Black Swan PP

[moda0306]

Anybody ever think of implementing a PP without stocks? Historically, this would actually be more volatile, but overall performs most impressively during really rough times.  It wouldn't react to any particular "black swan" event, but that event's affect on the macroeconomy as a whole.

It would seem to me that even if your portfolio is not as poised to grow as well over time and be even more volatile, that it may be kind of a nice counterbalance to the fears of economic turmoil in other non-investing areas of your life (loss of job, higher costs of living, home price drop, terrorist attacks, deficits, political turmoil accross the globe) to have something that will jump in the double digits when the SHTF.

Just a thought.

[MediumTex]

Of the four PP assets, stocks are the only one that actually provides a proxy for real wealth creation.

The government bond market does not create wealth, it merely redistributes tax revenue.

Gold does not create wealth, though it can act as a solid store of wealth.

Only stocks provide a proxy for the icrease in wealth occasioned by technological breakthroughs, increased efficiency, and other means by which value is created through entrepreneurial efforts.

I think you always have to own stocks.

[moda0306]

Just because gold and treasuries seem to perform at their best when things start to go bad doesn't mean, to me, that they don't grow your wealth.  If you earn a return that beats inflation, to me, you've built wealth.

What if someone makes a ton of money trading commodity futures.  Is he/she not wealthy after putting all that into a savings account? 

I would never keep stocks out of the PP, but I'm just saying, if stocks can truly go on 50+ year streaks without beating bonds, then why would we consider stocks the ONLY way to provide for "real wealth creation."

If one would have bought LT bonds and gold in 1999, and looked at their portfolio today, I would think that they would feel like their purchasing power has definitely increased.

[MediumTex]

Just because gold and treasuries seem to perform at their best when things start to go bad doesn't mean, to me, that they don't grow your wealth.  If you earn a return that beats inflation, to me, you've built wealth.

What if someone makes a ton of money trading commodity futures.  Is he/she not wealthy after putting all that into a savings account? 

I would never keep stocks out of the PP, but I'm just saying, if stocks can truly go on 50+ year streaks without beating bonds, then why would we consider stocks the ONLY way to provide for "real wealth creation."

If one would have bought LT bonds and gold in 1999, and looked at their portfolio today, I would think that they would feel like their purchasing power has definitely increased.

I'm speaking about stocks from a macro perspective and how they are the only proxy for real underlying wealth creation that we have.

I'm not saying that you are not making real money when you successfully trade in and out of gold, cash and government bonds.  Rather, what I am saying is that if we had a world of only government bonds and gold, and no private sector entrepreneurship represented through stock markets, then there would be no wealth to shift around through successful trading in the first place.

As much as a casino as the stock market seems like at times, when you look at the gains for gold and LT government bonds over a 100 year period, stocks are clearly a more profitable investment, even if it occasionally takes decades for stocks to revert to their long term average returns.

The PP provides protection against these decades-long sideways or down moves in stocks, while allowing the PP investor to profit during the more frequent long term periods of rising equity prices.

[KevinW]

Here's perhaps another way of seeing it: you can try to grow capital by either being an "owner" of a productive enterprise or a "loaner" to someone else's productive enterprise.

Also, you can either play "offense" and take risks to get more, or "defense" to hold on to what you already have.

From that perspective there are four possible combinations:
offense owner: stocks
offense loaner: long term bonds
defense owner: gold
defense loaner: cash (short term bonds)

Without stocks you miss opportunities to profit from environments that favor offense ownership.  If you look at individual securities, bonds return capital at a fixed rate and 1 oz gold is always 1 oz gold.  However the potential upside for a stock share is unlimited, and there are times when stocks return spectacular returns.  You don't want to be left holding only fixed-return assets in those environments.  In fact there could be environments where the only way to keep ahead of inflation is to realize the unlimited upside of stocks.

[craigr]

Please also understand that "Black Swan", even as Taleb describes it, also means *good* outcomes as well that are unexpected. Such as discovery of a new drug by accident, getting a new idea by talking to a drunk guy at a party (as he states in an interview), or (my view) great stock market returns nobody expects. So if we get another late 90s stock boom you could be left in the dust if you don't hold stocks.

[cowboyhat]

If you are nervous about owning stocks because you fear the future, read "When Money Dies" by Adam Fergusson.

http://www.amazon.com/When-money-dies-n ... 0718302141

Stocks were a way to to preserve some wealth in the Weimar collapse. There's also an interesting story in the book about a widow holding things together by selling off her husband's cigar collection a little bit at a time.

[moda0306]

I, myself, would be more likely to tilt heavier towards stocks than away from them.  I just thought that it'd be interesting to have a portfolio that was geared specifically towards doing better if things got worse, and might even lose a little in times like 1995-1999.

It was just a thought, not by any means a suggestion to eliminate stocks from one's portfolio.

[MediumTex]

How about the French stock market with ZERO inflation-adjusted returns from 1912-1977.

That's a long time to have to wait.  The PP definitely would have helped during that period.

[Lone Wolf]

How about the French stock market with ZERO inflation-adjusted returns from 1912-1977.

That's a long time to have to wait.  The PP definitely would have helped during that period.

I had never heard of the example of the French stock market before.  Amazing.

The idea of taking on that level risk for 65 years only to see 0 real returns makes me feel like I need to lie down.

[MediumTex]

How about the French stock market with ZERO inflation-adjusted returns from 1912-1977.

That's a long time to have to wait.  The PP definitely would have helped during that period.

I had never heard of the example of the French stock market before.  Amazing.

The idea of taking on that level risk for 65 years only to see 0 real returns makes me feel like I need to lie down.

Maybe that's why the French seem so grouchy.

[pplooker]

The whole PP concept is that the forces/states of the economy shift around constantly, so without the stocks how does one capture prosperity?

And devil's advocate here, wouldn't a true Black Swan Portfolio be 90% 13 week treasuries and 10% wild, out in left field speculative options?

[craigr]

The whole PP concept is that the forces/states of the economy shift around constantly, so without the stocks how does one capture prosperity?

And devil's advocate here, wouldn't a true Black Swan Portfolio be 90% 13 week treasuries and 10% wild, out in left field speculative options?

Yeah that's Taleb's basic portfolio idea. Works great if you are running a very speculative hedge fund and can sit around for years with other people's money waiting for a problem. But for most investors the results are going to be way too lumpy and expensive to implement. IMO.