Mathjak Thread of Anti-PP

[mathjak107]

@Mathjak -- I actually prefer your pro-PP comments from the two weeks when you tried it out.  You were quite insightful.

the problem looking with the PP is the cycles are very very long for assets like gold to have their day in the sun and things can look no so hot for quite a while. that was why i abandoned it back in the 1980's.  in hind site it did  well over such a long period.

did you know if you bought the PP  BACK IN THE 1980'S on the worst possible day when gold  peaked around 800 that just by rebalancing over those decades that before gold fell from the almost 2k high your return would have beaten the s&p return if you bought that too on the same day. i believe the gold averaged 9.80% vs the s&p 500 9.6%

I am at a loss for words...this portfolio is very disappointing and it has trailed my 60/40 allocation substantially since 2009. No matter what anyone says, if gold sucks the PP sucks.

the portfolio didn't do much because it didn't loose much.  traditional portfolios needed those gains to get  back to where they were . the PP wasn't down .

in fact looking at the last 15 years the return is about the same as a 100% equity investment in the s& p 500

(The PP) counts heavily on trends . gold has been a loser , bonds a loser and stocks treading water,.  the other conservative model i used  was up 1.10% this year  and was a heavy bet on good times and low rates,

i swapped it this week for the permanent portfolio and put over 7 figures in.  i think it is a safer bet since once we get something negative happening the pp can make some money

The shift in tone since then is striking.  But the basic facts about the portfolios or the markets didn't change in the last month.  The same qualities that made the PP appealing enough for you to invest millions and eloquently defend it just a few weeks ago still exist.  The only thing that changed seems to be that you got cold feet and had a change of heart.  Perhaps you realized that the PP outlook does not match your own, or even that it may not meet your personal needs.  Frankly I think it's admirable to acknowledge when you made a decision against your nature.  It would have been much less expensive to sleep on it before allowing the "lack of investor discipline" to take over and switching millions in the first place, but it happens to the best of us.

Where I think the discussion has gotten a little off course since then is the degree you have gone to justify your perfectly reasonable decision by going scorched earth on the PP in dozens of posts per day.  I get the feeling you're trying to convince yourself you did the right thing more than you are trying to truly discuss the relative merits here to the same degree you did when you first joined.  And that's a shame -- you have a lot to contribute.

In any case, please realize nobody here is attacking you for changing your mind and you do not need to justify or defend your decision.  Just do it and be happy!

Aren't you retiring tomorrow? 

retiring fully next Thursday.

what changed is  after I tried it again is the more I watched what was going on in  it and how the pieces were interacting the more I realized  I BELIEVED

it was a mistake and I think the investment climate for it was not the same as I thought .

yeah it was a snap decision based on a few days but  I still believe the time for the pp is not now . it may not be in the future anymore either if things changed that much.

but time will tell. I think a slow continual trend of rising rates will just hurt the bonds and gold way to much and not worth the risk when I feel like that.

if I don't believe in what I am doing 100% I won't chance it.

in the mean time I am glad I am not down the 25k the pp  would have  fallen for me since then whether in the short term or not .

[ochotona]

I'm in martial arts...there's kata (form) and then there's combat. Kata is theory, combat is reality. We interpret the world through theoretical lenses, but if the lenses are cloudy, and you're getting beaten, don't just keep getting beaten. Move! Theory doesn't feed you, politics doesn't feed you... the market does. Do what you have to do, don't look back, tomorrow is another day.

[Pointedstick]

Over my short tenure, PP was a portfolio with a large drawdown relative to 60/40. My time horizon is 11 years to retire.

The PP is a low-volatility portfolio, not a zero-volatility portfolio. If that's what you thought you were getting, you were mistaken. Maybe cash or extremely short-duration bonds would have been a better bet if your time horizon was measured in days or weeks.

The PP, by design, will frequently move in different directions from a more stock-heavy portfolio. What you highlighted is in no way a failure of the PP; it is a failure of your expectations for what it does. The PP will have many, many days when it is down and a 60/40 is up. And there will be many, but probably fewer, days when the reverse is true.

The fact that you have successfully used a 60/40 portfolio for decades says to me that the PP might indeed not be right for you; you can clearly tolerate a good bit of volatility. If you wanted to implement mathjak's "glide path" idea but are spooked by a small amount of short-term volatility in that "safe" part of your portfolio, putting the money into cash might be a better idea--of course, then that money is not growing at all. But there's no free lunch.

