the past is guaranteed to repeat into the future for Permanent Portfolio

[Arturo]

Hi all,

one of the sentences most repeated when reading about investing and PP is:

"the past is not a guaranteed to repeat into the future"

with this sentence, the authors tries to explain that wherever models you want to build up to obtain better assets or portfolio performance, it will not guarantee nothing, because models based on past data can't predict future market behaviours. To me this sentence is wise, and keeps a huge expertise and knowledge inside it. Market is like gambling in some aspects. You can predict that a red is going to show up after 9 blacks in a row in a casino, once you understand that this 10 colors are uncorrelated and have the same probability to show up.

however, when i read about PP topics, this sentence is not applied to itself. Lots of people are investing on PP based on a system that works for past data, so at the end, Permanent Portfolio is doing the same than "[..] many investment professionals sweating details [..] and essentially driving forward by looking in the rearview mirror [..]"  (The permanent portfolio, Harry Browne). Amazing book by the way and still reading it :-).

When we see the famous 1970-2012 PP performance chart (individual assets against aggregated porftolio), we are seeing a planning that worked in the past, but how are we suppose to apply to the future, if one of the cores of PP is that there is no system, planning, mathematical or algorithm model that can predict the future?

How is it supposed to match? or maybe there is some concept i still dont get it.

regards

[craigr]

How is it supposed to match? or maybe there is some concept i still dont get it.

As we discuss in the book, we primarily like to use backtesting to disprove ideas. It can't prove anything. It can however allow you to weed out ideas that simply didn't work. So far, the Permanent Portfolio has shown to be very resilient to many market events that wrecked other strategies. In other words, the theories under it have proven to work when others have failed.

So while I can't say that it will definitely repeat going forward, I can at least look at other approaches and say: "Well I already know these have failed so I'm not going to trust them again."

If I see something has broken in the past I don't want to keep using it hoping it doesn't repeat the same thing again. So far the Permanent Portfolio has worked OK and the diversification is very wide and robust. In terms of strategies then I can't say it will always work (nobody can guarantee that!). However, I can make some educated guesses that it probably will not be worse than other approaches and probably will work a lot better than most.

[Pointedstick]

The PP is based on the idea that the economy is always in one of your states, and it allows you to profit from whichever state we're in. The PP will cease functioning if a fifth state is discovered that the PP has no assets to profit from it, or if one or more of the assets starts behaving in a different way in response to that condition. For example, if gold stops going up in response to negative real rates of return, that will negatively impact the performance of gold during inflationary periods. If The government balances the budget and deprives us of ultra-safe treasuries, we'll have to find another asset that may not be as safe, and thus we might expose ourselves to default risk during deflationary times.

Once you understand why the PP behaves as it does, and get that the world needs to fundamentally change in order for any of the assets to misbehave, I think you'll feel better. But the word "guarantee" is a dangerous word to use when you're talking about money. Nothing in life is guaranteed, not least of all the the returns from your investments! The real question I think you should be asking is, "what asset allocation is any better?" 100% stocks where you're betting on sustained prosperity? That approach has in the past delivered more than a decade of zero real return. 100% gold where you're betting on inflation? Same thing; more than a decade of zero real return has happened. And so on and so forth.

The PP ain't perfect, but I've yet to encounter a portfolio that does better, at least not without a whole lot more risk and required maintenance.

[MediumTex]

The PP assumes the future will remain unpredictable and that there will be a finite number of economic conditions (i.e. expansion, contraction, inflation and deflation).

As long as those assumptions remain valid, the PP should continue to do its job.

I know it's a bit much to accept, but keep reading and keep thinking.  You'll get there.  I struggled with it for a long time too.  My brain just resisted the whole concept until it finally started to sink in.

[Pointedstick]

Also, it seems like you're beginning to suffer from a bit of analysis paralysis. I can sympathize, as I can fall into this trap as well. One thing I would suggest is to start a small PP. $1,000 each in VTI, SHY, TLT, and GTU/SGOL. Or even 1K in PERM or PRPFX. See how it performs. Test it out. You might find you like it.

[MediumTex]

Also, it seems like you're beginning to suffer from a bit of analysis paralysis. I can sympathize, as I can fall into this trap as well. One thing I would suggest is to start a small PP. $1,000 each in VTI, SHY, TLT, and GTU/SGOL. Or even 1K in PERM or PRPFX. See how it performs. Test it out. You might find you like it.

