public domain while if it's from 1994 it's copyrighted.

As for value averaging:
"An investing strategy that works like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base."
http://www.investopedia.com/terms/v/value_averaging.asp

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Post by rogueeconomist » Thu Jun 03, 2010 8:14 pm

Saw this today which is interesting. Like Mr. Coggan said there are two very different potential paths:

long, drawn out deflationary period with low rates

ignition of inflation that can quickly spiral into high rates

We could see both! Years of deflation ending with an inflationary burst. And PP adherents are safe from one, the other, both or even neither!


Why Dan Fuss Sold U.S. Treasuries
When Dan Fuss speaks, the bond market listens. The Loomis, Sayles & Company vice-chairman tells Headline where he’s steering his $20-billion bond fund and explains why he offloaded all of his U.S. Treasuries.
Click Here »
http://watch.bnn.ca/#clip309325
Headline : June 3, 2010 : Why Dan Fuss Sold U.S. Treasuries [06-03-10 12:15 PM]
June 3, 2010
BNN discusses the latest news of the day and market trends with Dan Fuss, vice-chairman and portfolio manager, Loomis, Sayles & Co., and Philip Coggan, capital markets editor and Buttonwood columnist, The Economist.


And on the other portions of the Headline show they were talking about the possiblity and ramifications if the Euro came undone. Interesting times! Like what Dr Marc Faber said once awhile ago, when I look at people in charge like Tim Geithner, Larry Summers and Ben Bernanke I'm glad I own some gold! A portfolio allocation to gold is analogous to disaster insurance.

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Post by Gumby » Thu Jun 03, 2010 10:36 pm

rogueeconomist wrote:Editor's Note:
"The author of this story uses the pseudonym Victor D'Argent. He is believed to have become the head of one of the largest Parisian publishing houses and to have assisted the careers of Gustave Flaubert, the celebrated author of Madame Bovary, and Victor Hugo, who became internationally famous for writing Les Miserables. D'Argent himself eventually became something of a recluse, widely sought for financial, artistic, and personal advice, but quite careful about revealing his secrets. Just a few days before his death, he delivered this story to a small, provincial publisher who printed only a few copies, unaware of the true identity of the author.
A badly damaged but complete copy of this original French edition of An Uncommon Way to Wealth was discovered amongst the private papers of a wealthy Anglo-Irish bachelor, who recently passed away. The copy was found in the late gentleman's home in County Cork by an antiquarian bookdealer from Dublin who had purchased the books remaining in the house from the heirs. The bookdealer made a gift of the book to the translator of this first English language edition."
Oh come on. It is so clearly a fake. The name, the ridiculous roundabout story, everything. The Editor purposefully gave zero traceable information — no real names, no dates, not even the name of the purported author's famous publishing house. It sounds more like a fairy tale than history. It's well documented that Ken Roberts, a well known scam artist, widely distributed (and likely self-published) the book for his course. That alone should be a red flag.

If I had to wager, I would bet that the book conveniently omits the original French provincial publisher's info. That doesn't happen in the real world when an original text exists and subsequent translations are published. A real translation would always give an official and traceable credit (with an original publish date) for the original text and publisher.

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Post by kyounge1956 » Fri Jun 04, 2010 1:37 am

Is there enough historical data on the four asset classes to backtest how the PP would have performed in abnormal situations? What about protracted hard times (the Great Depression) or changing from Republic to monarchy and back again (France in the 19th Century) or internal strife (the US in the Civil War, or even more interestingly the Confederacy in the Civil War) or ongoing threat from external adversaries (Israel, 1948 to present)? Can the PP survive genuine cataclysms like defeat in war and its aftermath (Germany, WW I & II or Japan WW II) or the Russian Revolution? Just curious...

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Post by kyounge1956 » Fri Jun 04, 2010 2:00 am

I picked up a copy of Fail Safe Investing at the library yesterday. I am feeling argumentative tonight, so I'm going to take issue with Rule #3: "know the difference between investing and speculating". Based on HB's definition, it appears to me that the only thing that qualifies as investing, at least in his opinion, is the Permanent Portfolio. But ISTM there are any number of things, other than the PP, that one may do with a pot of money, and they are not all inherently speculative in nature. They don't all involve stock/fund/sector picking, market timing, etc.

Is it speculative to buy and hold a group of asset class index funds, selected on the basis of their combined return and volatility to match the one's needs and risk tolerance? Is is speculative to sell out of a fund or sector because one finds their products or practices morally objectionable? I don't think so. IMO, investing vs speculating is not a simple dichotomy, black and white. There are things that don't fit into either of the categories as HB described them in Rule #3. I don't think they are all unsuitable for a prudent investor, either.

