Gyroscopic Investing

iwealth wrote:

Sam Brazil wrote:and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

Sam Brazil wrote:This is where I'm personally more comfortable with a trend following layer on top of the PP, like a 200 day MA, so that if it turns out long bonds are "broken," the PP won't continue plowing more and more money into them during rebalance events. If I'm wrong and LTTs can continue to skyrocket all the way to -50% yields, then no problem either, the system dictates to continue putting money into them.

The problem is if you're out of gold or bonds while equity decides to take a dump, you have no protection. How to reconcile this? Grin and bear it? Keep a small eternal position even when it is still "risk on"? Ultimately you wind up back at the PP.

Libertarian666 wrote:Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

I was there. They all collapse eventually due to hucksters and fraudsters using it. Attracts unwanted government attention. But they weren't decentralized. Bitcoin isn't either really since four Chinese companies own the entire blockchain in practical terms, but at least its in the right direction.

What I don't like about Bitcoin is its got a limited supply, a limited number of decimal places and a limited number of transanctions that can be processed per second, i.e. perpetually deflationary and perpetually slowing down which doesn't make it useful as stable or practical money. OTOH, there was a cryptocurrency that was the opposite of Bitcoin and it attracted no attention at all and I was probably the only one even mining it. So my verdict is people are purely speculating on cryptocurrencies and not because they think its going to replace legal tender. Come on, people aren't that much of deep thinkers in the aggregate, especially the Chinese.

First mover advantage also works most of the time, hence Bitcoin is King of the Hill. The rest are me too tier players that aren't worth a moment's notice other than if it is cheaper to mine and convert to Bitcoin. However, Ethereum and Maidsafe are disruptive exceptions out of the payments realm, so they're worth paying attention to.

iwealth wrote:

Sam Brazil wrote:and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

You're right. There are no barriers other than branding, or more specifically, the network effect. That's a really powerful barrier, though, and I tend to think people dismiss it too lightly.

For example, what is to stop someone else from copying LinkedIn? Facebook? Twitter? Ebay? Paypal? The tech to create a social website is trivial. Their real value is in their 2 sided network popularity.

Once you've reached a certain critical mass of popularity in a two sided market, it becomes extremely difficult for others to compete. It's not impossible. Facebook's takeover of Myspace is an example, but it's generally speaking one of the most durable competitive advantages you can get, short of a patent.

Isn't that exactly the same thing as Bitcoin?

MachineGhost wrote:

Sam Brazil wrote:This is where I'm personally more comfortable with a trend following layer on top of the PP, like a 200 day MA, so that if it turns out long bonds are "broken," the PP won't continue plowing more and more money into them during rebalance events. If I'm wrong and LTTs can continue to skyrocket all the way to -50% yields, then no problem either, the system dictates to continue putting money into them.

The problem is if you're out of gold or bonds while equity decides to take a dump, you have no protection. How to reconcile this? Grin and bear it? Keep a small eternal position even when it is still "risk on"? Ultimately you wind up back at the PP.

Diversifying isn't a bad idea. One conventional PP. One trend following PP. Who knows which will end up better off.

Libertarian666 wrote:

iwealth wrote:

Sam Brazil wrote:and there are even certain alt coins being developed with even better built-in anonymity

Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

At what point is it no longer Bean Baby currency, though? How long does it need to maintain its growth in popularity to transition from a fad to a legitimate new technology that's disruptive and here to stay.

Sam Brazil wrote:

Libertarian666 wrote:

iwealth wrote:
Isn't this part of what makes bitcoins so risky? What's the barrier to entry here for newcomers besides branding?

Exactly. There is an unlimited number of other algorithms that have at least as good characteristics as the one implementing bitcoin.

This is why I call bitcoin the "Beanie Baby" of currencies.

Now what might be quite valuable is digital currencies that are 100% backed by gold (or silver, or whatever you wanted). I understand some people have developed something like that but I don't know anything else about it.

At what point is it no longer Bean Baby currency, though? How long does it need to maintain its growth in popularity to transition from a fad to a legitimate new technology that's disruptive and here to stay.

I think it would be reasonable to conclude that it is here to stay as soon as it has half the duration of gold's use as money. Let's call it 1000 years for a round estimate.

Bitcoin is still very "nubile."

clacy wrote:"Why should ______ continue to go up?"

