PP Headwinds

[doodle]

I came across this opinion regarding PP and was wondering what the forum thought regarding his arguments:
http://www.advisorperspectives.com/news ... tfolio.pdf

[MediumTex]

We have discussed this article before.

He sticks the PP into his black box fortune telling machine and it spits out a piece of paper that says the PP may not perform in the future as it has in the past.

Explaining the PP to the Wall Street mind is like explaining the physics of an airplane to a caveman.  You walk him through how and why it works, and he seems to understand, but then looks at it and says "But it's so BIG!  Nothing that big could EVER get off the ground...and even if it has flown in the past, I'm sure it will crash soon.  Big things like that don't fly."

 

[moda0306]

Explaining the PP to the Wall Street mind is like explaining the physics of an airplane to a caveman.  You walk him through how and why it works, and he seems to understand, but then looks at it and says "But it's so BIG!  Nothing that big could EVER get off the ground...and even if it has flown in the past, I'm sure it will crash soon.  Big things like that don't fly."

MT,

Awesome... one of your best yet... Do you write these in advance and wait to use them, or just think of them on the spot?

[MediumTex]

Explaining the PP to the Wall Street mind is like explaining the physics of an airplane to a caveman.  You walk him through how and why it works, and he seems to understand, but then looks at it and says "But it's so BIG!  Nothing that big could EVER get off the ground...and even if it has flown in the past, I'm sure it will crash soon.  Big things like that don't fly."

MT,

Awesome... one of your best yet... Do you write these in advance and wait to use them, or just think of them on the spot?

They flow out of me like a fountain.

It is a mysterious thing.

You will find, though, that I do re-use a lot of analogies in slightly modified form.  Fortune tellers and Egyptians come up a lot.

[pershing83]

I read the entire thing... and found it lacking. One thing that needs  to be addressed is the global nature of investing and has it altered HB's basic plan.

Nothing lasts forever and the black swan did exist in Terra Ingonita (Australis), after all that might be applied to the pp.

So, should one own 10% in Swiss francs?  Some REITS and overseas equities? After reading that post I thought, well, perhaps PRPFX has taken things a step farther and at the end of the day it will do better than the classic pp? These were not really issues when HB wrote the book, published in 1999. I admit I own a large amount of PRPFX but I've seen little on this board to make me change to the classic asset allocation.

As of 1999 HB was not worrying about a global economy and a failing USD.

I found the comments about the 60-40 allocation (bonds-stock) intersting as I have owned VWINX for years. Thankfully.

I wonder how the board views 25% "cash" and the "broad" mkt of HB?

[MediumTex]

PRPFX is a great fund.  It's a little more volatile than a HB PP, but it's certainly been firing on all cylinders in recent years.

I really think that very few people who write these articles about PRPFX have a strong grasp of the basic HB PP strategy and the ways in which PRPFX departs from the basic strategy, and the risks that are involved in these tweaks to the basic strategy.

The runup in the Swiss franc in the last 12 months has been marvelous, but I wonder how much more room it has to run.  Unlike gold, the Swiss franc has a lot of Swiss exporters who are probably furious that their businesses are being disrupted by the rise in the franc's value, not because of anything other than problems in the rest of Europe.

[pershing83]

My point being...

When HB wrote about cash and the broad mkt he was not contemplating what has occurred in the last 10 yrs. We have had time to observe these changes and the managers at PRPFX have made their changes and done rather well. That is of course an issue in itself. They are making some investment decisions, maybe too many, and sooner or later they will be wrong.

Still, the dollar and a global stock mkt should be addressed or at least considered.

When brokers and advisers begin to talk about what one should do look out. I think a poll of these people would reveal many, if not most, have not heard of HB and a lot have no idea what PRPFX is up to.

[MediumTex]

My point being...

When HB wrote about cash and the broad mkt he was not contemplating what has occurred in the last 10 yrs. We have had time to observe these changes and the managers at PRPFX have made their changes and done rather well. That is of course an issue in itself. They are making some investment decisions, maybe too many, and sooner or later they will be wrong.

Can you clarify what you mean by that?  

PRPFX's allocations haven't changed since the fund was started.

Still, the dollar and a global stock mkt should be addressed or at least considered.

When brokers and advisers begin to talk about what one should do look out. I think a poll of these people would reveal many, if not most, have not heard of HB and a lot have no idea what PRPFX is up to.

From my perspective, PRPFX has been up to the same thing since day one, but maybe I am missing the point you are making.  Are you saying PRPFX has changed its strategy, or that the people waking up to PRPFX now don't fully comprehend what they are looking at?

[AdamA]

My point being...

When HB wrote about cash and the broad mkt he was not contemplating what has occurred in the last 10 yrs. We have had time to observe these changes and the managers at PRPFX have made their changes and done rather well. That is of course an issue in itself. They are making some investment decisions, maybe too many, and sooner or later they will be wrong.

Still, the dollar and a global stock mkt should be addressed or at least considered.

When brokers and advisers begin to talk about what one should do look out. I think a poll of these people would reveal many, if not most, have not heard of HB and a lot have no idea what PRPFX is up to.

PRPFX was Harry Browne's original conception of the PP.  He later simplified it to the 25% x 4 model. 

What has changed with regard to the dollar and the global stock market in the last 10 years? 

[pershing83]

I don't know what HB'ss original portfolio was. The biggest difference now is PRPFX not holding the very few long US bonds, 20-30 yrs, and going to corporates and US with shorter maturities. 10% Swiss franc assets certainly differ. In 1999 at least it was 25% each asset as discussed here previoussly. Wonder what he would say if still alive? The weak dollar and 30 yr UST's might worry him.

