Why The PP Will Eventually Fail

Pointedstick · Post by **Pointedstick** » Fri Nov 16, 2012 8:43 pm

Gumby wrote: Funny... I look at negative real interest rates and thank my lucky stars that I found the PP. How do you safely protect yourself against negative real interest rates?

Quite true. If you don't like the PP, what other options are there? In isolation, the PP assets are quite volatile, and just as dangerous on their own if you think they're near the top of a bubble. Savings accounts are losing to inflation. Bank CDs are losing to inflation. Corporate bonds and Munis are barely beating inflation and are full of risks. What does that leave? Foreign stocks? LOL! Foreign bonds? LOL! Real estate? Silver? Annuities? Rare art and wine?

melveyr · Post by **melveyr** » Fri Nov 16, 2012 8:47 pm

Pointedstick wrote:
Gumby wrote: Funny... I look at negative real interest rates and thank my lucky stars that I found the PP. How do you safely protect yourself against negative real interest rates?
Quite true. If you don't like the PP, what other options are there? In isolation, the PP assets are quite volatile, and just as dangerous on their own if you think they're near the top of a bubble. Savings accounts are losing to inflation. Bank CDs are losing to inflation. Corporate bonds and Munis are barely beating inflation and are full of risks. What does that leave? Foreign stocks? LOL! Foreign bonds? LOL! Real estate? Silver? Annuities? Rare art and wine?

Yes, most deviations from the PP involve less diversification. Once you go diversified it's pretty hard to imagine taking more concentrated positions. You get spoiled in a sense.

Gary · Post by **Gary** » Sat Nov 17, 2012 2:40 am

Pointedstick wrote:
Quite true. If you don't like the PP, what other options are there?

Ya know, that's the response that always turns me against the PP even when I otherwise have a good opinion of it. Saying "what else is there?" is a non-answer. Obviously there are plenty of other options out there. The only advantage the PP has that I can see is that it has a history that dates back to the seventies. Most other assets, strategies, funds, etc. that work well now date back to the nineties or maybe the eighties. The PP looks better by default over the long term since none of the other alternatives have as long a history. That doesn't mean they are inferior strategies, however.

The other response that turns me against the PP -- hey, I might as well get it ALL out while I'm at it lol -- is the response about what happens when all correlations go to one and there are bad weeks and months in the PP. The response is to not look at your portfolio. Come on! That is not a response! This board is full of smart people who spend hours analyzing MMT, plotting sophisticated graphs and doing number-crunching galore and they are not interested in viewing their portfolios?!! It's an odd picture, but I see people with good brains putting their head in the sand.

When there are better answers to those questions, I might bite, but for now, there are too much unanswered questions regarding the PP, whereas there are other ways to get real returns that suit my comfort level. Mileage varies...

AdamA · Post by **AdamA** » Sat Nov 17, 2012 2:50 am

Gary wrote: ...whereas there are other ways to get real returns that suit my comfort level.

Such as?

BearBones · Post by **BearBones** » Sat Nov 17, 2012 3:54 am

Gary wrote: When there are better answers to those questions, I might bite, but for now, there are too much unanswered questions regarding the PP, whereas there are other ways to get real returns that suit my comfort level. Mileage varies...

Gary, what you have posted is actually very helpful. There are a few here perhaps who blindly believe in the PP, but the majority like to kick the tires whenever possible. I, for one, would love to hate the PP. And I am just waiting for someone to provide me with something better to protect my wealth in a very tricky savings and investing environment. Really, what alternative do you suggest? I'm all ears.

Pointedstick · Post by **Pointedstick** » Sat Nov 17, 2012 10:16 am

Gary, perhaps if you could give us a breakdown of your portfolio, we could evaluate your strategy and perhaps learn something from it.

Post by **MediumTex** » Sat Nov 17, 2012 11:01 am

Gary wrote:
Pointedstick wrote:
Quite true. If you don't like the PP, what other options are there?
Ya know, that's the response that always turns me against the PP even when I otherwise have a good opinion of it.

Well, you could look at its low volatility, rock solid returns and seeming immunity to any kind of stupidity that politicians and central bankers want to throw at it.

The "what better options are there?" question is normally only posed when for whatever reason a person just doesn't seem willing to recognize that the PP works and has worked for decades.