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Post by Gumby » Fri Jun 04, 2010 8:27 am

kyounge1956 wrote:Based on HB's definition, it appears to me that the only thing that qualifies as investing, at least in his opinion, is the Permanent Portfolio
He believed that the Permanent Portfolio was the best and safest way to invest your money. But, he never said it was the only thing that qualifies as investing. His definition is pretty clear: You're investing when you accept whatever return the markets are paying investors in general. You're speculating when you are attempting to beat that return through market timing, forecasting or selection. Pretty simple. There are many non-speculative ways to invest your money that fall outside the Permanent Portfolio.

It helps if you try to understand that he wasn't trying to give speculating a bad name. HB believed that speculating was a powerful skill and a wonderful way for some people to attempt to improve their return, provided you only speculate with money you can afford to lose.

In other words, play it safe with the money you can't afford to lose, and take as much risk as you like with the money you can afford to lose. I think most people would agree with that advice.

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Post by MediumTex » Fri Jun 04, 2010 8:51 am

kyounge1956 wrote:Is there enough historical data on the four asset classes to backtest how the PP would have performed in abnormal situations? What about protracted hard times (the Great Depression) or changing from Republic to monarchy and back again (France in the 19th Century) or internal strife (the US in the Civil War, or even more interestingly the Confederacy in the Civil War) or ongoing threat from external adversaries (Israel, 1948 to present)? Can the PP survive genuine cataclysms like defeat in war and its aftermath (Germany, WW I & II or Japan WW II) or the Russian Revolution? Just curious...
Iceland is a nice recent example of where the PP did its job and saved people from ruin.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Post by MediumTex » Fri Jun 04, 2010 8:55 am

Gumby wrote:
rogueeconomist wrote:Editor's Note:
"The author of this story uses the pseudonym Victor D'Argent. He is believed to have become the head of one of the largest Parisian publishing houses and to have assisted the careers of Gustave Flaubert, the celebrated author of Madame Bovary, and Victor Hugo, who became internationally famous for writing Les Miserables. D'Argent himself eventually became something of a recluse, widely sought for financial, artistic, and personal advice, but quite careful about revealing his secrets. Just a few days before his death, he delivered this story to a small, provincial publisher who printed only a few copies, unaware of the true identity of the author.
A badly damaged but complete copy of this original French edition of An Uncommon Way to Wealth was discovered amongst the private papers of a wealthy Anglo-Irish bachelor, who recently passed away. The copy was found in the late gentleman's home in County Cork by an antiquarian bookdealer from Dublin who had purchased the books remaining in the house from the heirs. The bookdealer made a gift of the book to the translator of this first English language edition."
Oh come on. It is so clearly a fake. The name, the ridiculous roundabout story, everything. The Editor purposefully gave zero traceable information — no real names, no dates, not even the name of the purported author's famous publishing house. It sounds more like a fairy tale than history. It's well documented that Ken Roberts, a well known scam artist, widely distributed (and likely self-published) the book for his course. That alone should be a red flag.

If I had to wager, I would bet that the book conveniently omits the original French provincial publisher's info. That doesn't happen in the real world when an original text exists and subsequent translations are published. A real translation would always give an official and traceable credit (with an original publish date) for the original text and publisher.
This style of writing has been used for decades in publishing financial and other self-help books. Og Mandino did it with "The Greatest Salesman in the World" and several follow-ups. "The Richest Man In Babylon" follows the same recipe as well.

It's just a writing device to help lend a sense of credibility and pseudo-historical context to what are sometimes pretty good ideas in need of an engaging narrative structure.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

Jim Lyon
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Post by Jim Lyon » Fri Jun 04, 2010 8:58 am

kyounge1956 wrote:I picked up a copy of Fail Safe Investing at the library yesterday. I am feeling argumentative tonight, so I'm going to take issue with Rule #3: "know the difference between investing and speculating". Based on HB's definition, it appears to me that the only thing that qualifies as investing, at least in his opinion, is the Permanent Portfolio. But ISTM there are any number of things, other than the PP, that one may do with a pot of money, and they are not all inherently speculative in nature. They don't all involve stock/fund/sector picking, market timing, etc.
Quoting Harry Browne in "Why the Best-Laid Investment Plans Usually Go Wrong" p239-240. I believe he said something similar in his radio show.
Harry Browne wrote: When you invest, you provide capital to the financial markets. You say, in effect, "Here's my money; use it as you think best, and pay me the return -- in dividends, interest, and capital appreciation -- that you're paying to everyone who invests."
The return on your investment will be determined primarily by the economic condition of the nation and the world.
...
A speculator attempts to earn more than what the market is paying an investor. He tries to be in a market when it's going up, and out of the market when it's going down. And he attempts to choose stocks or other investments that will outperform a market, rather than just reflect it.
Is it speculative to buy and hold a group of asset class index funds, selected on the basis of their combined return and volatility to match the one's needs and risk tolerance?
According to HB, this is investing.
Is is speculative to sell out of a fund or sector because one finds their products or practices morally objectionable? I don't think so.
Again, according to HB this is also investing. If you are moving in and out trying to time the market in order to make additional money, then it would become speculation.
IMO, investing vs speculating is not a simple dichotomy, black and white.
I agree, but I think most individuals (and probably institutions), are clearly doing one or the other. But they may be speculating while calling it investing. HB talked about that too.

