Stock Picking in the PP

Discussion of the Stock portion of the Permanent Portfolio

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stuper1
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Re: Stock Picking in the PP

Post by stuper1 »

Do you think splitting up your stock allocation into half total stock market index and half small cap value index is a move in the right direction in terms of Harry Browne's philosophy of using volatile stocks with high beta? Of course, this is the Golden Butterfly strategy, but of course each person can pick their own level of desired risk (e.g., the HBPP 25% stock allocation, or the GB 40% stock allocation, or some other number they like).

Or if you want to use index funds, would Harry say to put all of your stock allocation into a small cap value index? Or is there some other index you think he would recommend?
boglerdude
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Re: Stock Picking in the PP

Post by boglerdude »

Any large basket of stocks is good enough. Small indexes can get front run because they are forced to sell when a stock is no longer "value" as defined by some metric traders can look up. eg Mr Celebrity Money Manager knows that his index is going to be forced to buy company Z, so he buys it up then sells to his fund. I dunno how much of a problem it is, but I dont like it. Selling good companies just because they get classified as "growth" based on price/book with no holistic view.

> an index can allow everyone to win

If you buy and hold you get dividends or re-invested dividends (company growth) + nominal growth from inflation. In a shrinking population where the entire pie isnt growing, active management might make more sense.

Markets could be overvalued, because government broke the social contract by not offering bonds that match inflation (money supply). We've been forced to buy homes and stocks. And now gov cant let those drop, if they want re-election.
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joypog
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Re: Stock Picking in the PP

Post by joypog »

I'm a big fan of the LCG + SCV split. Paul Merriman's quilt charts show it as being the most consistent performer among various strategies - never the best, but never the worst. Which fits perfectly in line the HBPP mentality.

https://paulmerriman.com/wp-content/upl ... V1.3-1.pdf
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
stuper1
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Re: Stock Picking in the PP

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That's my question, though, is whether it fits in with the HBPP mentality. He seems to be saying to pick stocks with high risk/reward for better rebalancing opportunities. Would HB say to put all your stock allocation into SCV rather than splitting half and half between SCV and LCG? Or is there some other index besides SCV that HB would recommend for all of your stock allocation?
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joypog
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Re: Stock Picking in the PP

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stuper1 wrote: Sat Mar 04, 2023 11:54 am That's my question, though, is whether it fits in with the HBPP mentality. He seems to be saying to pick stocks with high risk/reward for better rebalancing opportunities. Would HB say to put all your stock allocation into SCV rather than splitting half and half between SCV and LCG? Or is there some other index besides SCV that HB would recommend for all of your stock allocation?
My thinking is that the stock portion of the HBPP was just to track that part of the market. I view 4 pieces of the HBPP in macro terms and don't worry about squeezing every ounce of performance within those buckets. As such, my goal for the stocks within the HBPP is to just be mediocre relative to the general equities market.

I view rebalancing opportunities as a slight side bonus and think that general stability within each of the buckets is fine too. For one thing, that would minimize transaction costs.

If I really wanted to shoot high risk/reward, I do it in the Variable Portfolio.

But for HB's mind...I dunno, its a good reminder to pull out fail safe investing for another read.
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joypog
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Re: Stock Picking in the PP

Post by joypog »

stuper1 wrote: Sat Mar 04, 2023 11:54 am That's my question, though, is whether it fits in with the HBPP mentality. He seems to be saying to pick stocks with high risk/reward for better rebalancing opportunities. Would HB say to put all your stock allocation into SCV rather than splitting half and half between SCV and LCG? Or is there some other index besides SCV that HB would recommend for all of your stock allocation?
I reread Fail-Safe Investing this afternoon. HB would agree with your assertion. In talking about the stock portion, his first directive was to pick a broad mutual fund. (Given the time he was writing, I suspect there was much less factor investing and more sector investing.) But his second detail is this nugget on Page 108:
In addition, you want funds that invest in volatile stocks, in the hope that they will move farther than the general stock market when times are good.
That implies to me that if you are doing a Pure HBPP you would want your 25% Stocks in Large Cap Growth.