I think that all we are saying is that if the standard you are going to apply to the PP is complete perfection 24 hours a day, how do other allocations stand up under that kind of scrutiny?

Saying "what else is there?" is a non-answer. Obviously there are plenty of other options out there.

Show me one. Show me one option that has done what the PP has done.

The only advantage the PP has that I can see is that it has a history that dates back to the seventies.

Really? You don't think that the PP's underlying theories are WAY more robust and comprehensive than the framework used to develop most investment strategies?

Most other assets, strategies, funds, etc. that work well now date back to the nineties or maybe the eighties.

That's not true. Investors have been using different strategies to try to beat the markets for as long as markets have existed.

The PP looks better by default over the long term since none of the other alternatives have as long a history. That doesn't mean they are inferior strategies, however.

That's not a good criticism of the PP. If you want to get a good sense of how the PP compares to another popular conservative strategy, compare the annual returns provided by Vanguard's Wellesley fund (which goes back to the early 1970s) and overlay inflation in your analysis and you will see exactly how the PP compares in inflation-adjusted returns to a more popular strategy that has been around a long time. You may find this exercise very eye-opening.

The other response that turns me against the PP -- hey, I might as well get it ALL out while I'm at it lol -- is the response about what happens when all correlations go to one and there are bad weeks and months in the PP. The response is to not look at your portfolio. Come on! That is not a response!

If you are committed to an investment strategy for the long-term, what's the point of looking at it on any particular day if you have satisfied yourself that the strategy is sound?

So many people have spent their whole investment careers bouncing from strategy to strategy that the whole concept of simply sticking with something through the ups and downs seems foreign to them. When you seriously consider the way we are wired as humans, however, and the ways that the market will use this to take investors' money away from them, you see that not looking at your portfolio is more subtle and wise advice than it may at first appear.

This board is full of smart people who spend hours analyzing MMT, plotting sophisticated graphs and doing number-crunching galore and they are not interested in viewing their portfolios?!! It's an odd picture, but I see people with good brains putting their head in the sand.

Perhaps. Or perhaps you just haven't made the investment to actually learn about the overall worldview that we are working from when a particular topic comes up.

When there are better answers to those questions, I might bite, but for now, there are too much unanswered questions regarding the PP, whereas there are other ways to get real returns that suit my comfort level. Mileage varies...

All of your questions have been answered here countless times from countless angles.

What is your basic criticism of the PP?

Has it not provide satisfactory returns for your taste?

Has it not provided satisfactory protection from large losses?

Has it not provided steady inflation-adjusted returns?

Has it not achieved its objectives with low enough volatility?

You can say that the overall style of the PP doesn't suit your tastes, but you really should share with us what works better than the PP, because I think that most of us would be ready to sign up tomorrow.

murphy_p_t · Post by **murphy_p_t** » Sat Nov 17, 2012 2:14 pm

Gary wrote: The other response that turns me against the PP -- hey, I might as well get it ALL out while I'm at it lol -- is the response about what happens when all correlations go to one and there are bad weeks and months in the PP. The response is to not look at your portfolio. Come on! That is not a response! This board is full of smart people who spend hours analyzing MMT, plotting sophisticated graphs and doing number-crunching galore and they are not interested in viewing their portfolios?!! It's an odd picture, but I see people with good brains putting their head in the sand.

Thanks for your comments Gary.

I share your view here...to some degree. However, I view this advice as a psychological mechanism to enable the investor to ride out the storm w/out panicking. To me, the proof is in the puddin' (as the historical results speak for themselves).

Regarding the comments you've read and found to be lacking, I think its helpful to keep in mind that these are the comments of folks who have next to nothing to gain by you either setting up the HBPP, or not. Even when someone's comments lack merit, this does not impact how the PP will perform! There are no commissions earned by the participants of the forum.

PS...please do share what's working better for you.

Gumby · Post by **Gumby** » Sun Nov 18, 2012 7:06 pm

Gary wrote:The other response that turns me against the PP -- hey, I might as well get it ALL out while I'm at it lol -- is the response about what happens when all correlations go to one and there are bad weeks and months in the PP. The response is to not look at your portfolio. Come on! That is not a response! This board is full of smart people who spend hours analyzing MMT, plotting sophisticated graphs and doing number-crunching galore and they are not interested in viewing their portfolios?!! It's an odd picture, but I see people with good brains putting their head in the sand.

