POLL: How did you overcome the fear of tracking error?

General Discussion on the Permanent Portfolio Strategy

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mukramesh
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Re: POLL: How did you overcome the fear of tracking error?

Post by mukramesh » Thu Aug 27, 2020 12:52 pm

glennds wrote:
Thu Aug 27, 2020 12:43 pm

Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.
Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash :)
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Re: POLL: How did you overcome the fear of tracking error?

Post by perfect_simulation » Thu Aug 27, 2020 12:59 pm

mukramesh wrote:
Thu Aug 27, 2020 12:52 pm

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash :)
when all assets are going down, are they going down or is it cash going up?
mukramesh
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Re: POLL: How did you overcome the fear of tracking error?

Post by mukramesh » Thu Aug 27, 2020 1:04 pm

It's all relative. We only care about the 3 major assets being correlated/uncorrelated (stocks, bonds, gold).

How can you measure their correlation to the value of cash when they are measured by cash?
glennds
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Re: POLL: How did you overcome the fear of tracking error?

Post by glennds » Thu Aug 27, 2020 4:17 pm

mukramesh wrote:
Thu Aug 27, 2020 1:04 pm
It's all relative. We only care about the 3 major assets being correlated/uncorrelated (stocks, bonds, gold).

How can you measure their correlation to the value of cash when they are measured by cash?
If I'm understanding you correctly, you're talking as though cash is a fixed variable against which the other three assets move. In recent years, due mostly to zero or near zero interest rate policies, this may indeed have been the case for practical purposes. But in principle, the Permanent Portfolio is built on the idea that there are four economic stages each of which favor one asset (or possibly more). Cash is held for the possibility of recession.

There have been years when cash has been the high performer. Over the long term, we cannot predict or dismiss whether this will be the case again.

So I would say we care about all four asset classes. I do agree that cash is not a growth asset. And I think it is fair to call it a hedge asset and as such it fulfills an important function in a strategy that pursues defensive growth.
But this is just my understanding from HB's book. If I'm missing something, please fill me in.
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Fri Aug 28, 2020 12:25 am

glennds wrote:
Thu Aug 27, 2020 4:52 am
ppnewbie wrote:
Sun Aug 16, 2020 7:46 pm
It’s tough - if I were to start right now. I am not sure I would buy in. One of my investment thesis is to buy things that are cheap. Right now nothing in the PP is cheap. It’s the opposite - very expensive.
Cheap (or expensive) in relation to what? What it once cost?

I remember meeting a gentleman who said he stopped buying real estate in So Cal in 1967 because it became too expensive.
In the case of Silver it was based on the gold / silver ratio. In the case of stocks I used the GDP / Market Cap ratio and the CAPE ratio - in the case of gold just its historical price also I looked at the FRED chart of M2 money supply for gold. None of these are perfect but help me to try to determine their actual value.
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Fri Aug 28, 2020 12:38 am

mukramesh wrote:
Thu Aug 27, 2020 12:52 pm
glennds wrote:
Thu Aug 27, 2020 12:43 pm

Well I suppose the act of re-balancing forces you to sell the expensive asset(s) that have run up in price and buy the inexpensive asset(s) that is probably out of favor. Unless of course, all of the assets are moving up together which has happened before, in which case you would not be re-balancing.
Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash :)
Great point about the rebalance to cash.
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Re: POLL: How did you overcome the fear of tracking error?

Post by ppnewbie » Fri Aug 28, 2020 12:46 am

jhogue wrote:
Thu Aug 27, 2020 7:55 am
@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.
Do I have to hold the EE bond for 20 years to get that rate? I need to better understand how the yield is calculated if the bonds are sold they mature.
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Re: POLL: How did you overcome the fear of tracking error?

Post by mukramesh » Fri Aug 28, 2020 1:26 pm

glennds wrote:
Thu Aug 27, 2020 4:17 pm

If I'm understanding you correctly, you're talking as though cash is a fixed variable against which the other three assets move. In recent years, due mostly to zero or near zero interest rate policies, this may indeed have been the case for practical purposes. But in principle, the Permanent Portfolio is built on the idea that there are four economic stages each of which favor one asset (or possibly more). Cash is held for the possibility of recession.
We (US investors) value the portfolio in USD. Cash is USD and is the yardstick by which the other 3 assets are measured. All 4 assets cannot all simultaneously be high and correlated with each other.

I agree, Cash is held for the possibility of recession. In this case, the other 3 assets would be correlated and all would be low. Hopefully cash will hit a 35% rebalancing band and BAM, you 'sell cash' and buy everything else.

perfect_simulation wrote:
Thu Aug 27, 2020 12:59 pm
mukramesh wrote:
Thu Aug 27, 2020 12:52 pm

Quick correction here, if all assets move up together, you'd rebalance by selling them and adding to your cash :)
when all assets are going down, are they going down or is it cash going up?
I'm not sure if this is tongue-in-cheek, but yeah this is what I'm saying. It's all relative.
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Re: POLL: How did you overcome the fear of tracking error?