You can substitute many things for PP in that questions..... Real estate, 60/40, any number of lazy portfolios, farm land, silver, muni bonds, etc, etc.

Unfortunately no one can ever answer these with certainty.

My belief is that balanced portfolios stand the test of time better than going all in on one asset class. And I happen to think that the PP tends to be the best situated of all the standard balanced/lazy portfolios.

So with that said, a better question is what asset allocation do you think will outperform it in the next 5 years?

Agreed.

Reality check: we don't invest in the PP because we believe it's gonna deliver superior returns. We invest in it in order to shield us from massive losses in case we're wrong. Even holding cash could lead to massive losses if we get hyperinflation (like the double digit inflation rates of the late 70s and early 80s.) Back in the beginning of 2013, I had a strong intuition that stocks were gonna be the winner that year and I was right, but I had chosen the PP which lost 3% vs stocks which gained 30%. On the other hand, Gold and Bonds both lost around 20% and had I picked the wrong asset, I could have been staring at those losses instead of the mere -3%.

The purpose of the PP, as stated by Harry Browne, is to protect the purchasing power of your assets, not to deliver superior real returns, without knowing what the future holds. So far, it seems to be doing its job well, but if you're still not satisfied with the returns you're getting, there's always the VP.

For what it's worth (not much), I would wave off a trend following PP. Gold is the only asset of the three that trends well. Band rebalancing (return to mean) is a much better approach for this particular portfolio. Having noted this, one could use a discretionary mix. When you hit a rebalance band slap a MA on the asset(s) that are showing good trending and wait until the asset stalls or is potentially reversing and at that point pull the rebalance trigger. Just make sure you decide your mechanics ahead of time and pull the trigger with no regrets when it happens. This may get you a bit more juice if the trend continues or lose a bit if the rebalance hits right around the extreme.

There is no way to backtest this as it is all discretionary. It may help and won't hurt that much.

I am coming a bit late to this very interesting discussion. Sam, you are raising a number of very valid questions. I set up an EU PP only 4 months ago and the bond issue was a big question for me. The 30y Bund was trading at 0.87% at the time ... In Europe we are basically already facing your theoretical questions about the bond floor. And guess what: 4 months later, the same bund is at 0.42% yield and the Long term bond part has generated close to 10% return so far in the EU PP. So it does seem to fulfil what it needs to do even at yields that are ridiculously low. People have to put their money somewhere when they panic. I do agree that somewhere there must be a floor or things become ridiculous. But I believe that floor is well below 0% as there is a cost to storing cash under your mattress on a large scale. And i noticed that the Swiss bonds are all trading well below 0% even the very long ones; it does not seem to immediately "kill" the Swiss banks. So I can see a scenario where the long term rates will remain very low for very long and that you do not hold them for their yield but because they act as a safe haven in a panic scenario. And once, who knows when, rates will go up and the bund will show losses, but my hope is that the other assets will have risen enough to compensate for this scenario. We are indeed in unchartered territory but I am quite happy with the Bunds so far.

I was listening to a podcast yesterday and the interviewee made a very interesting case for the US eventually getting to the same/close to the same rates as Japan and Europe. Several points why but the big ones were better government finances and international money flows into the US as a result of NIRP/ZIRP in the other major economic blocks. If you are a foreign investor you get the carry spread and dollar appreciation. He gave an anecdote where several rich Russians in his neighborhood are up like 60%.

Kbg wrote:For what it's worth (not much), I would wave off a trend following PP. Gold is the only asset of the three that trends well.

There is no way to backtest this as it is all discretionary. It may help and won't hurt that much.

What a bunch of rubbish! All three assets trend well. You don't think T-Bonds have been trending for 30 years? Or stocks in the 90's? LOL!

It's a great idea though but rebalancing bands are not hit that frequently so it could be risky. Then again, true bear markets don't occur all that often either. Definitely anything that reduces the whipsaws of trend following is a plus to the CAGR. I've seen it in my own backtests.

It can be backtested. Just need to add an additional check after a rebalancing band is triggered. But certainly not in AmiBroker until someone figures a way to get the rebalancing bands implement. Support is no help.

Rather than using one size fits all rebalancing bands for the portfolio, just use trend following on each individually. That's what I hav to do as it's the only way I can sleep at night.