[dualstow]

I'm in martial arts...<snip>We interpret the world through theoretical lenses, but if the lenses are cloudy, and you're getting beaten, don't just keep getting beaten. Move!
...

Sounds good for martial arts, but terrible investing advice. The quickest way to the poorhouse is to move when you feel you are beaten, and unfortunately that's what most of the novices do. They will forever remain yellow belts.

[iwealth]

Over my short tenure, PP was a portfolio with a large drawdown relative to 60/40. My time horizon is 11 years to retire.

When I look back through 2011 doing annual rebalances for the sake of simplicity, I can't find any large differences. Looks like the PP may have had a 3-4% greater drawdown depending on what day between then and now that you started, but it was never more than that.

I can go back farther but obviously then the PP would have a lower max drawdown.

What was your large PP drawdown relative to a 60/40?

[ochotona]

YTD 2015

[LC475]

The fact that you have successfully used a 60/40 portfolio for decades says to me that the PP might indeed not be right for you; you can clearly tolerate a good bit of volatility.

The Permanent Portfolio isn't just for people who can't tolerate volatility.

It's for people with humility.

The PP: It's not about volatility -- it's about humility.

[Cortopassi]

I think the main point for me is sequence of returns risk. Gold and LT Treasuries are having bad downdrafts now, so few will volunteer to enter the portfolio now in order to be subjected to a beating, in hopes of better days.

When I started in Feb 2014, gold was ~1325.  If I happened upon the PP now and decided to get in now, being subjected to a beating is all relative.  Gold is much lower than my entry point so "buying low" would have made for a much better entry now vs. then.  I would volunteer to get in now.

And since we are looking so short term, look at today, TLT is making up for pretty much all gold and VTI's losses.  But long term bonds are bad...

I have given up trying to predict the future. 

Rule #4: No one can predict the future.

[Reub]

Re: Permanent Portfolio Without Rebalancing
� Reply #2 on: November 15, 2014, 09:03:33 PM � Quote
Quote from: Kbg on November 15, 2014, 07:03:57 PM
What is the MaxDD with rebalancing annual and/or bands?
"It's around -25% with annual rebalancing; you'll have to check others work on this board for
the bands."...MachineGhost

Is the MaxDD really 25%?

[Xan]

After a long and protracted argument, MachineGhost withdrew his claim of 25% max drawdown, although he never admitted he had been wrong.

[Reub]

So then what is the MaxDD?

[dutchtraffic]

So then what is the MaxDD?

100% obviously.

[ochotona]

FYI, I'm not anti-PP. I just don't think it's timely. Because I am greedy. 

[ochotona]

It's a nice sentiment. Understand that if headwinds are that if 30-year Treasury yields go up from 3% to 4.5%, your long bonds will go down by 25%. Gold might go down by 0 - 25% more. Cash will start paying more in the future. Stocks, the bull market is old, the best days are behind it until a correction comes. If these headwinds come in close succession, the portfolio will lose more, possibly 15% down. If not... it will keep on keeping on. That's why I shed most gold, most long Treasuries.


from another thread-

As a man in my late 60's, low volitility is quite attractive to me. I made my money. If I lose 3% a year in a PP, I won't go broke (I won't be thrilled either). If I have a 50/50 portfolio and lose 10% to 30% of my net worth, I will be pretty stressed with not much time to recover. I have seen equities get slaughtered. I am quite satisfied with 25% equities. Then if I lose 40% of 25% of equities, balanced by cash, bonds and gold, I won't lose sleep. Cash is neutral. The downdraft in gold which has gotten taken to the woodshed has only lost me a few percent on the whole. The point of all this is that its rare that all of the components will go to hell at once. I am actually excited about gold going down because I am still saving and adding to my portfolio at lower prices with a portion going to keep my gold allocation at 25%. If and when stocks decide to take their seven year itch and get murdered once again, gold will be a great place to recover. It works for me!

[LC475]

After a long and protracted argument, MachineGhost withdrew his claim of 25% max drawdown, although he never admitted he had been wrong.

Well, while this interpretation makes me look good, since I was the one questioning him on the claim..... it's not quite so simple.