The response to "not look at your portfolio" is generally to people who get upset about a 1% or 2% decline in their portfolios. For those individuals, they need to find a new hobby besides watching the normal day-to-day and month-to-month fluctuations of their portfolio.

By the way, we also discuss topics such as traditional wet shaving, the health benefits of saturated fats, auto maintenance and Breaking Bad.

These aren't coping mechanisms. Most of us are content enough with our portfolios that we'd rather discuss other things to pass the time.

Most people aren't really discussing "MMT" here — at least not anymore. Though, the term is still thrown around loosely. We often discuss Monetary Realism (MR), which is an operational description of how fiat money interacts with the bond market. While it may seem like a waste of time, MR allows us to understand fiat money and why 50% of our PP wealth in Treasury bonds are perceived as "risk free". Without MR, most of us would be freaked out by the thought of owning so much public debt. In a sense, MR helps explain why the PP is able to eliminate credit risk.

Lone Wolf · Post by **Lone Wolf** » Mon Nov 19, 2012 8:55 am

Gary wrote:
Lone Wolf wrote: That's not true today, though. Interest rates are 0% but inflation is certainly >0%. So the "whiners" are of course correct when they worry that their irreplaceable savings are being eroded by our current policies.
How many other oddities do there have to be before the PP loses its safety appeal? In the interest of full disclosure, I do not invest in the PP, but like to read about it since it is an elegant theory. But it is little things like zero interest rates, along with a lot of bigger things (like the potential end of the secular bond bull), which make me wonder how the PP can do well going forward. I respect Harry Browne, but he reserved the right to change his mind. I wonder what changes he might make to the PP today in light of the extraordinary extremes we are seeing in asset classes.

That's just it, though -- the Permanent Portfolio survived this oddity beautifully, coasting through the 2000s and the financial crisis with flying colors.

When Harry Browne talked about how people with savings accounts can "sort of" survive inflation, all he meant was that these people were often less screwed than those who pursued wild anti-inflation speculative investments. He didn't endorse going 100% savings account to anyone but the most fearful, uneducated neophyte. More than anything he wanted to keep people from getting themselves into unnecessary trouble.

Harry Browne was a very successful speculator during a period of negative real interest rates (the 1970s.) The difference between what was going on then versus what's going on now is ZIRP. Is the effect of ZIRP on the cash allocation your main source of concern?

Gary wrote: The response is to not look at your portfolio. Come on! That is not a response!

Heh heh heh... I say this one all the time, and I do stand behind it. If you believe (as I do) that investing has a psychological component to it, infrequent checking is IMO essential. Why draw unnecessarily on your limited reserves of willpower and time in order to obsess about the daily movements of your portfolio? If your strategy is sound, you simply don't need to give it this much attention.

I find that if you give the portfolio 30 days to do its thing, the great majority of the time, you'll be pleased with what you see. If the strategy is sound, the daily movements have no value to me. And when you're only checking once per month, the psychological aspect of investing becomes extremely easy to manage, freeing your mind for other tasks.

Gosso · Post by **Gosso** » Mon Nov 19, 2012 1:38 pm

Gary,

I think the standard 4x25% PP is "good enough" for most people. It is simple, backtests well, has a nice theory behind its construction, and is agnostic towards the future.

However, that hasn't stopped me adding my own twists! Personally I do the following:

10% Domestic Stocks
20% World Stocks
20% Gold
10% Domestic LTT
40% FDIC CDs in a five year ladder

It's basically the same as a 4x25, except it makes me feel smart to rearrange things slightly. I have done enough mental gymnastics to satisfy most of my doubts. I also run a VP that utilizes trend following based on the 200 day moving average, which acts as additional insurance if we see a collapse in either gold or stocks.

I don't really see how I can improve upon this, so I don't devote too much more energy to it.

I now spend more of my time researching philosophy, religion, mythology, and psychotherapy. For me, this is a far more rewarding activity than worrying about financial BS (although I do occasional get sucked back into it).

MachineGhost · Post by **MachineGhost** » Mon Nov 19, 2012 4:30 pm

Gosso wrote: 10% Domestic LTT
40% FDIC CDs in a five year ladder

Why did you decide on 10%?