One of the temptations that all smart people face is to approach a group and assume that the group is primarily composed of people less smart than you are.  Normal life experiences reinforce this general approach to things.

With the PP, however, and the people here, I would be cautious about assuming that we are all missing something fundamental about the PP and that it actually doesn't work as well as we think it does.

Do your own due diligence and arrive at your own conclusions, of course, but don't let your own preconceived notions about the way things are supposed to work interfere with a revised understanding of how they actually work.

[Arturo]

Also, it seems like you're beginning to suffer from a bit of analysis paralysis. I can sympathize, as I can fall into this trap as well. One thing I would suggest is to start a small PP. $1,000 each in VTI, SHY, TLT, and GTU/SGOL. Or even 1K in PERM or PRPFX. See how it performs. Test it out. You might find you like it.

One of the temptations that all smart people face is to approach a group and assume that the group is primarily composed of people less smart than you are.  Normal life experiences reinforce this general approach to things.

With the PP, however, and the people here, I would be cautious about assuming that we are all missing something fundamental about the PP and that it actually doesn't work as well as we think it does.

Do your own due diligence and arrive at your own conclusions, of course, but don't let your own preconceived notions about the way things are supposed to work interfere with a revised understanding of how they actually work.

Hi. I am sure you understand the situation of overanalyzing when you find a new investment strategy. Is what we all have done in the past, and thats the reason all of us accept the wise sentence "the past is not a guaranteed to repeat into the future". It could have been written like "successful investment strategies in the past  is not a guarantee to continue in the future".

With this particular subject, i just wanted to double check your opinions about how you would match the previous sentence ("the past is not a guaranteed to repeat into the future") with Permanent Portfolio, when both concepts seemed (at least seemed) as opposed or diverging.

The PP assumes the future will remain unpredictable and that there will be a finite number of economic conditions (i.e. expansion, contraction, inflation and deflation).

As long as those assumptions remain valid, the PP should continue to do its job.

I know it's a bit much to accept, but keep reading and keep thinking.  You'll get there.  I struggled with it for a long time too.  My brain just resisted the whole concept until it finally started to sink in.

I am reading Craig Rowland's book, and the more i am reading, the more this system looks very stable and 'scientific' in terms of searching for low volatility (low risk) and constant returns. The book propose 4 possible states of the economy (expansion, contraction, inflation and deflation), but for your point of view,

- is for instance a world war (3?) another posible different state that could be added to the other 4?

- or a world (west?) inmersed in a long term "trap liquidity", like Japan is suffering since 90's, and is the actual situation of USA and Europe (0% interests rate, central banks printing and inyecting money to zombie banks, and low economic growths)?

- returning to gold policy like before 70's?

- end of Fiat money and central banks monopoly, as austrian economists (Nobel Prize Mises) blame, the core reason of constant contraction and expansion crisis during the history?

- black swan?

What i am trying to double check is nothing to do about the system by itself, that from my point of view is awesome, but simply trying to obtain information about how you reflect about the situation where PP just worked during a "short" period of time, from 1970 to 2012, that gives us just 40 years compared to centuries of political and economic changes, that we want to accept or not, will continue to happend in the future.

Because PP is thinking in the long run (30 or 40 years), and that is a very long run where lots of things can happend.

[MediumTex]

If you're reading the book, that should answer your questions in a pretty comprehensive way.

The book was written for people exactly like you (i.e., skeptical beginners).

I'm anxious to hear what you think about the book when you finish it.

[Arturo]

If you're reading the book, that should answer your questions in a pretty comprehensive way.

The book was written for people exactly like you (i.e., skeptical beginners).

I'm anxious to hear what you think about the book when you finish it.

done! :-)

[Xan]

If you're reading the book, that should answer your questions in a pretty comprehensive way.

The book was written for people exactly like you (i.e., skeptical beginners).

I'm anxious to hear what you think about the book when you finish it.

done! :-)

...and?

[Arturo]

If you're reading the book, that should answer your questions in a pretty comprehensive way.

The book was written for people exactly like you (i.e., skeptical beginners).

I'm anxious to hear what you think about the book when you finish it.

done! :-)

...and?

i mean that i will give my opinion when i finish it :-)

[Xan]

i mean that i will give my opinion when i finish it :-)

Oh, hah!  Sorry.