Jim

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Post by Lbill » Fri Jun 04, 2010 9:07 am

Continuing to count the angels on the head of this pin - if I provide capital to a local business in return for an ownership share is that "investing" or "speculating?" I thought is was investing. I guess it would be speculating if the local business was a meth lab.
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Post by Jim Lyon » Fri Jun 04, 2010 9:26 am

Gumby wrote:
rogueeconomist wrote:Editor's Note:
"The author of this story uses the pseudonym Victor D'Argent. He is believed to have become the head of one of the largest Parisian publishing houses and to have assisted the careers of Gustave Flaubert, the celebrated author of Madame Bovary, and Victor Hugo, who became internationally famous for writing Les Miserables. D'Argent himself eventually became something of a recluse, widely sought for financial, artistic, and personal advice, but quite careful about revealing his secrets. Just a few days before his death, he delivered this story to a small, provincial publisher who printed only a few copies, unaware of the true identity of the author.
A badly damaged but complete copy of this original French edition of An Uncommon Way to Wealth was discovered amongst the private papers of a wealthy Anglo-Irish bachelor, who recently passed away. The copy was found in the late gentleman's home in County Cork by an antiquarian bookdealer from Dublin who had purchased the books remaining in the house from the heirs. The bookdealer made a gift of the book to the translator of this first English language edition."
Oh come on. It is so clearly a fake.
That does appear to be the case here.
Gumby wrote: The name, the ridiculous roundabout story, everything. The Editor purposefully gave zero traceable information — no real names, no dates, not even the name of the purported author's famous publishing house. It sounds more like a fairy tale than history.
This is very common when dealing with older published works. Pen names are very frequently used. In fact, in the France of that time, I would consider it a mark against its authenticity if a real name had been used. The social, financial, and political scenes were all intertwined, and you had to be very careful in what you published. Of course, it might be widely known that you were the one that wrote it, but appearances were very important. Disputes were still settled by duels.

As far as last existing copies being found in old libraries, or being unearthed in improbably ways, that is also very common. There has been a recent surge in the number of older manuscripts publicly available, as people sift through old personal collections, libraries, and museum archives and republish or put on the internet.
Gumby wrote: It's well documented that Ken Roberts, a well known scam artist, widely distributed (and likely self-published) the book for his course. That alone should be a red flag.

Yeah, that does it for me.
Gumby wrote: If I had to wager, I would bet that the book conveniently omits the original French provincial publisher's info. That doesn't happen in the real world when an original text exists and subsequent translations are published. A real translation would always give an official and traceable credit (with an original publish date) for the original text and publisher.
Again, omitting proper credit in modern reprints is more common than you might think. And there are usually deliberate changes made. Older manuscripts will be out of copyright, so modern publishers work hard to make sure that their version is distinct enough to be given a new copyright. Also, older works might only give a name and a date. The name was often clearly fake. The date often was after the person died, perhaps by a considerable amount of time. Even the book itself may have been penned by a follower of the purported author. History is a messy business.

My disclaimer - I haven't seen the book or done any real investigating. But this does hold a lesson - it is very easy to construct a "story" to prove your own point, just as in evaluating economic situations. The truth can be more improbable than you might imagine.

Note: a search of the French National Library fails to find anything by Victor D'Argent.

Jim

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Post by Jim Lyon » Fri Jun 04, 2010 9:39 am

Gumby wrote:
cosmic wrote:Bear in mind, a 2 metre cube of gold contains $6 billion worth of the metal, and the entire world gold reserves would take up a little less than a 12 meter cube.
I'm pretty sure that the total world gold equaling 12 cubic meters is a myth. According to the World Gold Council, at the end of 2009, it is estimated that all the gold ever mined amounts to about 165,000 tonnes.

165,000 tonnes = 165,000,000 kg. The density of gold is 19,320 kg per cubic meter. Dividing 165,000,000 kg by 19,320 kg per cubic meter gives 8,540 cubic meters as the volume of all the gold in existence. The volume of an Olympic-size swimming pool is 2,500 cubic meters (50 m by 25 m by 2 m). Dividing 8,540 cubic meters by 2,500 cubic meters give 3.42 Olympic-size swimming pools as the volume of the gold in the world.
Gumby, he said a 12 meter cube.
This is 12^3 = 1728 cubic meters.

By your figures, the cube would be 8540^(1/3) = 20.44 meters on a side.
This is still a pretty large cube, and almost 5 times the volume of the other estimate, but it's still an impressively small figure to me.

Jim

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