Gosso · Post by **Gosso** » Mon Nov 19, 2012 5:03 pm

MachineGhost wrote:
Gosso wrote: 10% Domestic LTT
40% FDIC CDs in a five year ladder
Why did you decide on 10%?

I don't want to pay the cap gains on the LTT.

The main reason is it moves my duration out to about 5 years. Five years seems to be a sweet spot for maximizing yield while reducing volatility (ie Sharpe).

STT/LTT are a pain in Canada. There is a $25 trading fee, and you need a minimum face value of $5000 for each transaction. Plus I can buy a five year CD with the same yield as the 30 year Canadian Bond (currently around 2.4%), and with zero trading fees and spreads.

Also I am beginning to prefer FDIC over treasuries. FDIC is built for the little guy (as WildAboutHarry mentioned in another thread), while treasuries are mainly for corporations and governments. I want to take advantage of every basis point I can get. The extra risk, if it even exists, doesn't bother me.

Canada doesn't have anything similar to an I-bond.

notsheigetz · Post by **notsheigetz** » Mon Nov 19, 2012 5:31 pm

Entropy is a thermodynamic property that is the measure of a system’s thermal energy per unit temperature that is unavailable for doing useful work.

Of course it will fail. Can you give us the precise date and time?

smurff · Post by **smurff** » Wed Nov 21, 2012 2:02 pm

Fail date: the 59th of Oberrender, in the year 357904. And not a day sooner.

Post by **MediumTex** » Wed Nov 21, 2012 4:49 pm

I can't believe how long Gary is making us wait to see the PP alternative that works better.

MachineGhost · Post by **MachineGhost** » Wed Nov 21, 2012 9:36 pm

smurff wrote: Fail date: the 59th of Oberrender, in the year 357904. And not a day sooner.

But Nostradamus said 3786 or 3797 depending on which expert you believe!

smurff · Post by **smurff** » Sun Nov 25, 2012 2:33 pm

Ha! Nostrad's prediction was the end of the whole world, not the end of the PP. And a Mayan analyst thinks it will be the 21 st day of December in 2012--mere days from now.

The PP will survive both. The world will end, save for the PP. How's that for reliability.

melveyr · Post by **melveyr** » Sun Nov 25, 2012 5:50 pm

smurff wrote: Ha! Nostrad's prediction was the end of the whole world, not the end of the PP. And a Mayan analyst thinks it will be the 21 st day of December in 2012--mere days from now.

The PP will survive both. The world will end, save for the PP. How's that for reliability.

Forget international diversification; I am pushing for intergalactic diversification. I actually have some bullion stashed away in the constellation Lyra.

smurff · Post by **smurff** » Wed Nov 28, 2012 1:25 am

melveyr wrote: Forget international diversification; I am pushing for intergalactic diversification. I actually have some bullion stashed away in the constellation Lyra.

Lyra--a great constellation for diversification. MediumTex and CraigR might want to include them in the upcoming intergalactic edition of their book.

MachineGhost · Post by **MachineGhost** » Wed Nov 28, 2012 2:17 am

smurff wrote: Lyra--a great constellation for diversification. MediumTex and CraigR might want to include them in the upcoming intergalactic edition of their book.

Could you please point out where Lyra is? I seem to be lost.

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melveyr · Post by **melveyr** » Wed Nov 28, 2012 1:40 pm

MachineGhost wrote:
smurff wrote: Lyra--a great constellation for diversification. MediumTex and CraigR might want to include them in the upcoming intergalactic edition of their book.
Could you please point out where Lyra is? I seem to be lost.

[align=center][/align]

You are making me nervous... I can't find it either. WHERE THE HELL DID MY GOLD GO?!

MachineGhost · Post by **MachineGhost** » Wed Nov 28, 2012 5:55 pm

Speaking of gold and the massive universe, here's another shameless plug for Elite: Dangerous:

http://www.kickstarter.com/projects/146 ... -dangerous

melveyr · Post by **melveyr** » Wed Nov 28, 2012 6:04 pm

MachineGhost wrote: Speaking of gold and the massive universe, here's another shameless plug for Elite: Dangerous:

http://www.kickstarter.com/projects/146 ... -dangerous

Ahhhh. Looks so fun!

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