The draw-down that MachineGhost claimed that his special, unidentified, proprietary data set showed occurring in the late 1960s almost certainly never occurred, or at least we have no evidence that it occurred.  However, Gosso found a completely different draw-down we had all forgotten about.  [url=http://"http://gyroscopicinvesting.com/forum/permanent-portfolio-discussion/has-the-pp-ever-suffered-a-25-nominal-maxdd/msg110762/#msg110762"]Gosso reminded us[/url] all that gold was really, really high in January of 1980.  On one day in particular.  And he made some nifty charts showing the results:



What's more, this is using the daily London close of $850, while the intraday high appears to have been $887.50.

And so, if someone were unlucky enough to buy into the 4X25 Permanent Portfolio -- including gold, and never having owned any gold before -- at the right moment in mid-morning US Eastern Time on January 21st, 1980, he could have been down.... well, a lot.  Probably a bit more than 25%, maybe 28%.  Even more if he (inexplicably) didn't follow the rules and never rebalanced -- probably about 50% eventually.

Keep in mind that this scenario is unlikely for a few reasons:

1) This is only one day, and in fact one moment in that day, out of hundreds of possible days and moments.  The odds are accordingly very small that one would have had the very bad luck to get in on this particular day.
2) Gold had gone up over 44% (using the intraday top, remember) in 6 days.  Someone looking for "safety and stability for the money that was precious to him" maaaay not have been exactly anxious to touch that with a ten foot pole.
3) The 4X25 Permanent Portfolio as we know it did not exist at that time, at least not publicly, making it impossible that anyone would have begun investing in that style on that day.

In historical reality, Harry Browne did, in fact, have investment recommendations for people in 1979 and 1980, and guess what they were?  The risk-reward ratio has shifted far enough that it's time to sell your gold and especially your silver.  That's right, he called the top!  Furthermore, Harry had been recommending that people put essentially 100% of their portfolios in gold and other hard assets for over a decade.  So even if the 4X25 had existed and even if someone had started doing it around that time, they would be selling off 75% of their existing hard assets to buy stocks and bonds and cash.  It is very unlikely that someone with no gold previously would be suddenly buying gold to get into the PP in January 1980.  Thus, the draw-down, while interesting, should not be particularly discouraging to us as PP investors.  Gold zoomed up, gold zoomed down, all very quickly.

[Tyler]

So then what is the MaxDD?

PeaktoTrough has a max drawdown of 22% from Jan 21st to March 27th in 1980.  From my own numbers, the max drawdown for any single year is 12% in 1981.

[Reub]

Thank you!

[rickb]

So then what is the MaxDD?

100% obviously.

Hmmm.  If we want to go there, the theoretical maxDD for the PP (assuming you have physical gold) is more or less 75%.  In contrast the theoretical maxDD for any completely paper based portfolio is 100%.  This is one of the major strengths of the PP vs. any other allocation.

To consider this a risk requires expanding the timeframe over which your backtest covers to include events where your currency collapses.  This hasn't happened in the US since the early days of the republic.  Blithely assuming it won't happen again is tantamount to sticking your head in the sand.  Over 1000+ year timeframes, essentially every currency collapses.  The probability is indeed low.  But if it happens, then what?

With the PP, you preserve a significant portion of your assets.

With any paper based portfolio, you are truly screwed.

[dutchtraffic]

Hmmm.  If we want to go there, the theoretical maxDD for the PP (assuming you have physical gold) is more or less 75%.  In contrast the theoretical maxDD for any completely paper based portfolio is 100%.  This is one of the major strengths of the PP vs. any other allocation.

Over 1000+ year timeframes, essentially every currency collapses.  The probability is indeed low.  But if it happens, then what?

With the PP, you preserve a significant portion of your assets.

With any paper based portfolio, you are truly screwed.

The probability is not low at all.

"The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value."

"You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price."

This covers 775 different fiat currencies, it has never worked in history before, ever.
But surely this time it will work, right....? 

[AnotherSwede]

Dutch,
is that 775 failed fiat currencies or does it include not yet failed? How is failure defined?

Just changing from one currency to another is not failure if the exchange rate is fair, like lire, d-mark, finnish mark and whatever Holland had before the euro.

[dutchtraffic]

Dutch,
is that 775 failed fiat currencies or does it include not yet failed? How is failure defined?

Just changing from one currency to another is not failure if the exchange rate is fair, like lire, d-mark, finnish mark and whatever Holland had before the euro.

"Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes."

[AnotherSwede]

I hold my thumbs for monetary reform or independence. The latter almost sounds optimitic ..