Bonds below the zero bound rely on the Greater Fool theory to work.

Just as with gold, smart money is massively short Treasuries. But unlike gold, the dumb money is massively long Treasuries. Both are at 21 year highs.



"Bond King" Gundlach said he has fielded more investor questions about buying Treasureis recently than at any other point in his career. And no one he talks to thinks interest rates can go higher today. He thinks a reversal could be an "unexpected" move by central banks to quit QE and move to "helicopter money".

Boy, I think I'm gonna speed up my final gold accumulation... might even now be cheaper to buy it in Britain, eh?

MG,

Yes you are right it could be backtested. Totally agree about AB. I don't know why Tomasz doesn't build a function that allows one tap individual position equity without having to resort to using the custom backtester. OBTW, when are you going to post max intraday drawdown post 1981? Pretty please will you do that?

Kbg wrote:MG,

Yes you are right it could be backtested. Totally agree about AB. I don't know why Tomasz doesn't build a function that allows one tap individual position equity without having to resort to using the custom backtester. OBTW, when are you going to post max intraday drawdown post 1981? Pretty please will you do that?

1982 to date is 7.85% CAGR and -14.46% MaxDD. Do keep in mind Vanguard S&P500 had atrocious tracking error for about a decade after its introduction so the return may be a bit understated compared to what is possible nowadays.



Looks like 1981 was no more than a 2 sigma event based on 1982+:

Speaking of Britain, might this not be a good time to pick up some British stocks post-Brexit?

Thanks MG!

Deleted.

The max intraday DD post 1981 I think is a better practical DD bogey, but who knows? Eventually I'd like to attempt coding a min variance PP similar to the Gestault U series on the PP from a couple of years back. Trying to get my brain around matrix algebra again first though.

hi this is my first post here. I learnt of the permanent portfolio several months back and subsequently read both harry brown's and greg rowlands recent book (clearly written I should add). what i took away was the permanent portfolio basically says buy your four assets in equal quantity for protection - since you are a fool if you think you can predict the future - and then shut up and get on with life and stop obsessing about it. i started reading this blog a few days back and see so many people obsessing how to tweak it, back test it and predict the future. seems at odds to me ?

grapesofwrath wrote: i started reading this blog a few days back and see so many people obsessing how to tweak it, back test it and predict the future. seems at odds to me ?

haha, yeah, it boggles the mind, doesn't it? The variable portfolio or vp is supposed to be an outlet for other investments so that we can avoid tweaking. Some just can't resist leveraging, taking out the cash portion, replacing the cash portion, and so on.

Also, once you learn the rules, there isn't that much to talk about, save fretting over the price of gold and the crazily low yields. Hence "other discussions."

Just tune it out.
And welcome, by the way!

thank you for the welcome. i will try ignore the navel gazing... i thought this forum may serve useful advice on implementation issues. what i have is not too far removed from pp. i have a significant chunk in "cash" - a vanguard short term treasury fund, and also in a vanguard long term treasury fund. i've been wondering about instead buying the bonds from the treasury directly (a self constructed bond ladder). my thinking was this would reduce some of the "institutional risk" and it may also reduce the fees i pay albeit it with a little bit more work on my part (the vanguard fee is low % but the total is noticeable). i've never bought treasuries directly. is it easy ? how does one set a price or you just take what is there? would you expect an institution (eg blackrock, vanguard etc) to gets a lower purchase price than the little person which would offset their fee ? thanks.

It's easy. I think there are How To stickies on it in the bond section. There's treasury direct, which I consider to be a clunky website, but you can do it. It's easier still in Vanguard and Fidelity, and fee-free in both.

You can look at the prices in the secondary market. I usually buy at auction when I have the cash which means I "just take what is there" with regard to price, but I'm pretty sure I'm in the minority.

I'm certain institutions get better prices because they can buy at such high volume. Enough to offset the fund fee? Well, I don't avoid treasury funds due to the fees, as they're not that high to begin with. I just like holding the pure bonds and knowing that nothing else is mixed in. You can buy teriyaki sauce with all the crap in it, or you can make your own from soy sauce, brown sugar, sake & mirin.

Still, I seem to remember Craig saying the Vanguard fund is fine. I used to hold it, and TLT and EDV.