As a government worker I have a pension on the horizon, so I am going closer to 50% stocks, split equally between LCG, SCV, and Intl-SCV....but if I was investing without a pension, I'd go for the GB, the extra portion for SCV lets me root harder for general prosperity (a good thing psychologically) but be cushioned from the worst of the LCG stock market fluctuations.
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Re: Stock Picking in the PP

Post by Jack Jones »

joypog wrote: Sun Mar 05, 2023 6:00 pm
stuper1 wrote: Sat Mar 04, 2023 11:54 am That's my question, though, is whether it fits in with the HBPP mentality. He seems to be saying to pick stocks with high risk/reward for better rebalancing opportunities. Would HB say to put all your stock allocation into SCV rather than splitting half and half between SCV and LCG? Or is there some other index besides SCV that HB would recommend for all of your stock allocation?
I reread Fail-Safe Investing this afternoon. HB would agree with your assertion. In talking about the stock portion, his first directive was to pick a broad mutual fund. (Given the time he was writing, I suspect there was much less factor investing and more sector investing.) But his second detail is this nugget on Page 108:
In addition, you want funds that invest in volatile stocks, in the hope that they will move farther than the general stock market when times are good.
That implies to me that if you are doing a Pure HBPP you would want your 25% Stocks in Large Cap Growth.

As a government worker I have a pension on the horizon, so I am going closer to 50% stocks, split equally between LCG, SCV, and Intl-SCV....but if I was investing without a pension, I'd go for the GB, the extra portion for SCV lets me root harder for general prosperity (a good thing psychologically) but be cushioned from the worst of the LCG stock market fluctuations.
Yes, the funds he recommends in Best Laid Plans are largely Growth funds. Nowadays you might look for something like this:

https://www.spglobal.com/spdji/en/indic ... eta-index/

However, I would also want to be sure that I'm not concentrated in a couple industries.
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Re: Stock Picking in the PP

Post by Jack Jones »

Jack Jones wrote: Tue Jan 31, 2023 12:22 pm Losers:
CIGI (-19%)
FRC (-17%)
AAPL (-16%)
TAC (-15%)
FDX(-14%)
FRC: First Republic Bank of California is taking me for a ride. HODLing because PP and it's not time to rebalance.
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jalanlong
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Re: Stock Picking in the PP

Post by jalanlong »

Maddy wrote: Wed Mar 01, 2023 5:23 pm
Jack Jones wrote: Wed Mar 01, 2023 12:44 pm Here is what HB has to say on the topic. . .
For the Permanent Portfolio, a stock-market investment should have these attributes:
The Permanent Portfolio's stock-market investments, as a group, should reflect a broad spectrum of American enterprise; they shouldn't be tied to a signle industry or narrow group of industries. . .
How well does the SP500 reflect the broad spectrum of American enterprise?
https://www.thebalancemoney.com/what-is-the-sector-weighting-of-the-s-and-p-500-4579847 wrote: Information technology: 28.1%
Health care: 13.3%
Consumer discretionary: 11.8%
Financials: 11.5%
Communication services: 9.6%
Industrials: 8%
Consumer staples: 6.2%
Energy: 3.7%
Real estate: 2.6%
Materials: 2.6%
Utilities: 2.6%


It's been a while since I looked at the sector breakdown of the S&P 500, and, wow. What are we doing using this in the PP?

Is there a mutual fund or ETF that better represents what Harry had in mind?
The sector allocation is bad. You virtually got no exposure to the run up in energy and commodities last year. What bothers me even more than the sector breakdown is the emphasis on the top stocks in the index. The top 10 stocks make up 25% of the index and Apple alone makes up 6.31%. That is not diversified enough for me.

There is an ETF that turns the index on its head and invests in stocks from small to large instead of the normal large to small.

https://www.ishares.com/us/products/251 ... factor-etf
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