Maybe Cuggino is trying to do what he thinks HB would have done. What would Jesus do :-)

[pershing83]

To be clear in 1999 HB made it clear it was the 25% allocation we all know, not PRPFX.

[MediumTex]

pershing,

PRPFX has had the same allocation since day one.  Cuggino hasn't changed anything.  He is a bus driver, not an engineer.

[cowboyhat]

In a mid-2005 Money Show (see the radio show archive) Harry Browne was asked by a caller about setting up a PP as an Indian investor. Harry Browne used this caller's question to at least partially address your question. The answer reflected his thinking circa 2005.

Harry Browne said that the 25% gold allocation was currency neutral and that the remaining 75% of the assets should be denominated in the investor's local currency. Harry Browne reasoned that any one of the four parts of the PP will carry the portfolio in any investment climate even if the other three parts are tanking. And since an Indian investor lives in the Indian economy he should tie his fortunes to the behavior of that economy. He noted that in the 1970's gold carried the portfolio under conditions of sharp inflation, but allowed that gold prices had been artificially suppressed for several decades before the 1970's so it might not perform as well in future inflationary periods.

I think it is clear that as recently as 2005 Harry Browne thought 25% gold was enough to cover hyperinflation and currency collapse. He repeated said on the radio show that the PP is designed for any economic calamity.

The question is really whether or not you think is was right. The problem with answering this question is one that Harry Browne pointed out many times: economics is not a science that lends itself to testable hypotheses because it involves self-aware variables.

I share your concern about having 75% dollar exposure. My question is whether 50% dollar exposure would likely meaningfully hurt PP performance. If not then the question of superiority between 75% $ and 50% $ exposure is moot.

[cowboyhat]

Clive's quick v. slow interest rate adjustment question is most important, in my opinion, relative to the frequency at which you consider rebalancing your PP. Ideally you want to rebalance after the interest rate corrects. With a mechanical rebalancing system (what Harry Browne recommended) you risk buying a still declining asset and sending your good money after bad. With a judgement call based system you run into the problem that most people have terrible judgement when it comes to calling bottoms and tops.

Although I intend to use the mechanical approach because I have little faith in my judgement, in a sudden interest rate crisis environment I would have a hard time rebalancing my PP until I started hearing sensible words and seeing tangible action of the political leadership with regard to restraining banks and reforming the financial system.

[pershing83]

<<Cuggino hasn't changed anything.  He is a bus driver, not an engineer.>>

Well, someone must pick the stocks and manage the bond portfolio at PRPFX. That is 50% of the fund.  Cuggino seems to have done a good job, at least so far. This could also result in some trouble; less is better, that sort of thing.


HB suggested all 30 yr UST's and 3 mtual funds, hardly a complicated exercise. It is his idea or concept of the allocation that brought him so much well deserved fame. 

[MediumTex]

Well, someone must pick the stocks and manage the bond portfolio at PRPFX. That is 50% of the fund.  Cuggino seems to have done a good job, at least so far. This could also result in some trouble; less is better, that sort of thing.

HB suggested all 30 yr UST's and 3 mtual funds, hardly a complicated exercise. It is his idea or concept of the allocation that brought him so much well deserved fame.   

If anyone ever wants to evaluate Cuggino's stock picking skills, take a look at PAGRX, which basically mirrors the 15% of PRPFX that is invested in "aggressive growth" stocks.  The other 15% of PRPFX that is in "natural resource and real estate" equities is normally split between mid cap energy E&P stocks, REITs and mining companies.

In my opinion,  PAGRX basically moves like a small cap index.  I have no idea why anyone wold want to buy PAGRX, given its large expense ratio and only fair performance relative to its peers.

[pershing83]

It is easier than all of that. How has PRPFX done compared to the classic pp over this last 5 or 10 yrs? Maybe its been posted but I'm fairly new and admit I do not read all the posts. Did not PRPFX have some problems prior to 2000? You all know more about this than I.

[MediumTex]

It is easier than all of that. How has PRPFX done compared to the classic pp over this last 5 or 10 yrs? Maybe its been posted but I'm fairly new and admit I do not read all the posts. Did not PRPFX have some problems prior to 2000? You all know more about this than I.

PRPFX has done better than the 25% x 4 approach over the last 10 years.  It has done better because gold and silver have been in a secular bull market over this period of time, AND the dollar has lost a lot of value against the Swiss franc, AND natural resource companies have done well as oil and natural gas prices have risen along with much of the commodity complex.

In other words, the last 10 years have been a near perfect set of market conditions for PRPFX, and every deviation from the 25% x 4 approach has basically paid off well.

Ironically, the period since 2001 is the market environment that the fund was set up to handle back in the early 1980s--PRPFX investors just had to wait 20 years for it to show up.

I just like the market neutral approach that the 25% x 4 approach takes, while those who like the inflation thesis on which PRPFX is based have seen those bets pay off well in the last 10 years.

But we really shouldn't be concerned about the last 10 years--we should be considered about the next 10 years.

[pershing83]

Well, that is what I was getting at... maybe HB would have changed his ideas about cash and stocks.  That goes back to the global economy, the dollar etc. It would not have changed his basic pp but 12 yrs have gone by and he has passed away.

It has been the perfect storm for PRPFX during this last 10 years and I doubt Cuggino knew that was coming down the pike. But, OTOH, 10% in Swiss franc with the dollar tanking sure makes sense. Again, HB might have had something to say about that.