Post by perfect_simulation » Fri Aug 28, 2020 4:50 pm

mukramesh wrote:
Fri Aug 28, 2020 1:26 pm
It's all relative.
That's the beauty of the PP. People love to hate on cash. In reality they just can't see the dollar bull when everything else is red.
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Re: POLL: How did you overcome the fear of tracking error?

Post by jhogue » Fri Aug 28, 2020 5:07 pm

ppnewbie wrote:
Fri Aug 28, 2020 12:46 am
jhogue wrote:
Thu Aug 27, 2020 7:55 am
@ ppnewbie:

Please note that negative interest rates ARE possible in the US. As I write, a 3 month Zero is going for a nominal rate of -0.02%. Real interest rates are actually lower than that (depending how you choose to measure inflation, of course.)

What is a prudent investor to do? One way to hedge against the Fed’s ZIRP is to diversify some of your LTT holdings into EE bonds, which currently carry an astounding 3.53% interest rate (federally guaranteed, federally tax deferred, and state and local tax exempt.)

I note in passing that Warren Buffet can't buy enough EE bonds to make a material difference in his enormous pile of T-bills, but your average investor can. I also think that ZIRP probably explains his recent about-face and sudden interest in Barrick Gold.
Do I have to hold the EE bond for 20 years to get that rate? I need to better understand how the yield is calculated if the bonds are sold they mature.
That's the kicker. EE bonds must held for 20 years to double in value, or 3.53%. See the Treasury website:
https://treasurydirect.gov/indiv/resear ... htm#eerate
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: POLL: How did you overcome the fear of tracking error?

Post by Henryinroad » Sat Aug 29, 2020 9:20 am

Kbg wrote:
Fri Aug 21, 2020 9:41 am
This is well known strategy and has been around for a long time. Things very similar are the basic strategy for annuities. It works pretty well when markets are moving and will lose money when markets are flat.

It works way better when internet rates real and nominal are high. The bond component is very important.
Hope there is a scientific method, like backtesting of decades' data, to assess the historic impact of real interest hike to Laddered U.S. Treasuries structure adopted by Swan etf. Unfortunately I dont have the tool. Not sure if the "assorted convexity" can neutralise the impact.

But at this moment it seems bond is in no danger given the latest speech of Powell who reinforce his hawkish view and pessimism..
Last edited by Henryinroad on Sat Aug 29, 2020 9:29 am, edited 1 time in total.
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Re: POLL: How did you overcome the fear of tracking error?

Post by Henryinroad » Sat Aug 29, 2020 9:28 am

PrimalToker wrote:
Thu Aug 27, 2020 12:12 pm
People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.
If we view the price in absolute term, it might be arbitrary to say its expensive or cheap. But I have a question in my mind, what if we view the asset (stock) in terms of valuation?

1.Buffett Indicator :
https://www.gurufocus.com/stock-market-valuations.php
The Ratio of Total Market Cap to US GDP is back to 2008 level.

2. Shiller-PE:
https://www.gurufocus.com/shiller-PE.php

Would a seemingly overvalued asset be an incentive for a more aggressive rebalancing to you?
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Re: POLL: How did you overcome the fear of tracking error?

Post by ahhrunforthehills » Sat Aug 29, 2020 10:23 am

Henryinroad wrote:
Sat Aug 29, 2020 9:28 am
PrimalToker wrote:
Thu Aug 27, 2020 12:12 pm
People always say the same thing. What I've noticed that although some parts of the PP could be expensive, one part is always inexpensive. That's how it works, non-correlated assets. It's just a guess on which one that is... If I had to pick right now it would be gold as the inexpensive asset. When it's $15,000 an ounce $2000 will seem cheap.
If we view the price in absolute term, it might be arbitrary to say its expensive or cheap. But I have a question in my mind, what if we view the asset (stock) in terms of valuation?

1.Buffett Indicator :
https://www.gurufocus.com/stock-market-valuations.php
The Ratio of Total Market Cap to US GDP is back to 2008 level.

2. Shiller-PE:
https://www.gurufocus.com/shiller-PE.php

Would a seemingly overvalued asset be an incentive for a more aggressive rebalancing to you?
I have researched this a lot. I pretty much learned from my data that the Shiller-PE is essentially useless until you are above the 99% historical average (which we are). However, even then, its usefulness is extremely limited for 2 reasons:

1. Black Swan events. No ratio can predict someone flying a plane into a building, a war, a pandemic, zombies, etc.
2. There is little correlation with stock valuations and stock prices in the minds of investors at the moment. When that is the case, how far can the variance go? Japan went really far, no? Markets can remain irrational longer than you can stay solvent.

All that said, I would still keep it in the back of my mind. For instance, I don't think I would buy into a Golden Butterfly allocation. I think that if you are looking to be "safe" I would recommend:

Golden Butterfly when Shiller/PE & Buffet are at historically underpriced levels and transitioning into a traditional PP when Shiller/PE & Buffet are at historically overpriced levels (basically, a macro-level rebalancing).

With all that said... Long Term Treasuries are a completely different matter. I still for the life of me DO NOT feel "safe" owning them at such low interest rates. The whole Bond Convexity is great, but I am not convinced that our free markets are free enough to allow that to happen.

Maybe someone needs to make a poll on who is holding them and who isn't.
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